The Biden administration is cracking down on so-called “junk fees” in retirement accounts.
The U.S. Department of Labor on Tuesday proposed a rule that would raise the bar for financial advisors, brokers and insurance agents who give investment advice to Americans saving in 401(k) plans, individual retirement accounts and other types of savings vehicles.
Specifically, the proposal seeks to close “loopholes” in current law that sometimes allow trusted advisors to recommend investments that aren’t in a saver’s best interest but may pay the advisor a higher commission, administration officials said.
The rule targets financial advice in three areas: rollovers from 401(k) plans to IRAs; “non-securities” products like indexed annuities and commodities like gold, which generally aren’t regulated by the Securities and Exchange Commission; and recommendations made to employers on which investment funds to offer in 401(k) plans, according to the White House.
There’s a 60-day period for the public to submit comments on the proposal.
Financial conflicts of interest are ‘hidden costs’
The proposal, if codified, would impact millions of investors.
For example, in 2020, about 5.7 million Americans rolled a total $618 billion into IRAs, according to most recent IRS data. Individuals also funneled $79 billion into indexed annuities in 2022, an annual record, according to LIMRA, an insurance industry group. And 86 million people were actively investing in 401(k)-type plans as of 2019, according to the Congressional Research Service.
The “hidden costs” of financial conflicts in retirement plans amount to “junk fees,” Lael Brainard, director of the White House National Economic Council, said during a press call Monday evening. They can reduce a middle-class household’s retirement savings by 20% — amounting to perhaps tens or even hundreds of thousands of dollars, she said.
“It’s time to get junk fees out of the retirement savings market,” said Julie Su, acting secretary of the Labor Department, during the call.
Critics think regulating the retirement market in such a way would do harm, however.
Sen. Bill Cassidy, R-La., and Rep. Virginia Foxx, R-N.C., sent a letter to the Labor Department in August saying its efforts to rewrite existing protections were “misguided” and risked creating confusion in the marketplace, unwarranted compliance expenses and instability for retirement plans, retirees and savers.
How the proposal seeks to raise investor protections
The Labor Department has jurisdiction over retirement accounts. Its proposal would subject financial advisors and others who work with retirement investors to a “fiduciary” legal standard under the Employee Retirement Income Security Act of 1974, according to administration officials.
Here’s why that’s important: These fiduciary protections are generally the highest known to law, relative to other rules covering financial advice and recommendations, according to attorneys.
That would generally mean investment advice must be given solely in investors’ best interests, and that advisors must set aside their own self-interests.
There are certain contexts in which these protections don’t apply under current law: for example, if an advisor makes a one-time recommendation to an investor to roll over money to an IRA and doesn’t maintain an ongoing relationship with that saver in the future.
And while the SEC separately raised its bar for investment advice in 2019, its purview doesn’t extend to popular retirement products like indexed annuities, a popular insurance product that’s not regulated as a security.
However, the Labor Department can regulate them if sold in a retirement account, according to a Biden administration official speaking on background.
Sales of these annuities, which are “relatively complicated” and opaque, are “too frequently driven by financial incentives” and not by what’s right for the investor, the official said.
The Obama administration tried to rewrite similar rules
The Labor Department also tried to rewrite so-called fiduciary rules during the Obama administration. However, the Fifth Circuit Court of Appeals killed that measure in 2018.
Some groups believe a new Labor Department rule would stifle uptake of certain investments that are helpful for savers. When the Obama-era rule initially took effect, 29% of brokerage firms reduced advice to investors and 24% eliminated it, according to a Deloitte survey commissioned by the Securities Industry and Financial Markets Association, a brokerage industry trade group.
“Unfortunately, a fiduciary-only regulation would shut off access to important retirement tools, and hurt the very people the regulation intends to help,” according to the American Council of Life Insurers, a trade group.
However, this new proposal is more narrowly applied, said the Biden official speaking on background.
“There are a number of fairly significant differences between the two,” the official said.