Analysts: DOL rollover ruling ‘a big deal,’ but don’t get carried away

Monday's federal court ruling tossing out a portion of the Department of Labor's advice rule governing rollovers is "a big deal," a leading analyst said Thursday.

But it is also just one step in a very long process, added Bradford P. Campbell, partner at Faegre Drinker Biddle & Reath.

"I think the answer is not, 'Hey everyone, DOL's interpretation is dead. Don't worry about it anymore.' That's not what's happening," Campbell said during a Thursday webinar.

A federal district court judge in Florida sided with the American Securities Association in striking down a portion of guidance the DOL issued in 2021 that expanded the definition of a retirement plan fiduciary.

The District Court for the Middle District of Florida granted the ASA’s motion for summary judgment one year after the lawsuit was filed. Judge Virginia M. Hernandez Covington ruled that a portion of the department’s frequently-asked-questions guidance illegally widened its regulatory lane, and failed to comply with the agency’s own regulations.

The DOL has long tried to tighten financial advice regulations with regard to "rollover" transactions, that is, transferring money out of retirement plans. Many advisors earn a commission on these transactions, which regulators consider a conflict of interest.

The fiduciary standard is based on the "five-part test" established in 1975, in which one of the prongs, the "regular basis" test, is based on whether the advisor and client are in an "ongoing relationship."

In order to satisfy that prong, the DOL claims a one-time rollover contains the expectation of future advice rendered.

'Pretty considerable blow'

Judge Hernandez Covington's decision is the second big court loss on this point for the DOL, the first being the repeal by the Fifth Circuit in 2018 of a highly controversial Obama-era fiduciary rule issued in 2016.

Still, the DOL is determined to expand the definition of fiduciary and has shown it is in the fight for the long haul, Campbell pointed out.

"This is definitely a big deal and it's a pretty considerable blow against DOL's theories as to why rollover recommendations are fiduciary advice in what's probably a longer battle," he explained. "So I wouldn't run out and change my policies and procedures right now."

Furthermore, there is still another lawsuit challenging the DOL's investment advice rule, Campbell noted.

The Federation of Americans for Consumer Choice, joined by a number of independent insurance agents and agencies, sued the Labor Department in Dallas federal court. That court is within the Fifth Circuit, where the DOL lost its fiduciary rule fight.

The lawsuit asserts the Labor Department’s latest rule “carries forward the core problem the Fifth Circuit identified in vacating the Fiduciary Rule the first time,” adding that “pouring the same old wine into a new bottle does not change the result.”

Appeal likely

Judge Hernandez Covington's decision will likely be appealed, added Fred Reish, partner at Faegre Drinker Biddle & Reath.

"I believe the department will want to preserve its position and keep some rule in place for the time being," Reish said, "because I think they're working on a new regulation."

The DOL’s spring 2021 Regulatory Agenda confirmed that it will rewrite the definition of fiduciary, a much-speculated-about process ongoing behind closed doors. The Employee Benefits Security Administration could send a new fiduciary rule to the White House in April or May, Reish guessed.

"One way to look at [Judge Hernandez Covington's ruling] is that it's just a first step in a long process," Reish said.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.