Federal judges have brought to an end the Department of Labor's latest attempt to heighten the fiduciary standards financial advisors are subject to when proffering retirement-related advice.
Judge Reed O'Connor of the U.S. District Court for the Northern District of Texas on Tuesday ordered the vacation of a 2024 Labor Department rule meant to subject advisors under the fiduciary duty to always put their clients first when making recommendations on 401(k) rollovers or purchases of annuities or other insurance products. That decision came just days after another judge, Jeremy Kernodle of the U.S. District Court for the Eastern District of Texas, handed down essentially the same decision.
The orders mark the end of the road for a regulation officially named the Retirement Security Rule: Definition of an Investment Advice Fiduciary. Almost immediately after its
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A fiduciary loophole for one-time retirement-related advice
Investor advocates have long sought to heighten the conduct standards that financial advisors must adhere to when offering retirement-related advice. Financial advisors are already subject to the fiduciary duty when offering retirement recommendations as part of a long-term relationship with clients. But there is an exception for one-time advice — often recommendations to transfer assets out of one 401(k) retirement plan into another or buy an insurance product like an annuity.
Besides requiring advisors to put clients' interests first, the fiduciary duty calls for the elimination of most conflicts of interest. Investor advocates have said an advisor's one-time retirement-related advice can come with substantial conflicts. Financial advisors, for instance, can receive commissions or other payments for directing clients into certain annuity products.
In seeking to bring all retirement advice under the fiduciary standard, the Department of Labor was met with a barrage of criticism from industry groups complaining the stricter standard would lead to increased costs and fewer choices for investors and savers.
"We are concerned that the new rule will limit retirement savers' access to professional financial advice, products and services offered by independent financial advisors and firms and create a more complicated, burdensome and costly regulatory environment," the Financial Services Institute, a brokerage and advisor advocacy group, said in a statement a few months
On Tuesday, various industry groups applauded the federal courts' decision to bring an end to the Department of Labor rule.
"The order ensures that financial advisors can continue to provide the services best suited for each individual client," the Securities Industry and Financial Markets Association said in a statement.
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Not the first time the DOL has sought a fiduciary standard for retirement advice
Many opponents of the Biden Administration rule contended it was substantially similar to another fiduciary requirement approved under President Barack Obama and later struck down by the Fifth Circuit Court of Appeals. The groups that sued in federal court over the Biden Administration rule — the American Council of Life Insurers and eight other insurance trade groups in the case in Northern District of Texas and the Federal of Americans for Consumer Choice and various independent insurance agents in the Eastern District of Texas — argued that the Biden Administration had essentially ignored the Fifth Circuit's previous ruling overturning the earlier fiduciary standard for retirement advice.
The fiduciary standard adopted under Biden was never officially in force. The groups challenging it — which also questioned if the Labor Department had exceeded its authority in adopting the rule — got
The Department of Labor appealed the court stays. But those efforts were later abandoned under President Donald Trump when labor officials filed motions in November withdrawing their case from the U.S. Court of Appeals for the Fifth Circuit.
Savers move billions out of 401(k)s and similar "defined contribution" plans every year. The Life Insurance Marketing and Research Association, or LIMRA, has estimated more than $1.1 trillion will be rolled out of defined contribution plans into individual retirement accounts, or IRAs, by 2030.
Loads of letters, debates before Congress
In the months before its adoption, the Biden Administration's fiduciary rule for advice was a hot topic of debate. The Department of Labor received more than 19,000 letters about it in a 60-day comment period leading up to its adoption.
The House Financial Services Committee's Subcommittee on Capital Markets held a hearing on the proposal in January 2024
Meanwhile Kamilla Elliott, a founder of Collective Wealth Partners in Atlanta and a former chair of the Certified Financial Planner Board of Standards, said the rule would merely help ensure advisors are always placing clients' interests first. "I am here because moderate-income Americans saving for retirement should have the same access to best-interest financial advice that wealthy Americans enjoy," she testified.
Critics of the Biden Administration rule contended its proponents were overlooking regulatory changes already made to protect savers and retirees. In 2019, for instance, the Securities and Exchange Commission adopted a conduct standard called Regulation Best Interest, which calls on brokers not only to look out for clients' interests but to disclose conflicts that can't be eliminated. Reg BI, as it's known for short, applies to "one-time" recommendations on 401(k) rollovers and annuity purchases.
