A regulation introduced by the Labor Department designed to protect retirement savers from potentially detrimental investment advice is facing potential rollback during President-elect Donald Trump’s upcoming term, highlighting a familiar scenario, according to legal analysts.
This rule, introduced during President Biden’s tenure in April, seeks to address conflicts of interest that might arise from investment advice given by less scrupulous advisors, brokers, or insurance agents. These conflicts are concerning because they might lead advisors to benefit personally at the client’s expense, as in cases where they encourage rolling funds from a 401(k) into an IRA.
The immediate threat facing this rule is that the Trump administration may not defend it in court any further, as per legal experts. So far, the rule has encountered significant legal resistance, with two federal courts in Texas pausing its rollout, potentially setting the stage for its nullification.
Fred Reish, a specialist in retirement law at Faegre Drinker Biddle & Reath LLP, pointed out that the Trump administration could simply withdraw from the case if it chooses to do so, which aligns with Trump’s stated deregulatory goals.
The Department of Labor’s rule primarily intends to elevate the standard of investment advice pertaining to 401(k)-to-IRA rollovers, with a particular focus on certain insurance products. With an increasing number of retirees, especially as baby boomers transition, these rollovers are becoming more frequent. In 2020, 5.7 million individuals moved $618 billion into IRAs, a figure that grew to $779 billion by 2022, according to data from the White House Council of Economic Advisers.
Reish explains that the new rule significantly increases the likelihood that advice regarding rollovers will be governed by fiduciary standards. Such a standard requires financial professionals to prioritize the client’s interest in their advice rather than their own potential earnings.
However, many retirement investors may not currently receive fiduciary advice due to existing regulations specified under the Employee Retirement Income Security Act, which doesn’t recognize one-off advice as meeting the fiduciary threshold.
The Biden rule stands to impact insurance agents selling non-securities products, like indexed annuities, the most. These agents would be expected to examine whether a client’s best interest is at stake when recommending moving funds to annuity products.
Meanwhile, investment advisors and brokers dealing in securities products like mutual funds are subject to a similar rule by the Securities and Exchange Commission established in 2019.
Legal experts anticipate that the Texas courts, which have indefinitely stayed the rule pending further review, might eventually overturn it. If this does occur, the case might be elevated to the U.S. Fifth Circuit Court of Appeals. This court previously nullified an Obama-era fiduciary regulation.
Ultimately, the Trump administration has the option of ceasing to defend the rule at any point in the legal process, aligning with Trump’s agenda of reducing regulations. While Trump’s intentions are clear, Fred Reish noted the uncertainty around how the administration might handle it, reflecting the blend of conservative and populist approaches Trump is known to favor.
