Labor Department won't enforce investor protection rule after court decision

  • The Labor Department's decision to put enforcement of the fiduciary rule on hold adds to the uncertainty of the measure's future.
  • Regardless of what happens, retirement savers should be sure to carefully vet their financial advisor and understand exactly how they are paid.

Federal regulators for now are backing off enforcement of an Obama-era rule intended to protect retirement savers.

The 5th Circuit Court of Appeals ruled on March 15 that the Labor Department overstepped its authority by creating the so-called fiduciary rule, parts of which went into effect last year. In general, the rule requires advisors and brokers to put their clients' interests before their own when advising on retirement accounts such as 401(k) plans and individual retirement accounts.

"Pending further review, the [Labor Department] will not be enforcing the 2016 fiduciary rule," an agency spokesman said in a statement to CNBC.

Financial advisor
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No further details were provided.

The department's decision affects all advisors nationwide who have been subject to the rule, not just those who work in the area of the country that the appeals court has jurisdiction over — Texas, Mississippi and Louisiana.

Last June, some provisions went into effect, requiring advisors to provide advice that aligns with clients' best interests, charge reasonable compensation and not make misleading statements.

The remaining provisions set to take effect July 1, 2019 — the result of repeated delays after President Donald Trump took office — articulate what advisors must do to meet those requirements.

For instance, it would require those earning commissions on investments in retirement accounts to sign a legally binding agreement putting their clients' interests ahead of their own, and to provide other disclosures related to fees, services and conflicts of interest.

The Labor Department already has been reviewing those provisions. It indicated when it issued its most recent delay in November that the agency would use the time to work with other federal regulators on potential changes to the postponed provisions.

Although it's uncertain how the agency may ultimately respond to the appeals court's decision, the legal battle is likely to continue.

Regardless of what happens, experts recommend that retirement savers choose their advisors carefully and understand exactly how they are paid.

According to a 2015 study from former President Barack Obama's Council of Economic Advisors, conflicted advice was costing consumers about $17 billion in retirement earnings each year.

The chart below provides some tips on how to evaluate a financial advisor.