DOL’s Retirement Security Rule Challenged by Insurance Industry Associations

Nine national insurance trade associations Friday filed new litigation challenging the Department of Labor’s recently released Retirement Security Rule.

The associations filed the suit, American Council of Life Insurers et al. vs. U.S. Department of Labor, and Julie Su, in her official capacity as Acting Secretary, United States Department of Labor, in the U.S. District Court for the Northern District of Texas, which is within the jurisdiction of the Fifth Circuit Court of Appeals. The associations cited that court in the complaint because several years ago the court overturned a prior  rule DOL intended to change the definition of what it means to give fiduciary advice for retirement investments.

A DOL official as recently as Wednesday said the new fiduciary proposal took the 5^th Circuit ruling into consideration and the department is comfortable it avoids the prior legal perils.

This is the second filed against the rule since the DOL published it in April. The Federation of Americans for Consumer Choice, an advocacy group for insurance agents, filed a lawsuit against the rule on May 2, then on Tuesday requested a preliminary injunction to pause implementation amid the litigation.

The insurance industry has fought back hard against the Retirement Security Proposal, which would in part bring recommendations for retirement income annuities under the regulatory framework of the Employee Retirement Income Security Act. The latest rule, a final version of which was published in April, also brings individual retirement investment rollover advice and investment menu and plan design advisement for small plan sponsors under that fiduciary umbrella.

The insurance organizations have argued that the added fiduciary obligations are unnecessary, as annuity sales are already regulated by many states, and investment advice is generally guided by the Security and Exchange Commission’s Regulation Best Interest rules. More broadly, the firms have argued that the fiduciary obligations would be costly, restrictive, and ultimately limit retirement advice to people with fewer assets who cannot afford long-term financial advisers.

The organizations that together filed the lawsuit include: the American Council of Life Insurers, National Association of Insurance and Financial Advisors, NAIFA-Texas, NAIFA-Dallas, NAIFA-Fort Worth, NAIFA-POET, Finseca, Insured Retirement Institute, and National Association for Fixed Annuities.

“The legal action we are taking today comes after careful deliberation on what is in the best interest of the retirement savers we serve,” the firms wrote in a combined statement. “Our filing makes a convincing case that the DOL’s fiduciary-only regulation suffers from the same legal defects as the DOL’s failed 2016 rule. It exceeds the DOL’s authority under federal law, is arbitrary and capricious, and is unconstitutional. Moreover, it ignores recently enhanced federal and state standards for financial professionals who work with retirement savers.”

The insurers argue that the regulation will “block retirement savers” from access to annuities when “the lifetime income these products provide is needed more than ever before.”

The groups go on to point out that, since 2020, 45 states have adopted revised regulation around selling annuities via a project of the National Association of Insurance Commissioners.

In comments made Wednesday to the American Bar Association, Timothy Hauser, deputy assistant secretary for program operations of the DOL’s Employee Benefits Security Administration, said that the new rule is different from the previous one in a number of ways. That includes not covering “any direct recommendation” to a retail investor, but limiting fiduciary obligation to advisers that hold themselves out as “providing individualized advice, based on the best interests of the retirement investor.”

He gave the example of a commercial showing happy retirees on a beach by an investment adviser, only to “have a footnote in small print at the end” that they are not acting as a fiduciary with only the best interests of the client in mind.