DOL’s Retirement Security Rule Stayed Ahead of Effective Date

A federal judge in Texas has temporarily blocked the U.S. Department of Labor’s Retirement Security Rule ahead of its September 23 effective date.

On Thursday, Judge Jeremy Kernodle of the U.S. District Court for the Eastern District of Texas granted an insurance industry trade association’s request to block the so-called fiduciary rule, which creates new standards for what constitutes investment fiduciary advice for retirement plans and savers. The Federation of Americans for Consumer Choice Inc., an advocacy group for independent insurance agents, along with other independent insurance agents, filed the a complaint seeking a preliminary injunction on May 2.

The plaintiffs in Federation of Americans for Consumer Choice Inc., et al. v. U.S. Department of Labor, et al., had argued that the new fiduciary rule was not different enough from a similar proposal made by the DOL during the Obama administration that was struck down by the U.S. 5th Circuit Court of Appeals in 2018. The DOL has frequently disputed that claim, arguing that the new rule took the 2018 ruling into account and was designed to more clearly address when retirement plan rollover advice and annuity sales fall under ERISA’s fiduciary standards.

On Thursday, Kernodle sided with the plaintiffs, agreeing in an opinion that the Retirement Security Rule does trod the same ground as the proposal struck down by the 5th Circuit in 2018. Kernodle made clear the scope of relief is national and not limited to “the parties before the court.” The 5th Circuit hears appeals on cases from federal courts in Louisiana, Mississippi and Texas.

“Plaintiffs are likely to succeed on the merits of their claim because the 2024 Fiduciary Rule conflicts with ERISA in several ways, including by treating as fiduciaries those who engage in onetime recommendations to roll over assets from an ERISA plan to an IRA,” Kernodle wrote.

The judge also wrote that the DOL’s related amendments to Prohibited Transaction Exemption 84-24, which allows insurance agents to receive commission for the sale of annuities, “are also unreasonable and arbitrary and capricious.”

“For its part, DOL attempts to reconcile the Rule to Chamber but fails,” Kernodle wrote, referencing the name of the 2018 case, Chamber of Commerce v. U.S. Department of Labor. “Ultimately, DOL contends that Chamber is wrong and unduly limits the agency’s authority. But that is an argument for the en banc Fifth Circuit or the Supreme Court. The balance of the factors necessary to issue a stay, moreover, weigh in Plaintiffs’ favor here.”

As a result of the findings, Kernodle granted the plaintiffs’ request for preliminary injunction and stayed the effective date of the fiduciary rule and the PTE 84-24 until further order of the court. Parts of the rule, including the important new standards for when an investment adviser is acting as a fiduciary for a client, had been slated to take effect on September 23.

The ruling, barring a successful appeal by the DOL, will give pause to retirement plan sponsors and their advisers who had been working to understand and implement the changes required by the rule.

The DOL did not immediately respond to a request for comment.

The ruling from a Texas judge was “not unexpected” given prior decisions, says Allie Itami, a partner with Lathrop GPM LLP. She notes that the plaintiffs picked a favorable venue for that reason.

“Finding a court in Texas that believes there is room in the statute [ERISA] for one-time recommendations to be fiduciary is going to be a challenge for the DOL, and it may need to hope for a suit in a different jurisdiction to get a favorable outcome,” she says.

Chevron’s Role

Personally, Itami says, she believes the new rule does not go as far as the 2016 version, but the legal test is not about whether the rule is “more modest in scope,” but whether it conflicts with the ERISA statute for one-time recommendations.

In this regard, she says, the Supreme Court’s overturning of the Chevron doctrine with the recent Loper Bright decision is significant. Because of that ruling, courts now give less deference to agencies like the DOL when evaluating agencies’ rulemaking.

“The Texas court relies on the Chamber decision’s indicating that ERISA statutorily codified the common law understanding of fiduciary relationships being based on ‘trust and confidence’ between a client and fiduciary,” she says. “The Texas court found that the plaintiffs were likely to succeed on the merits of their claim that the 2024 fiduciary rule again sweeps in ‘non-trust-and-confidence relationships’ in conflict with the statute by sweeping in one-time sales conversations.”

The FACC brought the suit along with independent insurance agents James Holloway, James Johnson, TX Titan Group LLC, Provision Brokerage LLC, and Eric Couch. They are being represented by law firm Figari & Davenport.

Many in the insurance industry have been fighting the Retirement Security Rule with multiple arguments including that the stricter standards and higher costs for brokers and advisers to operate as fiduciaries would limit the potential for lower-to-middle income savers to receive advice. Insurers have also argued that annuity sales are already regulated at the state level under the auspices of the National Association of Insurance Commissioners, and that the Securities and Exchange Commission’s Regulation Best Interest already regulates investment advice.

Many others in the retirement and financial sectors, including organizations such as the AARP, CFP Board and Morningstar Inc., however, have supported the rule for solidifying a fiduciary standard of care when giving retirement investment advice.

The DOL Retirement Security Rule is currently facing another legal challenge in the U.S. District Court for the Northern District of Texas brought by nine insurance trade groups as led by the the American Council of Life Insurers. The associations also cited the 2018 5th Circuit decision in their complaint, which is pending decision.

Meanwhile, the House Committee on Appropriations advanced a spending bill this month for the 2025 fiscal year that would cut the DOL’s budget to defund priorities including the Retirement Security Rule. The Senate will be holdings its Appropriations Committee markup meetings on August 1, including for the DOL, according to an agenda sent to press.

Also in July, the House Education and Workforce Committee approved a bill that would overturn the rule.