DOL May Not Have the Authority Over IRAs It Thinks It Has

Rollovers between individual retirement accounts might be low hanging fruit for opponents of the Retirement Security Rule, finalized by the Department of Labor in April.

Legal experts with varying perspectives on the rule agree that the DOL likely does not have authority to apply fiduciary duties under Title I of the Employee Retirement Income Security Act to individual retirement accounts.

When discussing the meaning of a recommendation as it relates to rollovers, the final rule says that it would cover recommendations concerning the “rolling over, transferring, or distributing assets from a plan or IRA, including recommendations as to whether to engage in the transaction, the amount, the form, and the destination of such a rollover, transfer, or distribution.”

This area of the rule does not distinguish between sources of a rollover, provided they are “from a plan or IRA.” According to Chantel Sheaks, the vice president of retirement policy at the U.S. Chamber of Commerce, this means that any rollover or transfer from an IRA is covered regardless of its original source. This would include a rollover from what Sheaks calls a “pure IRA” or an IRA that was funded from a source other than a retirement plan rollover, such as from cash drawn from a bank account.

Kendra Isaacson, a principal at Mindset and former Senate pension policy director for Senator Patty Murray, says that the DOL’s jurisdiction is shakiest over rollovers that do not involve an employer-sponsored plan under Title I, such as between IRAs or from an IRA to an annuity. Sheaks says IRA-to-IRA transfers can be common in cases where an adviser changes jobs and recommends an existing client move between IRA providers so they can continue to serve them. Such a rollover would likely be covered by the final rule, but this most likely goes beyond DOL’s authority.

Isaacson says, “the IRA is a creature of the [Internal Revenue] Code,” and under the authority of the Treasury Department. She adds, “If DOL wanted to cover these rollovers, it should have been a joint rulemaking.” The DOL likely would have jurisdiction over a rollover originating from a qualified plan, as well as IRA to plan “roll-ins,” since those do involve plans governed by the Employee Retirement Income Security Act. DOL has “clear authority to regulate money flowing out of qualified ERISA Title I plans,” Isaacson says.

Carol McClarnon, a partner with Eversheds Sutherland, concurs and says, “The DOL is imposing ERISA fiduciary duties on IRA fiduciaries, which is without question contrary to the intent of Congress in enacting ERISA. The DOL can issue conditional prohibited transaction exemptions, but there are limits to how far they can go.”

Sheaks explains that the Treasury Department can impose an excise tax on IRA fiduciaries who engage in a prohibited transaction, and the final rule does not disturb this. However, by amending the prohibited transaction exemption 2020-02, which an IRA fiduciary adviser would depend on, the DOL has effectively set the criteria by which IRA fiduciaries would be penalized by the Treasury. Sheaks calls this “indirect enforcement,” against IRA advisers, and like McClarnon, says it imposes ERISA Title I obligations on IRAs, which are covered in Title II of ERISA and were not intended by Congress to have the same duties.

Sheaks wrote in Chamber of Commerce’s comment letter to DOL, when the rule was still a proposal, that “Individual Retirement Accounts (IRAs) were included in Title II and not in Title I because they are not employer plans, and Congress did not intend for DOL to have jurisdiction over IRAs. The duties of loyalty and prudence do not apply under Title II.”

Court Challenges

So far, there is one legal challenge to the rule in the federal courts, brought by the Federation of Americans for Consumer Choice on May 2. The lawsuit makes a similar argument, among others.

“Notably, the DOL does not have supervisory regulatory authority with respect to IRAs comparable to its authority over ERISA Title I plans, and the Code does not impose statutory duties of loyalty and prudence on fiduciaries,” the plaintiff’s complaint states. “Instead, the Code allows the IRS to impose an excise tax on prohibited transactions involving either ERISA or IRA fiduciaries.”

Sheaks argues that these provisions of the rule are not severable from the full rule because they are “fundamentally woven together.” Isaacson says that it is “up for debate” if a court simply strikes down this element of the rule, but leaves the rest intact.