Expert: Advisers Should Pause on DOL Rollover Guidance Despite Court Reversal
In the meantime, legal experts discourage advisers from violating it in case it is re-instated.
The District Court for the Middle District of Florida ruled against the Department of Labor on Monday and struck down their interpretative guidance from April 2021 for Prohibited Transaction Exemption 2020-02, concerning the five-prong test for determining when a financial adviser is a fiduciary in relation to a retirement account.
The DOL was responding to inquiries concerning when a solicitation to rollover plan assets into an individual retirement account was considered on a “regular basis,” one of the five prongs of the fiduciary test. The DOL answered that a “single, discrete instance” could not be on a “regular basis,” but if the solicitation was part of an ongoing relationship or the beginning of an intended future relationship than it would trigger fiduciary duties under ERISA.
The Court agreed with DOL that the guidance was an “interpretative rule” and not a “legislative rule.” But it still struck the rule down because it was not consistent with the text of The Employee Retirement Income Security Act, as assets kept in an IRA are no longer workplace plan assets. Despite the court ruling, legal experts caution retirement plan advisers and plan sponsors from abandoning compliance mechanisms as it relates to this DOL interpretation.
Jason Berkowitz, the chief legal and regulatory affairs officer at the Insured Retirement Institute, says advisers should still “wait and see how things play out” before making any changes in their compliance procedures. He says that there is a “good likelihood” that the DOL will appeal this decision which could result in a favorable outcome for the DOL.
The DOL views the decision to rollover into an IRA as a “very consequential decision” for retirement savers, and feels an obligation to see that rollover transactions are properly regulated.
Though the legal arguments for overturning the rule are solid and other courts have ruled similarly, there are many variables in play, according to Berkowitz. A higher court could still rule in the DOL’s favor and the DOL might issue a new rule which accounts for the court’s reasoning, but which has similar consequences for advisers.
He adds that if IRA rollovers are not regulated by DOL through ERISA that does not mean they are not regulated at all. The SEC and state-level regulatory agencies still oversee advisers in the context of IRA management.