The headquarters of the US Department of Labor in Washington.
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The Biden administration issued a final rule Tuesday that cracks down on investment advice that advisors, brokers, insurance agents and others give to retirement savers.
The U.S. Labor Department’s regulations — which follow a proposed rule in October — aim to ensure that investment recommendations are in the best interests of savers, according to agency officials.
In legal terms, the final rule expands the scope of when a broker-dealer, advisor or other intermediary must act as a “fiduciary,” meaning that it is required to give advice that prioritizes the customer.
The final rule takes effect September 23. It picks up the torch from an earlier effort by the Obama administration to rein in conflicts of interest in retirement accounts. That Obama-era “fiduciary” rule, which experts say was broader than Biden’s, was thrown out in court.
Current retirement rules do not provide adequate protections for savers, Labor Department officials said on a press call Tuesday.
Often, advice is tainted by “significant conflicts of interest” and in many circumstances there is “no duty” to act in the best interests of retired clients, said Lisa Gomez, deputy secretary of the Employee Benefits Security Administration.
“That’s not true,” Gomez said.
The Labor Department is trying to rein in bad actors in two big areas of advice: transfers from 401(k) plans to individual retirement accounts and purchases of insurance products like annuities, according to retirement experts and legal experts.
In some cases, conflicts of interest can allow financial professionals to recommend a transaction that earns them higher fees but is not necessarily best for the client. Such dynamics can “eat away” at Americans’ savings, Gomez said.
The Council of Economic Advisers estimates that Americans lose up to $5 billion a year due to conflicts of interest related to one insurance product, an indexed annuity.
“For too many people, the retirement savings they have accumulated through their work are by far the largest source of savings they have,” Gomez said. “These important, tax-efficient savings are worth protecting, and it is up to the Department of Labor to ensure they are protected.”
Amount of 401(k) transfers to IRA is ‘astronomical’
The final rule does not differ significantly from the Biden administration’s initial proposal, labor officials said.
Its elements occur in two phases.
Since September 23, the financial sector must recognize fiduciary status when working with clients and adhere to “impartial standards of conduct”.
These standards mean that financial professionals, when giving personalized investment advice to their clients, have an obligation to be careful, fair and truthful and to charge reasonable fees, for example, officials said Labor.
The remaining parts of the rule will take effect a year later, in September 2025, officials said.
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Americans transferred about $779 billion from 401(k) plans to IRAs in 2022, according to data cited in a Council of Economic Advisers analysis. Rollovers are common in retirement, and the annual rollover amount has increased as more baby boomers enter their retirement years.
“The amount of money transferred is astronomical,” said Andrew Oringer, partner and general counsel at Wagner Law Group.
“This juxtaposition of a huge amount of money and a compensation system that can encourage turnover-seeking without necessarily considering the best interests of the participant is something that has concerned the Department of Labor,” Oringer said.
Meanwhile, industry groups say the regulations are unnecessary and would harm the retirement savers the Labor Department is trying to protect.
In a memo released before the final rule was released, the American Council of Life Insurers, a trade group, said the new regulations were shaping up to be “alarmingly similar to the department’s 2016 regulations” under President Obama.
Before being rescinded, the rule caused more than 10 million investor accounts with $900 billion in total savings to lose access to professional financial advice, ACLI said.
Additionally, federal and state rules governed by the Securities and Exchange Commission and the National Association of Insurance Commissioners, respectively, already provide “robust” consumer protections for retirement savers, ACLI said.
However, the Department of Labor appears to be concerned that the “scope and substance” of these regulatory regimes are “insufficient” when it comes to retirement content, and the agency is attempting to “level the playing field fair,” Oringer said.
Labor officials also said Tuesday that the final fiduciary rule differs significantly from Obama-era regulations.
“We have done our best to write a rule that takes the teaching of the Fifth Circuit (Court of Appeals), the lessons we learned from the (public) comments,” and write a rule that protects investors without imposing “excessive load”. on the financial sector, said Timothy Hauser, deputy assistant secretary for program operations at the Employee Benefits Security Administration.
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