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Attorneys Urge Advisors to Comply With DOL Rollover Guidance, Despite Court Decision

In a decision this week, a district court judge overturned FAQs indicating that rollover recommendations for a 401(k) fall under ERISA, though attorneys believe the DOL will likely appeal.

Earlier this week, a District Court justice in Florida struck down a Department of Labor guidance from 2021 that would extend ERISA fiduciary protections to 401(k) rollover recommendations. But legal experts are cautioning advisors to stay the course of compliance.

According to Jaqueline Hummel, the director of thought leadership and regulatory compliance at the compliance consulting firm ACA Group, there’s still more that needs to be seen before opponents of the expanded guidance can declare victory.

“I wouldn’t get up and cheer at this point,” she said. “This is one court ruling at the trial stage; this decision is definitely going to be appealed, and the final decision is far down the road. I don’t think it’s good to rely on this decision until there’s a higher court ruling.”

The guidance was released in response to the department’s revised fiduciary rule from 2020, which spelled out exemptions to ERISA fiduciary conduct. The rule was released by the Trump administration and went into effect shortly after President Joe Biden entered the White House, in February 2021, with enforcement delayed until early 2022.

As part of the rule and accompanying guidance, the DOL asserted the 1975 “five-part test” that determines when an advisor’s counsel falls under ERISA protections. In particular, the DOL argued that advisors or agents who met clients for the first time to recommend they roll over their 401(k)s would still be considered offering “ongoing advice,” since it could be expected they’d continue to work with that client managing their retirement strategy and assets (and would therefore fall under ERISA regulations).

But in granting the American Securities Association’s motion for summary judgment, the Florida court ruled that legislators had long since bifurcated the protections investors have depending on the advice they’re receiving, according to Jason Berkowitz, the chief legal and regulatory affairs officer at the Insured Retirement Institute. In the case of advice on a 401(k), advisors are subject to the fiduciary standards of ERISA.

“If you’re providing advice on an IRA, then you’re not subject to those sorts of things,” Berkowitz said. “The DOL tried to blur the line on those things by saying that the source of the funds on the IRA are plan assets and that gives them the jurisdiction to treat them as plan assets under ERISA. This court says that’s not correct.”

Without the new rules, advisors making rollover recommendations would fall under the advisory fiduciary duty, or under the SEC’s Regulation Best Interest if they’re brokers. 

Berkowitz agreed with the DOL’s position that rollovers were one of the most important decisions a plan participant could make, but nevertheless, that didn’t impact the court’s decision.

“The structure Congress created does not allow the department to decide unilaterally that they should be in the mix on this sort of thing and have jurisdiction just because it’s a big deal,” he said.

At the same time, a similar lawsuit is unfolding in the 5th U.S. Circuit Court of Appeals in Texas brought by the Federation of Americans for Consumer Choice, an insurance agency trade association, arguing that despite modifications, the new rule would have similar impact as the Obama administration’s fiduciary rule that was overturned in 2018.

Both Hummel and Berkowitz agreed the DOL was likely to appeal the Florida court’s decision, though both were uncertain what arguments the appeal would make. Notably, the judge’s decision focused on the ways in which the department’s guidance allegedly created new regulations without going through the proper procedures for doing so. 

Additionally, the DOL’s regulatory agenda includes proposed regulation to revise its fiduciary definition and revisit the five-part test, though Hummel noted the department had continuously tried to pass a fiduciary rule for years, including the failed Obama-era rule.

Investor protection advocates were already pressuring the DOL to move forward on changes back in early 2022, but if the department did decide to move forward, it could negate the importance of the Florida court’s ruling.

“The basis for this decision was really a disconnect with the department’s interpretation of the plain text of its own regulation,” Berkowitz said. “If they change the five-part test for when fiduciary status is triggered, then the disconnect between the interpretation of the rule and the rule could go away.”

Hummel expected many firms who have made changes to their compliance procedures in the wake of the DOL’s guidance to continue upholding them despite the outcome of the District Court ruling in Florida.

“I think a lot of firms that are going to do it have already done it,” she said. “Firms that have traditionally lived in that space who provided rollover advice, they already have tools and are familiar with what the requirements are.”

Berkowitz also advised firms and agents to stay the course on compliance, regardless of the individual rulings.

“At the end of the day, what I say is, advisors need to make sure they’re providing advice to their clients that is focused on their clients’ best interest and not allowing their own interests to impact what they’re recommending or not recommending,” he said. “That general guidepost should keep people in pretty good shape, regardless of which regulatory regime they fall under."

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