Retirement Security Fiduciary Rule Stayed
Under recently finalized federal regulations (commonly referred to as the “Fiduciary Rule”) that were scheduled to become effective on September 23, 2024, the U.S. Department of Labor intended to expand the fiduciary protections of the Employee Retirement Income Security Act of 1974 (“ERISA”) to a broader group of service providers (for example, financial advisors who assist employees with rollovers to IRAs from employer sponsored 401(k) or other types of retirement plans). While most plan sponsors and fiduciaries were not expecting to wake up to a vastly different legal landscape on September 23rd due to the 2024 Fiduciary Rule (to be codified at 29 C.F.R. part 2510), they will now have a longer wait before seeing its impact.
Executive Summary:
The September 23, 2024 effective date of the following benefits related regulations is stayed on July 25, 2024 until further order of the Texas district court in Federation of Ams. for Consumer Choices, et al. v. U.S. of Lab., No. 6:24-cv-00163-JDK, at *41 *42 (E.D. Tex. July 25, 2024):
1. Retirement Security Rule: Definition of an Investment Advice Fiduciary, 89 Fed. Reg. 32,122 (Apr. 25, 2024).
2. Amendment to Prohibited Transaction Exemption 84-24, 89 Fed. Reg. 32,302 (April 25, 2024).
A second court issued a further stay on July 26, 2024 in the American Council of Life Insurers, et al. vs United States Department of Labor, et al. impacting the effective date of the amendments to Prohibited Transaction Exemption (“PTE”) 2020-02 and various other exemptions (PTEs 75-1, 77-4, 80-83, 83-1, 86-128).
The regulatory definition of “investment advice” under ERISA’s statutory definition of “fiduciary” has been the subject of much turmoil in recent history. As aptly stated by Judge Kernodle “being labeled a fiduciary under Title I [of ERISA] imposes a heavy burden.” Therefore, changes to the definition that cause persons to fall within or outside the scope of the definition are greatly important to service providers making recommendations. The recipients of these recommendations such as retirement plans or participants correspondingly have an interest in which side of the line these actions fall.
The breadth of the investment advice definition has expanded and shrunk multiple times in the past two decades, with the current in-force definition being one written in 1975. This 1975 definition or five-part test was issued by the Department of Labor at the dawn of ERISA and is a familiar touchstone in the retirement world. A 2016 regulatory change was intended to expand the scope of fiduciary advice to include recommendations to rollover from an ERISA plan to an IRA and one-time investment recommendations. However, this “2016 Rule” was vacated by the Fifth Circuit in 2018 and the 1975 definition reinstated. The “2024 Fiduciary Rule” attempts to expand the scope beyond the 1975 five-part test while avoiding the overbreadth found by the Fifth Circuit. In his opinion, Judge Kernodle does not agree that the 2024 Fiduciary Rule has struck the right balance and that it is again likely to be found in conflict with the statutory text of ERISA. Given the likelihood of success on the merits that the 2024 Fiduciary Rule is in conflict with the statute and unreasonable, arbitrary, and capricious,” Judge Kernodle issued a stay on the effective date. Likewise Judge O’Connor in the ACLI case agreed with Judge Kernodle’s reasoning and found that the plaintiffs were “virtually certain” to succeed on the merits of their claims. O’Connor stated that ‘[d]defendant’s arguments are nothing more than an attempt to relitigate the Chamber decision. Chamber decision unambiguously forecloses all of [those arguments.]” The likelihood of success on the merits is likely bolstered by the recent Supreme Court Loper Bright decision eliminating the deference provided to executive agencies like the Department of Labor.
A stay under the Administrative Procedure Act is akin to a temporary vacature that does not call for any action on the part of the Department of Labor, but pauses the effective date for all without regard to whether a person is a party to the lawsuits. This stay can be appealed by the Department of Labor. The litigation will continue in the Texas district courts absent such an appeal.
The long and drawn-out tussle over whether a one-time recommendation can be squared with a relationship of trust and confidence will likely continue for some time. This leaves broker representatives, insurance agents, advisors, and others wondering whether resources already put towards compliance with the 2024 Fiduciary Rule are wasted or merely deployed earlier than needed. Plan sponsors and plan participants will need to continue to wait to see if one-time pension risk transfer annuity sales or rollover distribution recommendations will be fiduciary in nature. Will plan fiduciaries receive less fulsome responses to Request For Proposals for managers or fewer sample line-ups from platform providers? Time will tell.
If you have questions about how this stay impacts either the services you provide to retirement plans and participants or the services your plan and participants receive, please contact Allie Itami or any member of the Lathrop GPM Employee Benefits & Executive Compensation team.