Challenges to the Labor Department's Fiduciary Rule

Several insurance organizations have initiated legal action to challenge the Labor Department's fiduciary rule concerning retirement advice, alleging an overreach of authority with the introduction of the new regulation.

This lawsuit marks at least the second attempt to contest the DOL rule, which broadens the fiduciary definition to include financial professionals providing one-time advice on matters such as 401(k) rollovers and annuity purchases.

Earlier in the month, another insurance coalition, the Federation of Americans for Consumer Choice, alongside several companies and individuals, filed a similar lawsuit. They claim that the department has overstepped its regulatory bounds as set by the Employee Retirement Income Security Act.

Central to the latest legal challenge, spearheaded by entities including the Insured Retirement Institute, the American Council of Life Insurers, and the National Association of Insurance and Financial Advisors, is the assertion that the new DOL regulation mirrors a previous Obama-era rule which was overturned in 2018.

Set to partially take effect in September, the new fiduciary rule is criticized for replicating the legal flaws of the 2016 DOL rule, according to a joint statement by the challenging groups.

The rule is deemed by the challengers to exceed the DOL’s statutory limits, to be arbitrary, capricious, and unconstitutional. They also highlight its disregard for recent enhancements in federal and state regulations that govern financial professionals advising retirement savers.

Critics from insurance sectors have been particularly vocal against the fiduciary rule expansion in retirement planning. The Biden administration has pointed out the annuity segment as notably concerning, arguing that many insurers direct clients towards high-cost products that generate significant commissions at the expense of savers, who might benefit more from lower-cost alternatives.

While industry groups like Sifma and the Financial Services Institute have expressed disapproval of the DOL’s new rule, they have yet to launch a legal challenge, unlike their response to the 2016 rule. Duane Thompson, president of Potomac Strategies, finds it surprising that securities sectors have not yet sought legal recourse.

It is suggested that the subdued response could be due to brokerage firms now having to adhere to Regulation Best Interest, an advisory framework established by the SEC during the Trump administration, which simplifies compliance with the DOL’s fiduciary rule.

Legal concerns extend beyond questions of authority to criticisms of the rule-making process itself. The challengers argue that the fiduciary rule is poor policy, likely to increase service costs and reduce financial advice availability for less affluent clients—those who could benefit most from such guidance.

They argue that the regulation restricts access to crucial annuity information at a time when the guaranteed income from these products is increasingly vital, with millions approaching retirement age without traditional pension support. The rule, they contend, threatens the retirement security of numerous Americans by limiting their access to essential financial advice and protected income solutions.

Moreover, they point to the nearly universal adoption of suitability standards by states, which mandate that insurance salespeople recommend products that meet their customers' needs, as evidence that the DOL’s efforts are redundant.

Supporters of the rule argue its necessity for protecting investors, citing potential annual losses to investors from conflicts of interest in certain annuities. Estimates suggest the DOL rule could save investors billions over the next decade.

Assistant Labor Secretary Lisa Gomez emphasizes the importance of unconflicted, high-quality advice in retirement planning. She warns that without prioritizing client interests, Americans may face reduced returns and higher fees, eroding their financial security.

Despite the anticipation of legal challenges, further lawsuits are expected. Both the current and a previous challenge are proceeding in Texas federal courts, under the jurisdiction of the Fifth Circuit Court of Appeals, which previously overturned the Obama-era rule.

DOL officials maintain confidence in the rule's robust legal foundation, strengthened since the last challenge. However, Thompson notes that the compelling arguments presented in the lawsuits could potentially lead to a similar outcome as before, especially given the Fifth Circuit’s history.

Regardless of the trial outcomes, an appeal is anticipated, and if there is a change in the White House, the rule's defense may shift significantly, as seen in 2018 when the administration withdrew its appeal following a decisive Fifth Circuit ruling.


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