Trump DOL Restores Prior 401(k) Test After Biden Rule Axed (1)

The US Department of Labor said it is effectively restoring a 1975 five-part test for determining retirement account fiduciary status after two Texas federal courts agreed to vacate a Biden administration 401(k) rule.

The DOL Employee Benefits Security Administration said Wednesday it will publish an entry in the Federal Register to formally remove the 2024 rule, which had many Wall Street critics.

President Donald Trump’s DOL said it will not engage in new notice-and-comment rulemaking to replace the Biden-era regulation that would have applied the highest legal standard of care to one-time 401(k) rollovers.

The Trump administration has increasingly ignored the notice-and-comment process typically used for creating or repealing rules, speeding up de-regulatory action.

Judges in the US District Court for the Eastern District of Texas and the US District Court for the Northern District of Texas in recent days approved motions to vacate in two separate cases challenging the Biden fiduciary rule on Administrative Procedure Act grounds.

“The challenged regulation wrongly sought to impose ERISA fiduciary status on securities brokers and insurance agents when there was not a relationship of trust and confidence,” Assistant Secretary of Labor for Employee Benefits Security Daniel Aronowitz said in a statement. “The Securities and Exchange Commission and state regulators regulate the activities of securities brokers and insurance agents and will continue to do so.”

The SEC in 2019 adopted Regulation Best Interest, which many opponents of the Biden fiduciary rule argued provides enough protection for retirement savers, along with best interest standards for annuity sales that have now been adopted in all 50 states.

Long Road

The DOL for decades has relied on a five-part test, established shortly after the Employee Retirement Income Security Act was enacted, to determine when an adviser offering recommendations qualifies as a fiduciary.

Under the 1975 test, the individual must provide investment advice to the plan, the plan fiduciary, or the retirement account owner on a regular basis, pursuant to a mutual agreement that their advice serves as the primary basis for investment decisions based on the needs of the plan.

The Obama administration proposed a rule in 2016 that replaced the five-part test in defining a fiduciary. The US Court of Appeals for the Fifth Circuit in 2018 vacated that rule, determining it violated the APA.

The first Trump administration in 2020 publisheda prohibited transaction exemption that reinterpreted the five-part test that covered rollover advice.

The preamble to that exemption was effectively vacated after a court challenge, but Wednesday’s announcement clarified “each term and condition” of PTE 2020-02 remains in effect, undoing alterations made to it by the Biden rule.

The Biden administration’s fiduciary regulation faced pushback from insurers and other firms that argued the added liability would increase their risk and drive up the cost of one-time transactions, hurting investors in the process.

It was portrayed by the life insurance industry groups challenging it in court as too similar to the vacated Obama-era fiduciary rule. These groups welcomed EBSA’s announcement Wednesday.

“Today’s swift and sure action by the Department of Labor protects consumers and their access to information about financial protection,” American Council of Life Insurers CEO David Chavern said in a statement.