What’s the ‘Over/Under’ on the DOL’s New Fiduciary Rule?

What’s the ‘Over/Under’ on the DOL’s New Fiduciary Rule?

November 13, 2023

Please read my contribution to this article published in Fiduciary News...

What’s the ‘Over/Under’ on the DOL’s New Fiduciary Rule?
by Christopher Carosa November 14, 2023

When the DOL finally released the wording of its much-anticipated new Fiduciary Rule, people did two things: they read it, and they prepared to fight it. It’s just what people do with DOL Fiduciary Rules.

“The strengths are its weakness,” says Harold Evensky, founder of Evensky & Katz in Miami, Florida, and Lubbock, Texas. “It steps on the toes of financial institutions with almost unlimited financial resources and political contacts that may well ensure its political failure.”

Beyond upsetting the usual suspects, it may very well be that the new Rule does less than advertised.

“The primary weakness of the fiduciary rule is that the proposed rule may have been unnecessary,” says Eric Gregory, member at Dickinson Wright PLLC in Troy, Michigan, “It may very well be vacated by a court similar to the 2016 fiduciary rule. Institutions have already worked hard over the last few years to comply with PTE 2020-02. The new proposed amendments to PTE 2020-02 and PTE 84-24 may have, on their own, accomplished the goals of the Department of Labor without requiring the revisions to the definition of fiduciary imposed under the new proposed regulation.”

With the growing acceptance of sports betting, the term “over/under” is fast becoming a standard phrase in our lexicon. It usually refers to whether the combined score in a particular game will be over or under a set amount. It can also mean how fast a team might make its first score or how fast a player will reach a specific milestone within a game.

In keeping with the times, it’s only natural to ask, “When will some court vacate the new Fiduciary Rule?”

“You mean, this hasn’t happened yet?!?” says Matthew Eickman, National Retirement Practice Leader for Qualified Plan Advisors in Omaha, Nebraska. “Many trade groups—particularly those within the insurance industry—expressed a commitment to challenging the rule BEFORE it was publicly available. The proposed rule’s frequent references to specific vehicles—particularly fixed index annuities—will likely fuel that fire. The primary challenge will be that the DOL does not have statutory authority to extend its jurisdiction to IRAs. That will be a stronger argument than ‘this rule will cut off access for investors with small accounts because we can only work with smaller account investors if we don’t have to provide recommendations that are in their best interests,’ although we’ll hear that one, too.”

It’s not that easy to say you’re going to take the DOL to court. There are certain steps to the process, and these steps take time.

“Most likely several lawsuits are poised to be filed as soon as the rule passes through the public comments phase,” says Richard Bavetz, investment advisor and federal retirement consultant at Carington Financial in Westlake Village California. “The decision in a Florida district court in February rejecting the Department of Labor’s interpretation that fiduciary investment advice includes advice to roll over assets from an employer-sponsored benefit plan to an individual retirement account in some circumstances. In that decision, the judge used words and phrases such as arbitrary, capricious, an abuse of discretion, and contrary to law when referring to the DOL’s ‘impermissibly unmooring’ ERISA’s regulatory text. I think this guarantees another showdown. In reading the White House Statement and corresponding blog, they seem to be portraying themselves as fiduciaries dispensing the same advice to 100 million people, thereby violating the core principle of the fiduciary model.”

One hint of the new Rule’s over-under is to look at what happened with the old Rule.

“I suspect industry groups will sue not long after a final rule is issued,” says Gregory. “In its 2016 iteration, the final fiduciary rule was issued on April 8, and the Chamber of Commerce brought suit on June 1. I suspect it will be challenged on nearly identical grounds. That is, those groups will argue that the Department of Labor is reinterpreting a forty-year-old term, ‘investment advice fiduciary,’ in a manner that was not contemplated by Congress when ERISA was enacted.”

Between the IRA Rollover matter and the redefinition of “regular services,” there is no shortage of ways to chip away at the new Rule. What might be one way we can expect to see the industry attack the Rule in front of a judge?

“The following argument would be valid if made, but it will not be,” says Michelle Richter-Gordon, co-founder of Annuity Research & Consulting in New York City. “This is because it is not yet believed that my words are true, and the below is why it is perceived that insurance is expensive and its practitioners are inherently bad: Fiduciaries, like advisors, sell verbs. Agents and brokers sell nouns. There exists no precedent for noun-sellers behaving as fiduciaries. FINRA mistakenly believes that investment advisor as codified by the Investment Advisors Act of 1940 means financial advisor, when in actuality financial advisement = (assets – liabilities advisement). Insurance is the liability minimization industry. It deserves codification of the identity ‘insurance advisor,’ and America deserves financial advising, which means ongoing financial planning, to be governed under something that is not the Investment Advisors Act of 1940, which is a frame not required to consider the consumer’s liabilities when maximizing assets subject to risk tolerance constraints. Investment advising is a subset of, not a synonym of, financial advising. Until such truth comes to be acknowledged, it will remain the case that the insurance industry is unfairly maligned.”

Much like other rules and regulations promulgated by the then-serving administration, it may not require a court to intervene. A new President representing a different party might simply decide it no longer supports the policy and refuse to defend it, if not outright revoke it.

“I predict that this rule would not survive a Republican administration,” says Gregory. “Even before the Notice of Proposed Rulemaking was released, Republicans in the House and Senate were critical of the Department of Labor’s inconsistency and for, in their view, creating inconsistency for plan sponsors and participants. I expect that it would be scrapped in that case.”

This particular Rule, however, may engender bipartisan opposition.

“I don’t believe this rule survives under a Republican administration and maybe not even under a Democrat one,” says Bavetz. “The rule is a slap in the face to the 43 states that worked very hard to establish Best-Interest practices in accordance with NAIC standards with regard to insurance transactions, which are state governed. On its face, it is painting a target on insurance providers who will not sit this one out. I think you’ll see the Financial Services Institute and the National Association of Financial Advisors losing no time in filing against the DOL.”

Just because history suggests the new Fiduciary Rule may have a short life doesn’t mean plan sponsors should ignore it.

“Frankly, the high likelihood of a successful litigation challenge and/or Republican administration abandonment of the rule is why the plan sponsor education focus should shift from ‘what’ the rule would require to ‘why’ the DOL proposed the rule,” says Eickman. “Many employers are demonstrating an increased interest in protecting the financial wellness and retirement security of their employees, and they’ll be driven to better understand when their employees are protected under a fiduciary umbrella and when that umbrella has closed and exposed them to dangerous elements.”

This goes to say that sometimes the concept rises above the legal mumbo-jumbo. That’s because the market can do things regulators cannot. It can enforce customer demands through the brute force of competition.

While the drive to promote a fiduciary imperative by regulators for more than a decade is laudable, they may have succeeded despite themselves. There is a growing expectation within the marketplace that, more and more, holds that even those not legally defined as fiduciaries must be held to a fiduciary standard.

Said another way, the portion of the market that ignores demanding a fiduciary approach is shrinking. The new Fiduciary Rule may not survive a court challenge, but the idea behind it is becoming the de facto standard.

Christopher Carosa is an award-winning online news producer and journalist. A dynamic speaker, he’s the author of 401(k) Fiduciary Solutions, Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA.