Federal judge tosses out portion of DOL rollover advice guidance

By John Hilton

Financial advisors providing first-time advice in a plan rollover setting will not be considered fiduciaries – at least for the time being.

A federal district court judge in Florida sided with an industry trade group Monday in striking down a portion of guidance the Department of Labor issued in 2021 that expanded the definition of a retirement plan fiduciary.

The District Court for the Middle District of Florida granted the American Securities Association’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 ruling is the latest setback for the DOL in its bid to extend fiduciary duty to advisors who handle "rollover" planning. According to the Investment Company Institute, 401(k) plans hold $6.3 trillion in assets as of Sept. 30, 2022, on behalf of about 60 million active participants and millions of former employees and retirees.

When recipients retire and the money is "rolled" out of those plans, many advisors earn a commission. Regulators consider that a conflict of interest and want to expand the definition of fiduciary. The fiduciary standard is based on the "five-part test" established in 1975, in which one of the prongs is 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. The judge was not buying it.

"While an offer to provide future advice may, as the Department suggests, be the beginning of a relationship, that relationship is inherently divorced from the ERISA-governed plan," she wrote. "Because any provision of future advice occurs at a time when the assets are no longer plan assets, it is not captured by the 'regular basis' analysis."

The ASA celebrated the decision.

"ASA is pleased the court recognized the DOL operated outside the scope of its legal authority and vacated its unlawful policymaking through guidance," ASA CEO Chris Iacovella said in a news release. "ASA filed this lawsuit to protect investor choice and America's retirement savers from administrative overreach and the Court agreed the DOL's failure to seek public comment before changing its rules about retirement advice was a violation of the Administrative Procedure Act."

The lawsuits

The ASA filed its lawsuit days after the DOL investment advice rule took effect on Feb. 1, 2022.

Created by the Trump administration, the Investment Advice Rule has two main parts: a new prohibited transaction exemption allowing advisors to provide conflicted advice for commissions; and a reinstatement of the "five-part test" to determine what constitutes investment advice.

The Biden administration allowed the investment advice rule to take effect Feb. 16, 2021.

The ASA lawsuit claims the DOL overstepped its bounds with guidance issued in April 2021, which spelled out the new treatment of first-time advice to transfer retirement assets out of a federally regulated plan. Issued as a series of Frequently Asked Questions, the guidance essentially created new rules, the ASA claimed in the lawsuit.

The trade group claimed the guidance essentially “rewrote” the regulation, in the process, imposing burdensome documentation and investigation requirements on their members.

"The [Administrative Procedures Act] prohibits agencies from regulating in this manner," the lawsuit reads. "If the Department wanted to change its rules, it needed to do so through the required notice-and-comment process—not through guidance documents."

The ASA lawsuit was the second filed against the DOL investment advice rule. 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 appellate court three years ago struck down the DOL’s prior fiduciary rule.

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.”

In 2018, the Fifth Circuit Court of Appeals tossed out the fiduciary rule, ruling that the DOL exceeded its authority by creating a new regulatory scheme for the retirement plan space.

The FACC lawsuit is ongoing.

"It is our view the Florida decision knocks out an important pillar of DOL’s new guidance, but our case goes further in challenging other fundamental aspects of DOL’s guidance on who is a fiduciary," said Kim O'Brien, CEO of FACC. "The Florida decision reinforces our view that DOL has overreached on the specific point addressed in the ASA case and more generally in its reinterpretation of fiduciary in violation of the Fifth Circuit’s 2018 holding."

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.

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.