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Are Insurance Agents Fiduciaries? Federal Lawsuit Aims to Vacate This Controversial Rule


A federal lawsuit seeks to vacate a U.S. Department of Labor rule under which insurance agents who help clients roll over retirement assets are considered fiduciaries.

The Federation of Americans for Consumer Choice, an insurance trade organization, filed a 21-page complaint on Wednesday alongside several Texas-based financial advisors who direct clients regarding the purchase of annuity products with assets they’ve rolled into an individual retirement account (IRA).

The lawsuit, which was filed in the U.S. District Court for the Northern District of Texas, aims to vacate the DOL’s new interpretation of a 1975 rule for who qualifies as an investment advice fiduciary. The plaintiffs allege the new interpretation, which broadens the scope of professionals who are considered fiduciaries, will “directly and adversely” affect them. Under the Employee Retirement Income Security Act of 1974, fiduciaries cannot collect commissions from a third party or compensation that varies based on the advice given.

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Definition of a Fiduciary Under ERISA

An insurance trade organization filed a federal lawsuit that seeks to vacate the DOL’s interpretation of when an investment professional should be considered a fiduciary.

At the heart of the federal lawsuit is the 1975 regulation defining an investment advice fiduciary under ERISA and the Internal Revenue Code. In 2016, the DOL updated the rule and expanded the definition of a fiduciary as anyone who gives investment advice to an ERISA plan or participant for a fee, according to the lawsuit.

However, the U.S. Court of Appeals for the Fifth Circuit knocked down the updated fiduciary rule in 2018, stating that the new regulation “significantly expanded and conflicted with the statutory definition of fiduciary in ERISA and the (Internal Revenue Code).” The court also found that the updated rule “improperly” included sales conduct of financial professionals and insurance agents that “had historically never been considered as fiduciary in nature,” the lawsuit states.

Additionally, the appellate court posited that the DOL’s original rule specified a fiduciary relationship only exists when an advisor’s services are provided “regularly” and are the “primary basis” for the client’s investment decisions.

Lawsuit Targets New Version of Fiduciary Rule

An insurance trade organization filed a federal lawsuit that seeks to vacate the DOL’s interpretation of when an investment professional should be considered a fiduciary.

Despite the appellate court’s decision to vacate the 2016 version of the fiduciary rule, the DOL renewed its effort to expand the meaning of a fiduciary under ERISA, according to the lawsuit, prompting the new federal complaint.

In December 2020, the DOL adopted a new version of the regulation that left the text of the 1975 rule intact, according to the lawsuit. However, the revised regulation is accompanied by a 64-page preamble that “carries forward the core problem the Fifth Circuit identified in vacating the Fiduciary Rule the first time.”

As a result, the FACC lawsuit seeks to vacate the DOL’s interpretation of when an investment professional should be considered a fiduciary, specifically insurance agents who advise ERISA plan participants on the rollover of their assets into an IRA and/or the purchase of an annuity.

The complaint argues this “overreach” is “particularly significant” to the plaintiffs, since approximately one-half of annuity contracts sold by insurance agents are IRA or tax-qualified products.

According the complaint, DOL acknowledges that a single instance in which a financial professional offers advice regarding the rollover of assets from an ERISA plan fails to meet the “regular basis” standard of the five-part test of the 1975 rule.

“However, the New Interpretation provides that such advice rendered by someone who has not previously provided advice to the plan participant but may do so in the future would constitute the start of an investment advice relationship and, therefore, render him or her a fiduciary,” the lawsuit states.

The plaintiffs allege this distinction “is meaningless,” since all investment professionals look to establish and maintain relationships with potential clients, not deter them. The suit additionally argues that the DOL ignores the “well-settled” concept of a fiduciary relationship being defined by the trust and confidence that a client places in the professional, not the number of times investment advice is rendered.

Bottom Line

An insurance trade organization and group of insurance agents from Texas filed a lawsuit against the Department of Labor aiming to vacate a rule that expands the definition of a fiduciary under the Employee Retirement Income Security Act. If labeled fiduciaries, the plaintiffs allege insurance agents may not be able to collect commissions or third-party compensation when advising clients on the purchase of annuities within IRAs, dealing a blow to their business.

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