DOL retirement proposal faces 2 potential checks before election

As critics and supporters await the Labor Department's retirement advice regulation sometime later this year, the pending proposal is adding to the importance of the presidential election.

President Joe Biden's administration is trying to bulk up the fiduciary duties requiring individual retirement account rollovers, certain insurance-product sales and other services to 401(k) savers to be in their best interest. Since issuing the proposal in the late fall and receiving more than 19,000 public comments, Labor's Employee Benefits Security Administration will likely release the final version in the second or third quarter. Advocates argue the rule would bolster consumer protections against harmful sales practices, while opponents view the regulation as overly burdensome in a way that could reduce access to professional advice from financial advisors and insurance professionals.

The timing of the final rule revolves around the upcoming elections this November, according to Benjamin Edwards, a professor of law at the William S. Boyd School of Law at the University of Nevada, Las Vegas who's an expert in securities regulation and backs the proposal. The release will start a 60-day clock under the Congressional Review Act for U.S. lawmakers to raise any challenges. In addition, the trade and industry groups expected to challenge the rule in court must wait until there's a final rule to seek to vacate it through a lawsuit. The next occupant of the White House will decide whether to press any appeals against any potential court decisions striking down the rule, Edwards pointed out in an interview.

"The sense I have is that there are billions of reasons for the industry to bring some kind of a litigation challenge," he said. "How that litigation will play out may ultimately depend on who wins the next presidential election."

Meanwhile, any "significant shifts" in the current makeup of Congress stemming from the same election "could change the calculus" of the reviews, he added. Lawmakers have passed joint resolutions overturning administrative rules 20 times since 2001, including three in the last Congress and 16 in 2017 and 2018, according to the Congressional Research Service.

"There is a window for Congress to disapprove of regulations in some circumstances. One of the factors that might affect whether the rule makes it is exactly when it comes out and when that review period is and who is in Congress at the time," Edwards said. "If you get it done before the election and that period expires before a new Congress comes in, then it'll be up to the courts."

READ MORE: Critics of DOL fiduciary proposal pulling every lever to block rule

A significant rule

Those two checks on the executive branch will add another step in the process for possible major changes to the guidelines for IRA rollovers under the rule. 

As wealth management firms "continue to pursue opportunities in the Employee Retirement Income Security Act of 1974 (ERISA)-covered retirement plan space, they will need to navigate and overcome new and pending regulation imposing more stringent fiduciary requirements when recommending IRA rollovers," research and consulting firm Cerulli Associates found in a report last week. In 2022, an advisor worked with the retirement saver in at least 63% of the transactions rolling over $845 billion from 401(k) and other defined-contribution plans into IRAs — or more than $532 billion in assets, according to Cerulli.

"While regulation promoting a fiduciary standard often benefits end-investors, there likely will be pushback on these key provisions from the insurance industry and broker/dealer-based advisors who sell commission-laden annuity products," Shawn O'Brien, the director of Cerulli's retirement practice, said in a statement. "Opponents of the proposal note that the Securities and Exchange Commission already is enforcing Regulation Best Interest (Reg BI) outside of ERISA-covered retirement plans."

Many advocacy groups representing large wealth management firms, insurance companies and asset managers are making the case that the rule could remove the ability of those savers to receive professional advice as part of that process. 

The rule could cost as much as $2.5 billion per year in new compliance expenses, according to a survey of wealth management firms conducted by Oxford Economics on behalf of the Financial Services Institute, an advocacy group representing independent brokerages and advisors. The institute is calling for the agency to withdraw the proposal entirely.

"The study confirms our concerns about the DOL's proposed Retirement Security Rule and its negative impact on the accessibility of financial advice for Main Street Americans as they prepare for retirement," CEO Dale Brown said in a statement. "If approved, the rule would impose unnecessary and expensive requirements on our members, further restricting Main Street American investors' access to professional financial advice, products, and services."

However, the supporters of the proposal are coalescing behind it with just as much vehemence in questioning the credibility of the industry's claims about the potential impact. The rule's opponents may have even larger ambitions than simply tanking the rule, Knut Rostad, the president of the Institute for the Fiduciary Standard, wrote in a column earlier this month for VettaFi's Advisor Perspectives blog.

"Fiduciary opponents have embraced a more ambitious objective — to eliminate fiduciary advice," Rostad wrote. "They are not seeking this legislatively, but in interpreting rulemaking. They want to make 'fiduciary' meaningless through language that is unclear and ambiguous or redefines words and concepts to serve special interests. The testimony of fiduciary opponents on the proposed DOL Retirement Security Rule are clear evidence."

READ MORE: 12 standout comments on the DOL retirement advice proposal

An issue of trusting in advice?

The proposal represents "a great step" toward creating "a bit more of a level playing field" between the current fiduciary practitioners and insurance agents and other professionals providing retirement advice to plan participants, according to Edwards. Many annuity sales expected to be affected by the rule "are products that you would ordinarily consider to be securities anyway" that "end up in this different regulatory area" covered by the Labor Department rather than the SEC, he said.

Few consumers grasp the fees, conflicts of interests and differences between a registered investment advisory firm and an insurance producer when making their decisions about buying a product such as a fixed index annuity, he added.

"Investors are coming to them and asking them for help because they don't know what to do," Edwards said. "So this is ultimately an area where I think our bias should be to protect trust."