President Joe Biden’s administration has proposed a new rule that would protect Americans from being scammed out of their retirement savings by unscrupulous financial advisers.
“This is about basic fairness,” Biden remarked when announcing the proposed rule at a press conference on Oct. 31. “People are tired of being played for suckers.”
The Department of Labor’s proposal aims to close governance loopholes and require financial advisers to give retirement advice in the best interests of savers rather than chase the highest payday.
“Bad financial advice by unscrupulous financial advisers driven by their own self-interest can cost a retiree up to 1.2% per year in lost investment,” Biden said. “That doesn’t sound like much but if you’re living long, it’s a lot of money.
“Over a lifetime, it can add up to 20% less money when they retire. For a middle-class household, that can amount to tens of thousands of dollars over time.”
Here are the details behind the Biden administration plans to help you preserve and grow your savings so that you can enjoy a safe and financially secure retirement.
Conflicts of interest
The Biden administration believes that some (not all) financial advisers are giving into conflicts of interest, where they recommend specific investment products to get more commission — sometimes as high as 6.5% — even if those products generate poor returns and aren’t in the best interest of retirement savers.
“They’re putting their self interests ahead of their clients and they are scamming Americans out of hard-earned money,” said Biden. “People should be able to … get advice from a so-called expert [knowing] they are getting real help, not getting ripped off.”
The White House highlighted fixed index annuities as a problematic product — rich in conflicts of interest — that could cost retirement savers as much as $5 billion per year.
“When advice is sound, many annuities can be steady, reliable sources of retirement income, much like Social Security,” said Biden. “But when the advice is self-serving, annuities drain people’s savings and deliver much less than is expected by that person.
“And they can be unclear and confusing. The fine print can be filled with hidden fees. They cost too much [and] they don’t pay much back. But some brokers sell bad annuities because these brokers get big commissions that amount to thousands of dollars over time going into the broker’s pocket instead of the client’s pocket.”
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New rule to protect retirement security
Under the new proposed rule, all financial advisers giving retirement advice and selling retirement products would have a fiduciary duty to act in their clients’ best interests — rather than chasing the highest payday.
Many advisers already have that fiduciary duty under the Employee Retirement Income Security Act of 1974 (ERISA), which established minimum standards for pension plans in private industry.
That was the same year that Individual Retirement Accounts were created and six years before the first 401(k) plan was implemented — so as Biden pointed out: “Things are different now, but the rules haven’t caught up.”
Financial advisers are subject to the Securities and Exchange Commission’s (SEC) Regulation Best Interest (Reg BI), which means they must consider retirement savers’ best interests when recommending securities like mutual funds. But Reg BI doesn’t typically extend to commodities or insurance products, like fixed index annuities, which are governed by state laws.
“These inadequate protections and misaligned incentives have helped drive sales of fixed index annuities up 25% year-to-date,” according to the White House briefing.
The new rule would close that governance loophole and ensure that retirement advisers uphold the same fiduciary standards, regardless of whether they’re recommending a security or insurance product and where they are giving advice.
If advisers breach their fiduciary duty under this new rule, they would face serious penalties, including having to pay restitution and additional financial penalties.
Improving advice around 401(k)s
The Biden administration is also hoping to build on legislation Congress passed last year to ensure workers don’t lose money when they leave a job and enroll on their new employer’s 401(k) plan.
Under ERISA, advice that is provided on a one-time basis, such as advice to rollover assets from a 401(k) plan into an IRA or annuity, is not currently required to be in the saver’s best interest.
There is “real money at stake,” according to the White House briefing. In 2022 alone, Americans rolled over approximately $779 billion from defined contribution plans, such as 401(k)s, into IRAs. The Biden administration’s new proposed rule would close this loophole to ensure one-time advice about rollovers is in the saver’s best interest.
It would also cover advice to plan sponsors, including small employers, about which investments to include in 401(k) and other employer-sponsored plans.
“Tens of millions of people across the country have invested their hard-earned money into retirement accounts,” Joanne Jenkins, CEO of AARP, a non-profit focused on issues affecting Americans over the age of fifty, said at the press conference. “They need to be able to trust their financial advisers to give them the advice that is solely and completely in their best interests.”
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