This week, a Texas federal judge ruled partially in favor of a group of financial professionals and organizations challenging the Department of Labor’s interpretation of fiduciary standards under the Employee Retirement Income Security Act, in regard to employee retirement savings and rollover transactions.
In Federation of Americans for Consumer Choice Inc. et al. v. United States Department of Labor et al., the plaintiffs—a group that represents independent insurance agents, financial planners and industry organizations—argued that the DOL’s reinterpretation improperly expanded the definition of who qualifies as an “investment advice fiduciary” under ERISA, particularly regarding advice on rolling funds into individual retirement accounts from other retirement plans.
These advisors often make rollover recommendations for purchase of annuities to IRA owners and participants in employer-sponsored 401(k) plans, for which they receive commissions.
On July 9, U.S. District Judge Ed Kinkeade, in the Northern District of Texas, issued an order that accepted the findings and recommendations of a U.S. magistrate judge’s 2023 recommendation to vacate portions of the DOL’s guidance under the Prohibited Transaction Exemption.
The new DOL rule was “the latest iteration of decade-old effort by the government to turn more financial professionals, including insurance agents, into fiduciaries subjecting them to more onerous regulatory requirements," said executive director Kim O'Brien, in explaining why the federation originally filed the suit.
However, new DOL regulations that expanded liability for financial institutions and their employees or agents who give retirement rollover advice, which went into effect in 2022, said "financial institutions must document the reasons that a rollover recommendation is in the best interest of the retirement investor and provide that documentation to the retirement investor," according to the DOL.
In this particular case, the judge rejected the DOL’s attempt to consider a single rollover as the start of an ongoing advisory relationship, the assumption of possible future advice to IRAs and the view that a continuous advisory relationship covering both a workplace retirement plan and an IRA meets the “regular basis” requirement for fiduciary status.
Related: Another judge strikes down DOL’s 401(k) rollover rule, as new rule expected soon
The ruling partially invalidates the DOL’s attempt to regulate one-time rollover advice as fiduciary investment guidance, potentially narrowing the department’s oversight of financial professionals who offer IRA rollover services.
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