Second US District Court Issues Stay of Retirement Security Rule

A second federal court in Texas on Friday put a stay on the Department of Labor’s Retirement Security Rule, expanding beyond an earlier stay to halt all of the rule’s exemptions and describing the plaintiffs as “virtually certain” to succeed in their claims against the regulator.

An opinion issued under, but not attributed directly to, U.S. District Judge Reed C. O’Connor in the Northern District of Texas, Fort Worth Division, sided in part with the plaintiffs in American Council of Life Insurers v. DOL, ordering a stay on the so-called fiduciary rule with the argument that it did not need further court review and denying a preliminary injunction as redundant to the “complete relief” provided by the stay.

The final rule, which had been scheduled to take effect September 23, requires “trusted investment advice providers” and financial institutions working with them to operate as fiduciaries in most cases when advising on qualified retirement plan design, annuity sales and individual retirement account rollovers.

The Northern District’s denial was based in part on the court concluding that a new rule introduced by the DOL was similar to one knocked down by the U.S. 5th Circuit Court of Appeals in 2018, Chamber of Commerce v. U.S. Department of Labor.

“As a whole, Defendants’ arguments [against the lawsuit] are nothing more than an attempt to relitigate the Chamber decision,” the decision states. “Because the Fifth Circuit’s Chamber decision unambiguously forecloses all of Defendant’s arguments, the Court need not repeat why those arguments fail here.”

The suit, led by the American Council of Life Insurers, along with eight other insurers, was filed May 24. The plaintiffs argued that the DOL’s rule exceeded its “authority under federal law, is arbitrary and capricious” and had the “same legal defects” as the 2016 rule struck down in Chamber.

The Retirement Security Rule is also facing a similar complaint filed in the Eastern District of Texas by a group led by the Federation of Americans for Consumer Choice Inc., an advocacy group for independent insurance agents. U.S. District Judge Jeremy Kernodle granted the plaintiffs’ request for a stay in that case last Thursday, also writing that the plaintiffs are “likely to succeed” in their action.

The stays can be appealed to the 5th Circuit, which hears appeals from federal courts in Louisiana, Mississippi and Texas.

“When investors get advice from a trusted financial professional about their retirement savings, they expect that advice to be in the customer’s best interest, not the financial professional’s,” a DOL spokesperson wrote in an emailed response. “This rule makes that a reality. The Department continues to believe that this rule is essential to ensuring that retirement investors are protected.”

‘Certain to Succeed’

The Northern District court sided strongly with the plaintiffs, identifying the rule as “almost certainly unlawful for a broad class of investment professionals in the industry—not just the Plaintiffs.”

The court ruled that the plaintiffs’ arguments were sufficiently made to stay the rule, barring any further arguments before higher courts.

“Plaintiffs are virtually certain to succeed on their claims that the Rule exceeds DOL’s statutory authority, making remand insufficient and a potential waste of judicial resources,” the court stated. “All interested parties deserve prompt resolution.”

The court also included in the stay the DOL’s amendment to Prohibited Transaction Exemption 2020-02, 89, which the plaintiffs had argued “would impose obligations similar to PTE 84-24.” That exemption was not part of the FACC’s complaint in the Eastern District. According to the DOL, PTE 2020-02 “ensured that those saving for retirement could have access to high quality advice by requiring fiduciary advice providers to render advice that is in their plan and individual retirement account customers’ best interest in order to receive any compensation that would otherwise be prohibited by ERISA and the Code.”

The Northern District’s ruling states that the DOL, in its rebuttal, did not “sufficiently identify any countervailing hardship” from a stay: “In the interim, consumers will remain protected by existing state and federal regulations, along with the 1975 Regulation.”

The plaintiffs, including the ACLI, the National Association of Insurance and Financial Advisors, NAIFA-Texas, NAIFA-Dallas, NAIFA-Fort Worth, NAIFA-POET, Finseca, the Insured Retirement Institute and the National Association for Fixed Annuities responded with a joint statement backing the ruling.

“We are grateful to the court for its decision to issue a stay halting the September 23, 2024, effective date of the U.S. Department of Labor’s fiduciary-only regulation, the DOL’s latest attempt to vastly expand its statutory authority by imposing fiduciary status on almost every financial professional who sells retirement products,” they wrote.

A ‘Good Thing’ Held

The DOL has argued over the course of the creation and finalization of the Retirement Security Rule that it took the 5th Circuit’s 2018 ruling into account and designed the 2024 rule to more clearly address when retirement plan rollover advice and annuity sales fall under fiduciary standards.

Other advocacy groups and companies in the financial services sector have supported the 2024 rule in part or in whole, including the AARP, CFP Board and the National Association of Plan Advisors.

“The fiduciary rule would be a very good thing for American workers or retirees because it would create the best interest standard for any kind of retirement advice, be it a consultant to a plan, or a consultant to a plan sponsor,” says Jerry Schlichter, founder and managing partner in the law firm Schlichter & Bogard.

In terms of plan sponsors, he says, the rule would give them piece of mind that a plan adviser would not, for instance, be receiving an incentive to recommend a certain fund for the plan menu.

“It would align the best interests of the plan sponsor and the participant perfectly by enabling plan sponsors to have a degree of comfort knowing their fiduciary, or adviser, is acting in their best interest, which is to avoid litigation and serve the interests of the participants,” Schlichter says.

He notes the new rule also extends fiduciary obligation to insurance agents who are advising people on buying retirement income annuities and financial advisers recommending IRA rollovers or other fee-based services.

“This would have codified that [investment advice] in very clear terms and would have protected people who might be told they should be moving assets out of a 401(k) plan into an IRA or into wealth management or some other insurance product,” he says.