While the rule is final, meaning it will become enforceable soon, there is still a good deal of flexibility. It is unclear now the extent to which the DOL will enforce the law. It is also unclear how federal agencies like the DOL will fare after a trio of cases on federal agency power is decided by the U.S. Supreme Court.
Financial advisors may feel like they are finding themselves between a rock and a hard place lately and both rock and hard place may be the doing of the Department of Labor. The first of the two issues, the fiduciary duty rule, awoke from its several year slumber right in time to coincide with the second issue, a ruling from the Department of Labor concerning independent contractors. Just as with the debate in 2017 and 2018 on the fiduciary duty rule, much of the debate may concern whether the DOL has the power to make such a rule. As we said in past articles,[1] many issues of executive agency power are currently pending before the Supreme Court.
Let’s start with the fiduciary duty rule. In early January of 2023, the House Financial Services Capital Markets Subcommittee heard testimony on the Labor Department's proposed fiduciary rule. The Committee’s concern stemmed from the DOL’s October 31, 2023, release of its Retirement Security Rule which sought to redefine “who is an investment advice fiduciary under the Employee Retirement Income Security Act (“ERISA”).” The Committee seemed to lean towards curbing that rule as it stated the intent of the hearing was to “explore the necessity of the proposed rule, assess its alignment with existing regulations and legislative intent, and advocate for measures that enhance retirement security without creating unnecessary obstacles.”[2]
It seems that the Committee was acting in response to pressure from the industry and others concerning the proposed rule. In fact, the proposed rule is so disfavored that some critics requested that congress limit the rulemaking before it became final. “Nearly all the witnesses who testified at a House Financial Services subcommittee hearing Wednesday urged lawmakers to pass agency funding legislation with specific carve-outs that would prevent regulators from enacting or enforcing the disputed proposed rule.”[3] While we once thought the rule was buried after an unfavorable appellate ruling from the Sixth Circuit Court of Appeals, apparently the new and revised version reached out of the grave and clawed in rollovers and annuity sales. If you think we are exaggerating, some critics have referred to portions of the rule as severe and “draconian.”[4] As with the previous DOL fiduciary rule, this one may face efforts to block it in court.
In addition, the DOL also expanded its criteria concerning independent contractors. The new rule will become effective (unless temporarily halted by court action) in March of 2023. It will replace the previous guideline of two major factors, “how much control a company has over its workers and how much “entrepreneurial opportunity” the work provides.”[5] Instead, employers should now consider a six-factor list. The news concerning the rule often focused on businesses such as Lyft and Uber, but many financial advisors work as independent contractors.
As we noted in October of 2022, “The future court challenges to the changed rule… are unclear. In June of 2022, the Supreme Court denied an effort to change California’s new law. “The court denied a petition by the American Society for Journalists and Authors and the National Press Photographers Association…. That challenge may be more aligned with concerns that financial advisors have…. the independent contractor status by its nature reduces potential risk or liability to the institution they work. Financial advisors may also have a similar need for independence and risk reduction.”[6] Additionally, many business groups think the rule will create unnecessary uncertainty for employees.
While the rule is final, meaning it will become enforceable soon, there is still a good deal of flexibility. It is unclear now the extent to which the DOL will enforce the law. It is also unclear how federal agencies like the DOL will fare after a trio of cases on federal agency power is decided by the U.S. Supreme Court.
[1] https://www.bcgbenefits.com/blog/are-we-there-yet and https://www.bcgbenefits.com/blog/fiduciary-death
[2] https://docs.house.gov/meetings/BA/BA16/20240110/116725/HHRG-118-BA16-20240110-SD002.pdf
[6] https://www.bcgbenefits.com/blog/advisors-as-independent-contractors
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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