Trump administration may scrap Biden-era retirement rule.

Trump administration may scrap Biden-era retirement rule.
Trump administration may scrap Biden-era retirement rule.
  • In April, the U.S. Labor Department introduced a retirement security rule. However, two Texas courts appear poised to challenge it.
  • The "fiduciary" rule may no longer be defended in court by the administration of President-elect Donald Trump, who has indicated a deregulatory agenda, attorneys stated.
  • During Trump's first term, a similar Obama-era DOL fiduciary rule occurred.

The Labor Department rule protecting retirement savers from harmful investment advice may be repealed during President-elect Trump's second term, which would be a déjà vu outcome, according to legal experts.

The Biden administration's regulation, issued in April, aims to prevent conflicts of interest from influencing investment recommendations from unethical advisors, brokers, or insurance agents.

There is concern among officials that conflicts of interest may result in an agent benefiting at the expense of the consumer, such as when individuals are advised to transfer funds from their workplace retirement plans, like a 401(k), to an individual retirement account.

Fight over fiduciary standard: What 401(k) participants should know

The Trump administration's decision not to defend the Retirement Security Rule in court poses the most immediate threat to President Joe Biden's retirement security plan, attorneys stated.

The rule is facing an uphill legal battle as two Texas federal courts have already halted its implementation and appear poised to end it, according to legal experts.

Fred Reish, a retirement law expert and partner at Faegre Drinker Biddle & Reath LLP, stated that at that point, the Trump administration could choose to abandon the case.

'Here we go again'?

Something almost identical happened during Trump's first term as president.

In 2018, an appellate court overturned a retirement rule similar to the one introduced during the Obama era. The Trump administration did not defend it further, effectively ending the rule.

The possibility of replaying in that manner is intriguing, according to Andrew Oringer, partner and general counsel at the Wagner Law Group.

The Biden administration is facing pressure to forgive student loans before the Trump administration takes office. More employers are adding 401(k) plan matches for workers paying off their student loans. "Dynamic pricing" was a top contender for word of the year.

However, it's not a certainty, attorneys said.

"Although the Trump administration initially allowed the retirement rule to expire, 'here we go again,' according to Oringer, we are now in a wait-and-see mode."

The Trump transition team didn't respond to CNBC's request for comment.

What the DOL fiduciary rule does

The Department of Labor aims to elevate the investment-advice standard associated with 401(k)-to-IRA rollovers, particularly for specific insurance products, according to experts.

As baby boomers age and retire, rollovers are increasingly becoming a common occurrence.

In 2020, 5.7 million people rolled over $618 billion into IRAs, according to IRS data. By 2022, that amount had grown to $779 billion, as per the White House Council of Economic Advisers.

The new Labor rule increases the likelihood that rollover recommendations will be held to a fiduciary standard, according to Reish.

Financial professionals, including brokers, advisors, and insurance agents, are legally obligated to prioritize their clients' interests when recommending investments, rather than their own profit.

Many retirement investors may not receive fiduciary advice, attorneys said.

According to the Employee Retirement Income Security Act, providing one-time advice to an investor typically does not meet the standard for fiduciary duty.

Although rollovers are typically a one-time transaction, they are not typically protected under the Employee Retirement Income Security Act, according to attorneys.

Insurance agents who sell non-securities products, such as certain annuities like indexed annuities, would likely be most affected by the Biden-era rule.

401(k) doesn't seem to have the same fanbase that social security has, says Allison Schrager

Reish stated that such agents would need to consider additional factors in their rollover analyses, such as whether it is in a consumer's best interest to transfer funds from their 401(k) plan to an annuity.

Securities and Exchange Commission (SEC) rules issued in 2019 apply to investment advisors and brokers who sell securities products, such as mutual funds or exchange-traded funds, in a manner similar to the Department of Labor's (DOL) rule, according to Reish.

Texas courts likely to strike down DOL rule

In July, two federal district courts in Texas issued separate rulings and put a "stay" on the regulation nationwide.

The start date of the rule, which was scheduled to begin on Sept. 23, was indefinitely postponed by them as the courts conducted a more thorough examination of the lawsuits filed by various insurance companies.

Judges hinted at overturning the rule, which lawyers expect.

The order by the U.S. District Court for the Northern District of Texas in the lawsuit American Council of Life Insurers v. United States Department of Labor stated that the rule is likely unlawful for a wide range of investment professionals in the industry, not just plaintiffs.

The DOL's decision to impose fiduciary status on financial professionals who sell retirement products was praised by ACLI and other insurance industry groups, who viewed it as an expansion of their statutory authority.

The other Texas case is Federation of Americans for Consumer Choice v. Department of Labor.

If an appeal were filed by either party, it would be heard by the U.S. Fifth Circuit Court of Appeals, which previously struck down a comparable Obama-era fiduciary rule.

Attorneys said that the Trump administration had the option to stop defending the regulation at any point.

Trump has indicated that he plans to pursue a deregulatory approach during his second term.

"President-elect Trump's approach to issues is uncertain as he is both a Republican and a populist, and it is unclear whether conservative Republican philosophies or a populist approach will prevail."

by Greg Iacurci

Investing