Skip navigation
DOL Fiduciary Rule
DOL sign Stockbyte/Thinkstock

DOL Rule's Rollover Exemption a Surprise. But Is It Enforceable?

Some retirement experts expressed surprise that the DOL's proposed exemption for fiduciaries included any expanded investor protections, but they also cautioned the changes lacked teeth.

After the 5th U.S. Circuit Court of Appeals vacated the Obama-era fiduciary rule in 2018, few expected the Trump administration’s revised rule, meant to better align with the SEC’s Regulation Best Interest, to include any expansion of fiduciary standards. 

The proposed rule by the Department of Labor was released earlier this week, and some, including Fred Reish, a partner with Drinker Biddle’s Employee Benefits and Executive Compensation Group and chair of the Financial Services ERISA Team, were surprised to find that it may extend ERISA’s fiduciary standard to some rollover recommendations that would not have been subject to that scrutiny in the past.

“That was a shock, an absolute shock, and that means that most rollover recommendations made by advisors with broker/dealers would be fiduciary recommendations, because the reason the advisor recommends a rollover is to manage an IRA,” Reish said. 

But Reish and others cautioned that an uncertain future for DOL enforcement, coupled with the loss of investors’ right to pursue legal action in the case of recommendations or undisclosed conflicts, may still leave many consumers without much recourse.

Before the Obama administration’s fiduciary rule was enacted in 2016, recommendations made by brokers or advisors were subject to a ‘five-part’ test that was established in 1975 to determine whether they would be subject to an ERISA fiduciary standard. Among other requirements, the advisor would have to render advice on a regular basis for the recommendation to qualify. For many investors, a rollover recommendation from a 401(k) to an IRA may be their first (or only) interaction with a financial services professional, which made it difficult to view those recommendations as subject to a fiduciary standard.

While the Obama rule increased the fiduciary scrutiny applied to rollover recommendations, the DOL argues in its revised regulation that the appeals court's 2018 decision entirely vacated the Obama rule, leaving the five-part test in place as the means to judge whether the fiduciary standard applies (some, including Micah Hauptman, the financial services counsel at the Consumer Federation of America, have questioned whether the DOL’s argument here is sound).

If an advisor offers an investor a rollover recommendation, that recommendation could now be subject to a fiduciary standard, according to the proposed rule.

This could hold true even if it is the first interaction between client and professional, provided there’s an understanding that the relationship will be ongoing, according to Jasmin Sethi, an associate director of policy research at Morningstar. But Sethi cautioned since it is not known how often rollover advice is given on a one-off basis, it is possible that many rollover recommendations will not be subject to the standard.

“From Morningstar’s perspective, we’re happy to see that rollover advice can constitute investment advice under the proposed rule, but we do think there is some vagueness as to when the investment advice fiduciary standards apply," she said. "Also, there’s a lot to be determined based on enforcement.”

This question of enforcement is particularly important, as the new rule does not allow for investors to pursue lawsuits against investment professionals for recommendations they may have made (or conflicts they did not mitigate or disclose), according to Sethi.

“This leaves all the enforcement up to the DOL and the SEC,” she said.

The lack of any enforcement mechanism undercuts the supposed expansion of fiduciary protections to certain rollover recommendations, said Jamie Hopkins, the director of retirement research at Carson Group. After the court struck down the Obama rule in 2018, the DOL issued temporary enforcement policies saying advice professionals had exemptions from prohibited transactions provided they worked “diligently and in good faith to comply with ‘Impartial Conduct Standards.’” 

These standards included a "best interest" standard, a reasonable compensation standard, and a requirement that fiduciaries would make no misleading statements about transactions to clients, according to the proposed rule. The new rule may officially codify this temporary guidance into regulation, Hopkins said.

“This is not the creation of a rule; it’s the creation of an exemption. There’s no way for an investor to enforce the breach of an exemption to a rule,” Hopkins said. “You can not sue them for failing to meet their prohibited transaction exemptions.”

Additionally, Hopkins said that according to prior guidance, the DOL will not enforce lapses in exemptions from prohibited transactions. Coupled with the lack of a private right to action for investors, he said it leaves clients without much recourse and leaves the rollout recommendation fiduciary expansion somewhat toothless. 

Hopkins saw the DOL rule as the latest in a trifecta of regulations that scaled back consumer protections. With the SEC's Reg BI, he argued there would be confusion among clients between a broker’s best interest and an RIA’s fiduciary standard, while he asserted that the SECURE Act, which Congress passed late last year, would enable insurance companies to place their products into 401(k)s without requiring traditional ERISA review.

“And now, insurance brokers will also be able to recommend rollovers out of these plans without meeting a fiduciary standard of care by stating they’re a fiduciary while having an exemption from that rule,” he said. “When you put it together, that’s not a great stance from a consumer standpoint.”

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.