Compliance July 26, 2024

Judge Stays DOL’s Retirement Security Rule

The preliminary injunction issued in a Texas district court comes with the fiduciary rule scheduled to take effect September 23.

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

On Thursday, U.S. District Judge Jeremy Kernodle, of the U.S. District Court for the Eastern District of Texas, granted an insurance industry trade association’s request for a stay blocking the so-called fiduciary rule, which creates new standards for what constitutes investment fiduciary advice to retirement savers, “until further order of the court.” Kernodle made clear the scope of relief is national and not limited to “the parties before the court.”

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The The Federation of Americans for Consumer Choice Inc., an advocacy group for independent insurance agents, along with other independent insurance agents, filed a complaint seeking a stay or 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 administration of President Barack Obama that was struck down by the U.S. 5th Circuit Court of Appeals in 2018 in Chamber of Commerce v. Department of Labor. The DOL has frequently disputed that claim, arguing that the new rule took that ruling into account and was designed to more clearly address when retirement plan rollover advice and annuity sales fall under fiduciary standards.

On Thursday, Kernodle sided with the plaintiffs for the stay, agreeing in an opinion that the Retirement Security Rule does trod the same ground as the previous proposal struck down by the 5th Circuit, which 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.

PTE Stay

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. “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 a 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 advisers who had been working to implement the changes.

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 the notion that it would limit the potential for lower-to-middle-income savers to receive advice due to the stricter standards and potentially higher costs for brokers and advisers to operate as fiduciaries. Insurers have also argued that annuity sales are already regulated at the state level under the National Association of Insurance Commissioners and that the Securities and Exchange Commission’s Regulation Best Interest already guides investment advice.

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

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

Meanwhile, Republican members of the House Committee on Appropriations proposed a spending bill in June for the 2025 fiscal year that would cut the DOL’s budget and defund its 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.

Correction: The article has been corrected to show that the judge agreed with the plaintiffs’ request to stay the rule, not impose a preliminary injunction.

Data & Research July 26, 2024

Vanguard: Auto-Enrollment Has Most Significant Role in Equalizing Savings Access

Automatic enrollment ranks highest for promoting savings across racial and ethnic background, but other modern plan design features can also help book savings, according to Vanguard research.

 

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Automatic enrollment is so far the most powerful tool in eliminating disparities among retirement plan savers, according to new research by Vanguard.

When examining a sample of 14 large defined contribution plans across nine plan sponsors, Vanguard found that automatic enrollment had the most significant influence on the participation rates of lower-paid employees, especially Black and Hispanic employees: The participation rates of lower-income Black and Hispanic employees were 2.5 times higher in companies that automatically enrolled employees into their plan, according to the report.

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Six of the plans that Vanguard analyzed have an automatic enrollment design, with initial default rates ranging from 2% through 5%, and the remaining eight plans have a voluntary enrollment design.

Participation rates for those in voluntary enrollment plans varied significantly across races, but participation rates among those in auto-enrollment plans were much more consistent across the board.

For example, Black employees in voluntary enrollment plans had a 52% average participation rate, whereas white employees in voluntary enrollment plans had an average participation rate of 73%. The difference is much smaller for those automatically enrolled, as Black employees had a 90% average participation rate, and white employees had a 92% average participation rate.

Participation Rates

All employees
Automatic enrollment
Voluntary enrollment
All Employees
81%
92%
68%
Asian
88%
94%
80%
Black
72%
90%
52%
Hispanic
73%
90%
57%
White
83%
92%
73%
Source: Vanguard, 2024

“By far, I think the biggest takeaway from this is that … automatic enrollment is a benefit, [or] a tide, that lifts all boats,” says David Stinnett, a principal of strategic retirement consulting at Vanguard. “With this report, we’re no longer speculating. This study forcefully shows that how you use modern plan design can significantly drive better outcomes and be much more equitable in those outcomes.”

Total savings rates of employees across all racial and ethnic groups earning an income of $75,000 or less differed significantly between those who were automatically enrolled and those who voluntarily enrolled. For instance, the average savings rate for Hispanic employees in a voluntary enrollment plan was 4.9%, whereas the average savings rate for the Hispanic employees in an auto-enrollment plan was 8.3%.

However, Vanguard also found that participants in automatic enrollment plans were significantly more likely to have taken a hardship withdrawal. Stinnett argues that this trend is likely due to the fact that the automatic enrollment plans considered have more lower-compensated employees participating than the voluntary plans.

Employees in a voluntary enrollment plan are likely also facing financial hardships, but Stinnett says since they may not be participating in a plan, they are taking withdrawals from sources other than their retirement plan and addressing that hardship elsewhere.

“I think you could make the case that it’s better for [workers] to be in the plan, because at least then they have a balance to take out, and if they’re in the plan, they’re getting a match on that,” Stinnett says. “You never like to see more hardship withdrawals, but it’s not necessarily a strong critique of automatic plan designs.”

Besides automatic enrollment, other plan design features such as offering professionally managed allocations and advice services can also promote equity in retirement savings.

Within Vanguard’s sample, 58% of participants had a professionally managed allocation, 52% were pure target-date investors and 6% were using managed account advice.

Vanguard found that the rising use of professionally managed allocations is influencing extreme portfolio allocations, such as a 100% allocation to equities. The research showed only 4% of participants using professionally managed allocation had their entire account balance allocated to equities. As Black and Hispanic investors were more likely to have a professionally managed allocation—many being pure target-date investors—they were also less likely to hold an extreme equity allocation.

Stinnett adds that increased access to low-cost advice and digital robo-advice services is a positive step from an equity perspective.

“There are periods of volatility in the marketplace, and it’s very comforting when all of your wealth is in the plan and you know that you have professional assistance in how your saving behavior and investing behavior is going,” Stinnett says.

For the 59% of plan sponsors that have already adopted these modern design features studied, Stinnett says this research should be validating, as auto-enrollment and other features are driving better outcomes.

“For those plan sponsors who have yet to adopt [these features], I think [the research] serves as even more encouragement that you should be in your committees discussing, debating and considering these modern plan design features,” he says.

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