A U.S. District Court in Texas struck down a Biden-era rule that would have required more financial advisors to act as fiduciaries when advising on 401(k) rollovers.

Other regulations, such as the SEC’s Regulation Best Interest, may still apply to some advisors, such as broker-dealers.

A federal court in Texas vacated a Biden-era rule that would have required more financial advisors to act in a client's best interest when guiding 401(k) rollovers.

Former President Joe Biden's administration issued the rule because when a worker leaving a job gets a one-time recommendation to roll their 401(k), the advisor typically isn't required to act as a fiduciary. Under federal law, fiduciaries are required to act in clients’ interests, rather than selling them the financial product that will make the advisor the most money.

This is important in the case of rollovers because it can be the biggest financial decision many people will make, involving nest eggs built over a career.

If you're getting one-time advice on a 401(k) rollover, your advisor likely isn't required to act as a fiduciary under ERISA. Ask whether they're bound by other standards, such as the SEC's Regulation Best Interest, and how they're compensated for the products they recommend.

"Historically, a one-off rollover discussion between a financial institution and a participant was not treated as fiduciary," said Douglas Pelley, counsel at Arnold & Porter. "The Department of Labor tried to move the definition under their various proposals, but they were unsuccessful in doing so, and the courts struck down those regulations multiple times."

Advisors guiding 401(k) rollovers don't have to act as fiduciaries under the Employee Retirement Income Security Act (ERISA), unless they meet specific standards.

To qualify as a fiduciary must meet five criteria. They must (1) make investment recommendations, (2) on a regular basis, (3) under a mutual agreement with the client, (4) where the advice serves as the primary basis for investment decisions, and (5) where it's individualized to the plan's or account's specific needs. All five must be met, which is why a one-time 401(k) rollover conversation typically doesn't qualify.

Some advisors, including broker-dealers, insurance agents, and certified financial planners, are still bound by other regulations that require them to consider clients' interests, even if they don't meet the five-part test.

“The challenged regulation wrongly sought to impose ERISA fiduciary status on securities brokers and insurance agents when there was not a relationship of trust and confidence,” said Daniel Aronowitz, assistant secretary of labor for the Employee Benefits Security Administration, in a press release announcing the removal of the rule. “The Securities and Exchange Commission and state regulators regulate the activities of securities brokers and insurance agents and will continue to do so.”

Those other regulations may not be as stringent, though, according to Pelley.

For example, broker-dealers must comply with the Securities and Exchange Commission's Regulation Best Interest (Reg BI), which requires them to act in clients' best interests when making investment recommendations.

Critics say the rule's removal could harm consumers who may not know whether their advisor is legally required to put their interests first.

"[American workers] are thinking about whether they can trust and have confidence in the person they're relying on to guide decisions about a large portion of their lifetime savings," wrote Lisa Gomez, who served as assistant secretary of labor for the Employee Benefits Security Administration under Biden, on LinkedIn.

"The reality is that many advice providers take that responsibility seriously and are committed to serving their clients well," she wrote. "But we also know there are bad actors, and sometimes even well-intentioned incentives can pull someone in the wrong direction."

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