The Biden administration on Tuesday proposed a rule aimed at protecting retirement savers from conflicts of interest during account rollovers.
President President Biden spoke Tuesday afternoon on what the White House has called a crackdown on “junk fees” in retirement planning. Such fees chip away at account balances over time, leading to lifetime savings that are up to 20% less than if advisors were held to the highest standards, according to a White House statement.
Under current regulations, advisors who provide advice to workers rolling their 401(k) or related plan into an individual retirement account are generally not considered a fiduciary—that is, a professional who must put clients’ interests ahead of their own. This means that an advisor could steer an investor into, say, an annuity that pays the advisor a big commission, even if it’s not the best option for the investor. In some cases, commission costs and other fees are baked into the product, as opposed to paid outright, and investors don’t realize that they are silently eating into returns over time.
“This is about basic economic fairness,” Biden said in remarks at the White House. “People are tired of being played for suckers.”
Workers who spend their entire careers squirreling away hard-earned money for retirement should be able to trust that their advisor puts clients’ best interest ahead of their own enrichment, he said.
While Tuesday’s announcement builds on the Biden’s administration’s effort to crack down on junk fees across banking and other areas of consumer life, the U.S. Department of Labor’s push to strengthen investor protections stretches back more than a decade. These efforts have aimed to expand the definition of who is considered an investment advice fiduciary under the Employee Retirement Income Security Act of 1974 (Erisa).
Currently, one-time advice is generally not treated as fiduciary advice. And yet, rollover advice is often provided on a one-time basis, and it can be some of the most important guidance retirement investors receive, the White House said. Millions of savers roll over 401(k) plans into IRAs each year; in 2022, Americans rolled over approximately $779 billion from 401(k)-like plans into IRAs, according to the White House. The proposal would also make insurance products like annuities subject to the Securities and Exchange Commission’s Regulation Best Interest, which currently governs the sale of mutual funds but generally does not cover commodities or insurance products.
The proposal will now go through various steps en route to being finalized, including a public comment period. It may meet with legal challenges, as have prior efforts to expand the definition of fiduciary.
Critics charge that the proposal could hinder the ability of lower and middle-income savers to access advice by reducing the number of advisors willing to work with those investors. (Fiduciaries typically charge a flat fee or percentage of invested assets.)
In a statement, the Insured Retirement Institute, a trade organization that represents life insurers, asset managers, and broker-dealers, among others, said, “the rule will only increase retirement insecurity and result in millions of lower- and middle-income workers and retirement savers losing access to needed financial advice.”
Write to Elizabeth O’Brien at [email protected]
Read the full article here
