Another judge strikes down DOL’s 401(k) rollover rule, as new rule expected soon

A federal magistrate has recommended that a Texas federal court strike down the Labor Department’s five-part test to determine whether financial professionals are acting as “investment advice fiduciaries” under ERISA, but the final chapter of the saga likely has yet to be written.

“The DOL’s interpretation of its own regulation is in conflict with its own regulation,” Rebecca Rutherford, a U.S. Magistrate Judge for the U.S. District Court for the Northern District of Texas said last month.

In her recommendation, Rutherford said that the DOL exceeded its authority in issuing the new interpretation and that it amounts to an “arbitrary and capricious” move by the department.

The suit had been filed by the Federation of Americans for Consumer Choice, a group that represents insurance distributors, as well as several advisors who sell annuities as part of their practice. These advisors “oftentimes make rollover recommendations for purchase of annuities to IRA owners and participants in employer-sponsored 401(k) and similar benefit plans, for which they receive commissions,” according to the FACC.

In explaining why the federation filed the suit, the group’s executive director, Kim O’Brien said, “The new rule is 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.”

Related: New fiduciary rule’s release date confirmed in DOL’s updated agenda

The magistrate’s recommendation is just that—a recommendation that a federal judge could accept or reject.

“If the district court follows the magistrate’s recommendation it would be the second “holding that the long-standing assessment of what constitutes a ‘regular basis’ would be reinstated—and that while advice to the participant in the plan would continue to carry a fiduciary relationship to a rollover recommendation, a separate rollover recommendation by an advisor without that prior relationship would be a separate matter, the American Society of Pension Professionals & Actuaries, said, following the ruling. “At least for now.”

The society also noted that Rutherford’s ruling is a recommendation, but that it is likely to be given “thoughtful consideration” by a judge handling the case.” It’s not beyond the realm of possibility that that judge might make their own determinations here—but it seems more likely than not that the recommendations here will be adopted,” the society said.

The Texas decision is similar to one issued by a Florida federal court, which said the DOL’s five-part test setting out who qualifies as a fiduciary under the Employee Retirement Income Security Act was “arbitrary and capricious.” In May, the Labor Department dismissed its appeal of that ruling.

Following the decision not to appeal, attorneys at Faegre Drinker said the decision did not represent the final word on the issue because the Labor Department had indicated that it intended to issue a new rule on the matter and that the Florida case might prompt the department to move quickly to issue the new rule.

Other attorneys agreed.

“Many investment firms have already committed significant time and resources to revamping their processes and procedures to comply with PTE 2020-02 [Improving Investment Advice for Workers & Retirees] and the 2021 guidance, including, with respect to rollover recommendations, and it is not clear whether these firms would move to change practices while this high level of uncertainty persists,” attorneys at Ropes & Gray said, following the Florida court ruling.

It’s expected the Labor Department will issue a proposed fiduciary rule in August.