A Texas federal judge has granted a request by an insurance industry trade association to temporarily block a US Labor Department rule that classifies more retirement advice providers as fiduciaries.
The plaintiffs, including the Federation of Americans for Consumer Choice (FACC) and five other insurance industry stakeholders, may likely succeed on the merits of their claims. Judge Jeremy Kernodle of the US District Court for the Eastern District of Texas noted that the 2024 fiduciary rule conflicts with the Employee Retirement Income Security Act (ERISA) by redefining “investment advice fiduciary” to include certain non-trust-and-confidence relationships, according to a report.
The rule treats as fiduciaries those who engage in one-time recommendations to roll over assets from an ERISA plan to an investment retirement account. Additionally, the DOL’s amendments to Prohibited Transactions Exemptions 84-24 were deemed “unreasonable, arbitrary, and capricious” by the judge.
On May 2, the trade association and other stakeholders sued the US Department of Labor (DOL), seeking to halt implementation of the finalized rule and amended exemptions before their initial September 23 effective date. The Judge’s decision to grant a preliminary injunction effectively stays the rule’s effective date until further notice.
The FACC’s lawsuit contends that the Labor Department overstepped its authority by establishing a rule that is both arbitrary and capricious, violating the Administrative Procedure Act. The goal is to achieve a similar outcome to the 2018 US Court of Appeals for the Fifth Circuit ruling, which vacated an Obama-era fiduciary standard rule. According to the FACC complaint, the overturned rulemaking package was “effectively indistinguishable from the 2024 Fiduciary Rule.”
The FACC and members of the life insurance industry argue they would be negatively impacted by the expanded definition of “fiduciary.” The new rule, in their view, would unreasonably apply ERISA’s strictest standards of conduct to a broader swath of brokers and advisers who were not previously considered fiduciaries.
Another lawsuit, filed by the American Council of Life Insurers and eight other trade groups, is also in progress and seeks to vacate the rule based on similar arguments.
While the injunction is in place, retirement advice providers who offer one-time asset rollover recommendations for 401(k) and 403(b) participants to annuities and individual retirement accounts will temporarily not be classified as fiduciaries under the original 1975 five-part test, which required ongoing relationships to meet the fiduciary definition.
It’s noteworthy that a concurrent effort by federal lawmakers to overturn the rule using a Congressional Review Act resolution has also advanced in the House of Representatives, hinting at broader legislative dynamics at play.
The DOL had finalized the rule following a 60-day comment period, which many in the industry felt didn’t allow adequate time for comprehensive feedback. The Department received over 20,000 submissions during the comment period, reflecting significant concerns from the insurance and financial sectors. The case referenced is Fed’n of Americans for Consumer Choice Inc. v. Dep’t of Labor, E.D. Tex., No. 6:24-cv-00163.