Bloomberg Law
March 23, 2023, 4:55 PM

Regulators Revive 401(k) Fiduciary Effort in New Legal Landscape

Austin R. Ramsey
Austin R. Ramsey

Financial advisers are gearing up for round two in a fight against the US Labor Department over 401(k) fiduciary investment advice standards, this time armed with key federal court victories and new state and federal rules.

The department is drafting new regulations (RIN: 1210-AC02) that are expected to broaden the definition of an investment advice fiduciary as it applies to retirement plans, extending regulatory controls outside traditional private-sector employer-sponsored pensions into banking and insurance products.

It’s the latest development in a 13-year saga over the reach of strict fiduciary standards of conduct that threaten to upset the types of compensation advisers and broker-dealers can earn when they recommend transferring assets outside well-regulated workplace 401(k)s.

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Backed by consumer activists, the department’s Employee Benefits Security Administration says it wants to protect hard-earned nest eggs against investment industry bad actors charging higher fees, while banks and insurers argue that stricter standards are crippling and threaten to strip retirees’ access to lifetime income options.

Now, though, members of the regulated community say they believe the tide is turning in their favor.

“The world has changed from where things stood back in 2010 when they first started this effort,” said Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute. “We don’t think that there’s really a need for the sorts of changes that DOL is interested in, and I think there are a lot of uphill battles they’ve got to fight.”

It’s not clear when the department will officially propose its new rule, but it appeared on its most recent regulatory agenda, and benefits advisers say they expect it to be issued sometime this year. The Labor Department didn’t immediately respond to a Bloomberg Law request for comment on the rule and its timing.

Changing Landscape

The financial industry is coalescing around a different, slightly less burdensome standard of conduct that’s still designed to insure investors aren’t duped into paying higher fees. Since 2010, when the Labor Department first announced its intent to expand the definition of an investment advice fiduciary, the best-interest model has become the preferred method for advising clients, according to industry groups and advisers.

Until recently, broker-dealers only had to insure the products they marketed were “suitable” for their clients. The DOL wanted to raise that standard to the highest fiduciary level, while giving financial professionals the leeway to operate in the best interest of their clients as long as they and their employers complied with a strict set of disclosure and reporting requirements.

Since the DOL’s last attempt at fiduciary rulemaking failed an appeals court test, other state and federal regulators have swooped in to fill that void.

“There has been a dramatic change to the regulatory world in the last few years,” said Brad Campbell, a Faegre Drinker Biddle & Reath LLP partner and former top DOL benefits official under the George W. Bush administration.

The Securities and Exchange Commission has doubled down on its effort to enforce Trump-era rules that hold broker-dealers to a “best-interest” standard of conduct when selling retail investment products. Last year, the SEC issued a staff bulletin putting financial advisers on notice of strict oversight when they recommend participants roll over their assets out of a plan.

Illinois, meanwhile, became the latest state to adopt a best-interest standard for annuity transactions last month. Two-thirds of states have modified their insurance regulations in line with a model language issued by the National Association of Insurance Commissioners. The approach balances protections with a “variety of products in a competitive market,” an NAIC spokesperson told Bloomberg Law.

“Look, we’re good now,” said Chantel Sheaks, vice president of retirement policy at the US Chamber of Commerce. “We have Regulation Best Interest that’s being implemented for rollovers, we have these state models; the landscape is so different than it once was.”

But since an investment adviser may recommend rolling assets out of a plan guarded by benefits law into an individual retirement account or annuity that isn’t under the same statutory authority, the DOL thinks it should be able to oversee it.

Limited Authority

Even if the department maintains that retirement plan rollover customers are still at risk, regulators face a challenge convincing federal courts that they have the authority to protect them. DOL’s ability to define fiduciaries has historically been thought to revolve around employer-sponsored plans under ERISA.

A Florida district court last month overturned a portion of 2021 guidance the Employee Benefits Security Administration issued that reinterpreted whether first-time investment advice satisfied “regular basis” requirements under standing regulations. Last year, a major insurance provider survived a challenge to its high-fee 401(k) alternatives when a Manhattan federal district court judge determined it wasn’t acting as a fiduciary.

Both district court victories followed a major 2018 decision by the US Court of Appeals for the Fifth Circuit vacating the department’s last so-called “fiduciary rule” for violating the Employee Retirement Income Security Act of 1974 (Pub.L. 93-406) and federal agency procedure laws.

Officials are toying with an appeal in the Florida district court case. Earlier this week, EBSA officials filed a response motion in yet another Texas court case challenging its guidance, stating that courts have failed to recognize its “regulatory and interpretive authority” over individual retirement accounts and annuities.

It’s true that the department can issue some exemptive relief for retirement accounts and insurance products that aren’t traditionally covered under ERISA. A 1978 Carter administration reorganization plan split ERISA enforcement evenly between the IRS and DOL. But that authority is limited, said Campbell, and it now appears the department is yet again trying to use it to supplant other regulatory agencies.

“They’re trying to redefine the scope of of their authority to then use their exemption power to regulate the conduct,” said Campbell. “It’s a regulatory two-step.”

Still, consumer advocates that sided with the government when it tried to redefine advice last time are still advocating for fiduciary standards across the board.

“A rollover may be the single most important decision, often an irrevocable one, a person nearing retirement will make about their retirement income,” said David Certner, legislative counsel and policy director at AARP. “That simply can’t be outside the department’s regulatory control.”

To contact the reporter on this story: Austin R. Ramsey in Washington at

To contact the editors responsible for this story: Rebekah Mintzer at; Genevieve Douglas at

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