Labor Department should stop standing in the way of affordable retirement advice

The 5th Circuit Court of Appeals has vacated the Department of Labor’s 2016 fiduciary rule, handing a huge win to investors and savers.

In the firmly worded 2-1 decision, the court ruled in favor of financial services organizations who argued that DOL overstepped its authority by seeking to become the primary financial regulator for retirement accounts. The court agreed and voided the rule in its entirety by declaring the rule “an arbitrary and capricious exercise of administrative power.”

{mosads}The Obama-era rule was contested from the get-go. Realizing that the rule was a complete overreach, Congress passed bipartisan legislation in 2016 that sought to overturn the rule using the Congressional Review Act, a fast-track procedure that allows Congress to roll back a regulation and prevent a substantially similar one from being written in the future. However, that resolution was ultimately vetoed by President Obama.

The 1,000-page regulation was created with the intent of eliminating supposed conflicts of interest between financial advisors and clients. Even in its short implementation, it negatively affected how advisors gave advice to IRA and 401(k) customers planning for their future. The American Action Forum found that the rule would have increased consumer costs by $46.6 billion or $816 annually per account.

Building off the Employee Retirement Income Security Act which set standards and protections on retirement assets, DOL took it upon themselves to expand the definition of when financial advisers are considered to have a “fiduciary duty” and expose all brokers, agents and financial advisors to legal liability if they were alleged to acting in the “best interests” of the customer.

By moving out of their own regulatory purview, DOL entered an area predominately administered by the Securities and Exchange Commission, which oversees financial professionals and markets. DOL eagerly jumped into overseeing financial advisors because of their view that the SEC was slow walking these efforts even though past SEC commissioners have agreed the standard needs to be updated. Congress further agreed that the SEC is best suited to regulate this standard when they directed the SEC to decide the issue in their passage of Dodd-Frank in 2010. 

Under the scope of the rule, financial professionals like broker-dealers, insurance agents, appraisers, and others who gave advice or guidance but otherwise had no real influence over a financial portfolio were considered to be fiduciaries, and therefore held to fiduciary liability. As noted in one study, 35 percent of advisors surveyed said they would stop servicing low-balance accounts typically under $25,000, and that one-fourth would increase their current client minimums.

President Trump issued an executive memoranda soon after taking office that directed newly confirmed Secretary of Labor Alex Acosta to delay the implementation of a portion of the rule and directed DOL to complete an updated economic and legal analysis of it.

The 5th Circuit disagreed with DOL’s attempt to broaden the standard, declaring that the rule was a “novel assertion of DOL’s power.” Additionally, the court affirmed that the rule was inconsistent with the limited powers granted to the Department under ERISA, and not a reasonable exercise of their power under Chevron Deference; a legal doctrine that asserts courts should defer to executive agencies’ interpretations of laws.

DOL has two options to appeal: they can seek a review by all 17 judges of the 5th Circuit by April 30, or, they can appeal directly to the Supreme Court for a writ of certiorari asking the highest court in the land to hear their appeal by June 5. If DOL does not appeal, it keeps the possibility open for the SEC to proceed with the development of a new standard themselves.

DOL should abandon the appeals process completely as the five Circuit Court’s recent decision marks a substantial victory for consumers over a harmful Obama-era policy. If DOL does appeal, it would be a clear indication that Washington will continue to stand in the way of consumers and affordable retirement advice.

Matthew Adams is a federal affairs associate at Americans for Tax Reform, a nonprofit group dedicated to lower taxes and limited government.