For the first time, customers may be able to sue broker-dealers, insurance companies and their salespeople if their retirement rollover advice doesn’t meet proposed new Department of Labor fiduciary standards, ERISA expert and attorney Fred Reish said in an interview.
If a broker or insurance agent making a rollover recommendation receives any compensation, not only would they be defined as fiduciaries for the first time under the DOL’s new fiduciary proposal, but they would be subject to ERISA enforcement provisions, which include a private right of action, said Reish, a partner at law firm Faegre Drinker.
If the proposal is approved, “it will open the door to lawsuits by plan participants and class action lawsuits by the plaintiff’s bar,” Reish said.
“That’s one of the biggest reasons why the brokerage and insurance industries always fight a fiduciary rule,” Reish added. They’re currently exempt from a fiduciary standard and “once they are a fiduciary, it triggers other rules, including the private right of action.”
Both industries have enjoyed exemptions from the fiduciary standard of ERISA, but many of those exemptions have been removed in the agency’s latest proposed package.
The industries already successfully sued to vacate an Obama-era DOL rule that would have regulated them as fiduciary advisors when they provide rollover advice.
But the DOL seems undeterred and appears to be taking an even more aggressive stance in its latest proposal, applying the fiduciary standard to onetime advice for transactions like 401(k) rollovers and even prohibiting insurance and annuities compensation such as sales contest bonuses, trips and vacations.
Unlike the Securities and Exchange Commission’s Regulation Best Interest, the DOL’s rule would require brokers and agents to provide customers with specific reasons for the rollover in writing. If companies don’t meet the requirements of the rule, they could be sued by individual clients, and if there are systemic issues, attorneys could bring a class action on behalf of thousands of customers, Reish said.
In 2022, Americans rolled over about $779 billion from defined contribution plans such as 401(k)s into IRAs, according to Cerulli Associates.
The proposal of the rule on Halloween set off a storm of reactions from organizations, including the Financial Services Institute (FSI) and the National Association of Insurance and Financial Advisors (NAIFA)—both of which were plaintiffs who overturned the last DOL fiduciary rule.
“It is imperative that new regulations harmonize with Reg BI. Introducing more conflicting regulations would be unnecessary and could potentially hinder middle-class Americans’ ability to achieve a financially secure retirement,” said Dale Brown, the president and CEO of FSI.
Kevin Mayeux, the chief executive officer of NAIFA, said: “This is the fourth time since 2010 the federal government has tried to expand fiduciary requirements for advisors. This DOL proposal is particularly unfortunate, coming at a time when many Americans are concerned about their economic security and ability to prepare for retirement.”
In contrast, the CFP Board, the Consumer Federation of America and the Institute for the Fiduciary Standard all expressed support for the proposed rule.
“The outdated law does not prevent advisors from taking advantage of gaps in the regulations to steer their clients into high-cost, substandard investments that pay the advisor well but eat away at retirement investors’ nest eggs over time,” the CFP Board said in a statement.
Reish said he believes the industry will see a final regulation from the DOL by next summer.