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Biden administration wants to kill ‘junk’ fees in retirement investments and advice

<i>shapecharge/iStockphoto/Getty Images</i><br/>The Biden administration wants to kill ‘junk’ fees in retirement investments and advice.
shapecharge/iStockphoto/Getty Images
The Biden administration wants to kill ‘junk’ fees in retirement investments and advice.

By Jeanne Sahadi, CNN

New York (CNN) — As part of its ongoing effort to make it easier for Americans to amass retirement savings and protect consumers from having to pay “junk” fees, the Biden Administration on Tuesday released a proposed rule that would require any financial adviser, broker or insurance agent who sells retirement investments and advice to only do so in the best interest of their clients, not their own.

The goal? To prevent unscrupulous advisers from taking advantage of clients just to better line their own pockets.

“Most financial advisers give their clients good advice at a fair price and are honest with them,” said President Joe Biden at a White House event Tuesday afternoon. “But that’s not always the case. Some advisers and brokers steer their clients towards certain investments, not because of the best interests of the client, [but] because it means the best payoff for the broker.”

The new proposal is intended to standardize the rules for everyone who gets paid to offer retirement advice and sell retirement products.

“That means that if a retirement investor receives investment advice from a firm or someone and compensates that person for providing that advice, the retirement investor has the right to expect that the person providing the advice is going to act in the investor’s interest, and not in the advice provider’s own interest,” the Department of Labor said in a fact sheet on the rule.

While there are already fiduciary, “best-interest” rules in place from the Employee Retirement Income Security Act, which governs retirement savings plans, and from the Securities and Exchange Commission, which is charged with protecting investors when they purchase and sell securities, they don’t cover all types of investment products that retirement savers may be sold or all types of retirement savings transactions, such as one-time rollovers from a 401(k) to an IRA.

Generally speaking, whether advising an individual on what to do with their retirement savings or offering an employer advice on the investment options to include in a workplace retirement plan, advisers acting in a fiduciary capacity must avoid conflicts of interest. That is, their advice shouldn’t direct a client toward one product or service over another based on how much more they or their firm can make by doing so.

The DOL’s proposed rule seeks to ensure “all retirement investors receive the same quality of investment advice regardless of product or services,” said DOL Acting Secretary Julie Su in a call with reporters.

Among the types of investments that federal fiduciary rules don’t cover are non-securities such as real estate, commodities and some types of annuities, which like an employer pension can offer retirees fixed payments for life or for a period of years, depending on how the product is structured.

Annuities are insurance products and are regulated by state law — so the rules will vary by state. How they work can be complex to understand, and their fees can be high.

One situation the proposed fiduciary rule seeks to eliminate is when a person is sold a high-cost annuity, for which a broker may get a generous commission, that isn’t best suited to the client’s needs. As an example, the White House estimates that absent a fiduciary standard, the sales of just one such product — fixed index annuities — may be costing retirees up to $5 billion a year.

Across all retirement products, “requiring advisers to make recommendations in the savers’ best interest can increase retirement savers’ returns by between 0.2% and 1.20% per year. Over a lifetime, that can add up to 20% more retirement savings—potentially tens or even hundreds of thousands of dollars per impacted middle-class saver that could otherwise have been lost to junk fees,” according to a White House factsheet.

Industry pushback expected

The new proposed rule follows earlier attempts by the Labor Department to broaden and standardize the circumstances in which financial advisers must act in retirement savers’ best interests. But those attempts didn’t withstand judicial challenge.

It is not clear yet whether the changes called for in the latest proposed rule will be sufficient to quell the opposition earlier versions faced. But industry pushback is expected, including from the Insured Retirement Institute, a trade association for the insured retirement industry.

In a pre-buttal to the rule’s release, the IRI noted that in recent years “regulators at the federal and state levels have adopted and implemented significant and workable new regulations that directly address conflicts of interest that DOL is purportedly seeking to address with this new proposed rule.”

As an example, according to the IRI, 40 states have already enacted a regulation requiring insurance producers to satisfy a best interest standard that aligns with the SEC’s Regulation Best Interest (Reg BI). “And the remaining states are expected to do so in 2024,” IRI said.

In response, a senior DOL official told CNN “that standard is not sufficiently protecting consumers in those [40] states. We believe retirement savers deserve protection no matter which state they live in and this proposal would ensure that they don’t need to understand which set of rules they happen to be operating under — there would instead be a consistent standard for all.”

After the DOL publishes its proposed rule, there will be a 60-day period for public comment, after which possible revisions to the rule may be made before it is finalized. But there is no timeline yet for when that will be, the official said.

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