The White House says it wants to help retirement savers avoid billions of dollars in ‘junk fees’
President Biden’s newest retirement savings proposal announced Tuesday is a nod to the late fiduciary rule, touted as requiring financial advisers to always act in their clients’ best interests.
The proposal, expected to be officially unveiled Tuesday, will focus on “junk fees,” including the payment financial advisers get for recommending one investment product over another, also known as a “conflict of interest.” The rule, under the Department of Labor, would “close loopholes and require that financial advisers provide retirement advice in the best interest of the saver, rather than chasing the highest payday,” the White House said.
“America’s families spend a lifetime saving so they can retire with dignity. But junk fees are chipping away at their savings, going to financial advisers with conflicts of interests instead of to American families, and making retirements less secure,” the White House announcement said.
Recommendations can give retirement investment returns a boost, the White House said, anywhere from 0.2% to 1.2% every year, it said.
See: Fiduciary vs. financial adviser: What’s the difference?
This latest proposal is aligned with the controversial “Conflicts of Interest” rule, also known as the fiduciary rule, proposed under President Obama and killed in court under President Trump. The Department of Labor “overreached” with the rule, according to the Fifth Circuit Court. The Obama administration said the rule would have saved retirement investors $17 billion a year from conflicted advice.
The White House announcement on Tuesday said just one investment product, in its example fixed index annuities, could cost retirees as much as $5 billion per year. “This hurts workers, families, and the American economy,” the statement said.
“The updated definition of an investment advice fiduciary would apply when financial services providers give investment advice for a fee to retirement plan participants, individual retirement account owners and others,” the DOL said in a statement. The rule, if passed, would require advisers to “adhere to high standards of care and loyalty.”
The move would also target rollovers from employer-sponsored retirement plans to IRAs. Employer-sponsored retirement plans, such as the 401(k) plan, are protected under the federal law called ERISA, but IRAs are not.
Critics argue the rule isn’t necessary, and may cause confusion among advisers and clients, or deter some potential clients in need of retirement savings from working with a professional.
This rule differs from some of the other standards already implemented. The Securities and Exchange Commission also has Regulation Best Interest, but the White House said that the agency’s authority does not protect investors against advice to plan sponsors about investment options in employer-sponsored plans. It also does not cover certain investment products, such as those in commodities and under insurance, the White House said. States regulate that advice, which means governance varies across the country, the administration said.
“These inadequate protections and misaligned incentives have helped drive sales of fixed index annuities up 25% year-to-date,” the White House said in its statement. “The proposed rule would ensure that retirement advisers must provide advice in the saver’s best interest, regardless of whether they are recommending a security or insurance product and where they are giving advice.”