Time’s Ticking on 401(k) Fiduciary Rule Redo at Labor Department

The US Labor Department is running out of time to redefine 401(k) investment advice, while a series of legal battles regulators have lost is narrowing the parameters of that new regulation.

DOL’s Employee Benefits Security Administration last week backed out of a plan to appeal a decision from a federal district court in Florida striking down its guidance that widened the goalposts defining “ongoing” investment advice.

It’s the latest sign the Biden administration is fast-tracking its rulemaking (RIN:1210-AC02) with elections on the horizon and as courts continue to box the agency in, according to benefits advisers and former agency officials.

“Right now, we get the impression that they want to move this rule before the end of the Biden administration, but the reality is, they’re running out of time for that,” said Brad Campbell, a Faegre Drinker Biddle & Reath LLP partner and former EBSA assistant secretary under President George W. Bush.

Targeting Rollovers

“Fiduciary” is a loaded word. While applying the definition to more financial advisers ensures participants and beneficiaries are protected against conflicts of interest, it virtually eliminates common methods of compensation in the industry such as commissions on trades or contracts. Strict fiduciary standards of conduct rope those advisers into specific exemption agreements with regulators that add costs that are then passed down to consumers.

Regulators’ latest target for reining in retirement plan investment advice is expected to be the universe of advisers who recommend that participants “roll over” their employer-sponsored account balances out of a plan.

“We’ve been trying to come up with some version of the rule that will work and that is directed at the problems we have with individuals who provide investment advice for a fee,” EBSA Assistant Secretary Lisa M. Gomez told members of the International Foundation of Employee Benefit Plans last week.

Gomez and her team know that a fiduciary rule could bleed into a new administration and a potentially redder Congress, nearly guaranteeing its early demise unless the Biden DOL acts fast.

A proposed rule will have to go through two rounds of White House review and a formal notice-and-comment process. The final rule could easily take more than a year before it takes effect, Campbell said, which could leave it vulnerable to a congressional challenge.

Big Priority

It’s still unclear how regulators will draft a new fiduciary rule in time that navigates the precedent courts have already set against it.

The US Court of Appeals for the Fifth Circuit in 2018 penalized the DOL for encroaching on authority the Securities and Exchange Commission has to regulate adviser conduct. Federal district courts in New York and Florida have said rollover recommendations aren’t necessarily fiduciary conduct if advice extends outside the confines of the plan.

“Looking at the totality of cases against them, the department appears to be running out of options,” said Steven Rabitz, co-chair of the employee benefits and executive compensation practice at Dechert LLP in New York.

The department has been trying to cast a wider fiduciary net for more than 13 years, since the second Obama administration when the agency proposed two rules and finalized one that the Fifth Circuit vacated. A Trump-era exemption the Biden DOL allowed to take effect was curtailed by the sub-regulatory guidance a Florida federal court struck down earlier this year.

A similar challenge awaits a Texas federal district court judge’s ruling. The Federation of Americans for Consumer Choice filed papers this month to supplement its complaint against the Labor Department with the Florida district court’s ruling. A magistrate judge this week granted the department’s request for a time extension to respond to that notice of supplemental authority.

“I think a lot of folks are assuming that the Texas court will reach a decision similar to the Florida court,” Campbell said.

—With assistance from Sara Hansard.