The Labor Department has instructed its field investigators not to enforce the ban on class-action waivers in the fiduciary rule’s prohibited transaction exemptions.
The rule’s best interest contract exemption and other prohibited transaction exemptions allow brokers, advisors, and insurance agents to receive variable compensation on sales of investment and insurance products in qualified retirement accounts.
In order to use the exemptions to earn prohibited compensation, such as variable commissions, revenue on proprietary products, or fees on IRA rollovers that are greater than fees paid on assets in 401(k) plans, the contracts can’t include language that waives investors’ right to bring class-action breach of contract claims.
The announcement that Labor won’t enforce the class-action provision was published in a field assistance bulletin a day before Labor released its proposal to delay the fiduciary rule’s full implementation date by 18 months.
The BIC Exemption, and its prohibition on class-action waivers, is scheduled for implementation on January 1, 2018.
Often referred to as the rule’s private right of action, the class-action provision was designed by Obama-era regulators to be the rule’s primary enforcement mechanism.
It is also among the most contentious provisions of the fiduciary rule. The Employee Retirement Income Security Act has always had a private right of action for participants in employer-sponsored retirement plans.
But the fiduciary rule extended that right to IRA investors.
Proponents of the rule say the right to bring class-action claims is necessary to implement an enforceable fiduciary standard across the retirement advice industry.
Opponents of the rule argue it will expose financial institutions to frivolous lawsuits that will be costly to defend. Some have argued those costs would be passed on to retirement investors. Others say the specter of class-action suits will result in defensive investment practices, including moving lower value accounts to robo advice models, or raising minimum account requirements in order to access personal advice.
No ‘cottage industry’ seen in plaintiffs’ bar
Over the past decade, scores of ERISA claims have been brought against sponsors and providers to defined contribution plans.
Multi-million dollar settlements in claims brought against Boeing, Lockheed Martin, American Airlines, Cigna, and Nationwide are among the high-profile cases that have garnered headlines. Large 403(b) plans have been targeted over the past year.
And a rash of new claims have been filed against investment management companies that provide proprietary investments to their own employees.
By one estimate, nearly $700 million in penalties and settlements in ERISA claims against defined contribution plans were paid between 2009 and 2016, according to data cited by the American Benefits Council, which advocates for large plan sponsors.
Plaintiffs’ attorneys were awarded $204 million in fees, while the average award for individual plan participants was $116.
Opponents of the fiduciary rule say those numbers portend what can be expected under the regulation’s private right of action.
However, the American Association for Justice, the influential trial attorney lobby, says fears of frivolous lawsuits under the fiduciary rule are unfounded.
“We have not seen a new cottage industry crop up around the fiduciary rule,” said Andrew Rogers, director of legislative affairs at AAJ, in an interview with BenefitsPRO.
“There is nothing in the rule that will make non-meritorious litigation more appealing,” added Rogers, who describes the AAJ as a strong supporter of the fiduciary rule.
Beyond saying it won’t enforce the prohibition on class-action waivers in the BIC Exemption, Labor has also said it will grant wide latitude to financial firms that are making a good faith effort to comply with the rule’s impartial conduct standards, which went into effect in June.
Rogers says courts would honor that guidance. “The rule is designed to deter the worst type of practices,” he said. “If you had litigation attacking firms complying with the spirit of the rule, you will see courts throw those out.”
Many ERISA attorneys question the merits of the most recent claims against defined contribution plans.
But that body of law may not directly correlate to class-action claims under the fiduciary rule.
Marcia Wagner, managing director of the Wagner Law Group, says the millions of dollars industry has deployed to comply with the fiduciary rule is distinct from the complacency of defined contribution investment committees a decade ago, when claims against plans began in earnest.
“The reality is that there is no accurate way of predicting whether the 401(k) litigation is an appropriate barometer of class action litigation under the fiduciary rule,” Wagner said in an email.
A moot question
The Trump Labor Department has been unambiguous in its disdain for the fiduciary rule’s private right of action.
Labor dropped its defense of the private right of action in a lawsuit being considered in the 5th Circuit Court of Appeals.
The Department has also asked a federal court in Minnesota to stay a claim against the rule brought by Thrivent Financial.
Thrivent’s claim was unique from others brought by industry in that it focused exclusively on the rule’s private right of action.
Attorneys for Thrivent and the Labor Department have been struggling to negotiate the cleanest way to resolve the claim. Thrivent is proposing a motion for preliminary injunction, while Labor says the better course is for the court to stay the litigation.
In a letter to Judge Susan Richard Nelson, who is presiding over the Thrivent claim, Labor semaphored the release of its enforcement guidance on the BIC’s private right of action.
“A stay of the litigation is the most efficient way to address this claim regarding a provision that is not currently applicable to plaintiff and which will likely be mooted in the near future,” wrote attorneys for Labor in a letter dated one week before the field assistance bulletin was released.
Given the energy Labor has put in to disarm the fiduciary rule’s private right of action, Marcia Wagner says it is likely that a rule will emerge that allows financial institutions to waive the right of class actions in contracts with investors.
Still, Labor will have to devise an alternative enforcement mechanism, says Wagner.
But the road to that end could have detours.
One ERISA attorney, speaking on background, said they expect Labor’s enforcement guidance on the private right of action to by challenged by consumer advocate groups.