Don't Mess With Texas: Is the Fiduciary Rule from the DOL Now Officially DOA?

by Richard Bavetz, FRC℠ July 29, 2024

The dis-Chevron Effect… Well, That Didn’t Take Very Long!

The U.S. Department of Labor (DOL) has got to be asking themselves, "How can we stay out of Texas?" As a result of last week's preliminary injunction and stays issued by two separate district courts in Texas in as many days, the Department of Labor (DOL) has its work cut out for them. It's understandable if 401(k) plan sponsors are more than hesitant about implementing the new DOL Fiduciary Rule. These court decisions have brought to light several vulnerabilities that plaintiffs and courts will continue to exploit, potentially leading to a cascade of ongoing legal and compliance challenges that could significantly impact the 401(k) industry, maybe for the better.

The courts based these injunctions largely on the finding that the 2024 Fiduciary Rule closely resembles the Obama-era rule previously struck down by the Fifth Circuit Court of Appeals in 2018, known as the Chamber decision. Like its predecessor, they found that the new rule conflicts with the statutory language of the Employee Retirement Income Security Act (ERISA) and the common law standard. Their sweeping expansion re-defines the definition of a fiduciary to include one-time recommendations for rolling over assets from an ERISA plan to an IRA. This aspect of the rule was inconsistent with the traditional understanding of fiduciary relationships created by ongoing advice on a "regular basis", based on trust and confidence rather than a single transaction to move a client's retirement account from one place to another.

 (Chamber of Commerce v. U.S. Department of Labor, Case No. 17-10238 (5th Cir. 2018))

Ironically, the court even saw fit to smack down remind the DOL that it wouldn’t fall for another attempt to inflict the same “substantial harm” on lower to middle-income consumers as it tried to do before its previous attempt failed in 2018. Regrettably, our warnings last year went unheeded during the DOL's public comment period in December.

I hate to say, “We told you so,” but they weren’t even listening.

Judge Jeremy Kernodle's critique of the DOL's amendments to the Prohibited Transaction Exemption 84-24 as "unreasonable, arbitrary, and capricious" is a significant choice of language that offers a tip-in for future litigants planning to wage a direct APA challenge (Administrative Procedures Act) to the rule. This criticism also underscores the rule's legal fragility and the DOL's failure to adequately address the core issues identified in the previous 2018 ruling, which indicated then that the rule did not align with established ERISA statutory language.

 (FACC v. U.S. Department of Labor, Case No. 6:24-cv-163-JDK (E.D. Texas 2024))

According to the second motion, it doesn’t align now either. Issued by Judge Reed O’Connor, he went even further, writing, “As a whole, Defendants' arguments are nothing more than an attempt to relitigate the Chamber decision.” He continued, “Because the Fifth Circuit’s Chamber decision unambiguously forecloses all of Defendant’s arguments, the Court need not repeat why those arguments fail here.” He further stated in plain language that the Plaintiffs are “virtually certain” to succeed in their claim against the DOL, referring to the rule as, “almost certainly unlawful.” 

 (ACLI v. U.S. Department of Labor, Case No. 4:24-cv-00482-O (N.D. Texas 2024))

Almost certainly unlawful? Now, why would he say that? As the motion cites, “Generally there is ‘no public interest in the perpetuation of unlawful agency action,’” “To the contrary, there is a substantial public interest ‘in having governmental agencies abide by the federal laws that govern their existence and operations,’” (citing Texas v. United States, 5th Cir. 2022). The judge is sending a loud message that the DOL regulators are living in the past, hinting at the hubris entitlement that clearly still exists post-Chevron in the halls of our administrative state.

 (ACLI v. U.S. Department of Labor, Case 4:24-cv-00482-O (N.D. Texas 2024))

 (State of Texas v. United States, Case No. 22-40367 (5th Cir. 2022))

 (United Farm Workers v. U.S. Department of Labor, Case No. 1:2020cv01690 (E.D. Cal. 2020))

The Writing is On the Wall. The Fiduciary Rule from the DOL is DOA.

Given these legal uncertainties, plan sponsors and Insurance Marketing Organizations (IMO) should weigh the risks of not adopting any of the provisions of the new Fiduciary Rule. The ruling outlines how the enforcement of the DOL rule could lead to significant changes in the industry, impacting how financial advice is provided, with a high likelihood of increasing the costs for advisors and their clients. The Plaintiffs established to the court's satisfaction that these costs could potentially create "irreparable harm" that would have created substantial financial burdens on the financial industry as a whole and, at the same time, limit the consumer’s access to affordable advice.

The court's decision all but states the obvious: Continuous legal battles and challenges could disrupt the implementation process and create compliance complexities for plan sponsors. Ergo, the stay.

Making significant changes in response to a rule under this level of legal scrutiny could lead to unnecessary disruptions and costs, which would be especially disastrous for smaller companies. Plan sponsors and IMOs should avoid overhauling their processes until more regulatory certainty exists. Waiting allows plan sponsors to make informed decisions based on the final outcome of the legal proceedings and any potential revisions to the rule.

Maintaining compliance with existing fiduciary standards under ERISA will ensure that plan participants are protected and spare any premature adjustments. This approach minimizes disruption and allows for more informed decision-making once there is greater clarity on the rule's future.

Furthermore, the recent Supreme Court decision to overturn the Chevron doctrine, which previously granted deference to administrative agencies' interpretations of ambiguous statutes, likely influenced the court's stringent scrutiny of the DOL's rulemaking process. This change means that courts will now give less deference to agencies like the DOL, demanding more apparent and more robust justifications for their regulations.

Agencies like the DOL have relied heavily on Chevron for far too long. Based on this reliance, one might argue that the significant vulnerabilities associated with the DOL's new Fiduciary Rule were self-inflicted due to myopic overconfidence and will undoubtedly lead to further litigation. In flight school, pilots learn about a phenomenon called "Target Fixation." If an individual becomes too focused on an observed object, such as a target or hazard, they can inadvertently collide with the object.

While there is some risk, it would be prudent for 401(k) plan sponsors to adopt an exceedingly cautious approach and refrain from making immediate changes. The Chevron reversal all but guarantees that in the future, courts will now rigorously scrutinize the DOL's interpretations of ERISA without automatic deference. In a post-Chevron environment, the rule, criticized as "arbitrary and capricious," will surely face substantial legal challenges, and my prediction holds that some future court action will vacate the rule as it did in 2018. For now, these decisions reaffirm the court's commitment and return to jurisprudence, which is in the interests of all Americans and instills a sense of reassurance in the integrity of the legal system.

Richard Bavetz, FRC℠ is a Federal Retirement Consultant℠ and Investment Advisor with over 25 years of experience. As a Fiduciary, he works with 401k plan sponsors and their participants to provide advisory services and a wide range of compliant investment platforms.