One of the questions that I am repeatedly asked is whether the Department of Labor overreached their rulemaking capability by applying their new fiduciary rule to Individual Retirement Accounts (IRAs). I always tell people that will be for the courts to decide. Now, it looks like they will.
The Chamber of Commerce, its affiliates, and security trade groups filed a lawsuit against the Department of Labor’s attempt to stretch their definition of a fiduciary to IRAs in a Texas district court. The argument of course is that IRAs aren’t covered by the Employee Retirement Income Security Act of 1974 (ERISA).
Every plaintiff who thinks they are aggrieved are entitled to their day in court, but challenging an administrative agency in its rulemaking has a high burden. From my limited knowledge of administrative law, I know that the plaintiffs will have to show that the DOL was arbitrary and capricious in applying the fiduciary definition to IRAs. I believe there is enough leeway within the framework of ERISA to apply a fiduciary definition to IRAs since there is a tangential relationship between IRAs and employer sponsored retirement plans (rollovers, anyone?). In addition, the rulemaking process to change the fiduciary definition has taken 6 years, so it’s hard to show that the DOL’s lengthy rulemaking process is arbitrary and capricious when the public and these industry groups had enough time to challenge the rule.
I won’t say that the arguments against applying the rule are weak because District Courts are a funny thing when it comes to decisions. There is an obvious reason why the case was filed in Texas rather than let’s say, New York. The plaintiffs went forum shopping to get a District judge that will apply a strict reading of the rule and the DOL’s relationship to guidance over IRAs. This litigation process will take some time.