Risk to 401(k) Rollover Guidance: Essential Information for Retirement Savers

Legal experts indicate that the survival of the fiduciary rule is precarious following rulings from two federal courts in Texas. In July, these courts issued a national “stay” on the regulation, leading to an indefinite postponement of its scheduled implementation date of September 23. This delay allows the courts time to further examine lawsuits brought forth by various insurance industry associations.

Fred Reish, a specialist in retirement law, expressed skepticism about the rule’s prospects, suggesting, “It is almost a certainty that both courts will overturn” the Department of Labor’s regulation. He cited a hint from one of the courts, which commented on July 26 that the rule appeared “almost certainly unlawful” for a significant number of investment professionals, as documented in the case of American Council of Life Insurers v. United States Department of Labor.

A second case involves Federation of Americans for Consumer Choice v. Department of Labor, both of which challenge the legitimacy of the rule.

The Department of Labor maintains that the fiduciary rule is designed to create fairness in the financial advisory profession, allowing all qualified investment professionals to provide services without falling prey to unethical practices. A Department spokesperson reiterated that the rule aims to prevent insurance advisors from making recommendations that may be disloyal or misleading.

As legal proceedings unfold, the Department of Justice has been approached about potential appeals, but no comments have been made publicly on this matter yet.

In light of the court’s actions, the current regulations governing retirement rollover advice remain effective. Presently, brokers are allowed to provide investment recommendations that may benefit their commissions rather than the interests of the consumers they serve, a practice that the Labor Department has criticized, particularly in relation to annuity products.

The fiduciary rule is a significant element of the Biden administration’s efforts to eliminate “junk fees” that burden American consumers within the financial sector. Conversely, representatives from the insurance industry support the rulings, arguing that the suspension of the rule’s implementation offers necessary relief as the courts deliberate on significant legal arguments against the regulation.

The situation recalls a previous fiduciary rule introduced during the Obama administration that was ultimately overturned by the Fifth Circuit Court of Appeals in 2018. The subsequent Trump administration did not pursue this ruling to the Supreme Court.

Reish noted that the current fiduciary rules differ somewhat from the earlier iteration, suggesting that outcomes may vary. However, the outcome of the upcoming presidential election could significantly influence future actions. Should Democrats maintain control of the White House, they might pursue the case to the Supreme Court if faced with unfavorable court decisions.

Legal experts forecast a lengthy litigation process ahead, stating, “We are nowhere near a conclusion to the challenges to the 2024 fiduciary rule,” as pointed out by attorneys Gina Alsdorf and Stephen Kraus from Carlton Fields.