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President Joe Biden is poised to introduce a long-anticipated rule from the US Labor Department that promises to expand the scope of retirement advice subjected to rigorous fiduciary standards under federal benefits laws. This rule, set to be unveiled on Tuesday, addresses existing loopholes within the US Securities and Exchange Commission Regulation Best Interest, particularly concerning commodities and insurance products like annuities. The proposed rule aims to safeguard one-time advice for rolling over assets from Employee Retirement Income Security Act (ERISA) plans into non-ERISA plans like IRAs, while protecting workers’ retirement assets from conflicted investment advice.
Closing Loopholes and Enhancing Consumer Protection
The proposed rule represents a crucial step in eliminating hidden consumer fees and ensuring the security of retirement savings. By reshaping the financial industry’s role in the $10 trillion 401(k) market, the federal government aims to strengthen consumer protection. Over the past decade, numerous attempts to extend fiduciary standards across Wall Street have encountered limited success.
Challenging the Status Quo
Strict fiduciary standards pose a challenge to the business models of insurance companies and banking firms, particularly regarding the delivery of annuities and IRAs to clients transitioning from employer-sponsored 401(k)s or pensions. Under these standards, brokers and dealers could be prohibited from charging commissions, compelling them and their employers to adhere to more stringent oversight and disclosure exemption requirements.
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Acting Labor Secretary Julie Su emphasizes the urgency of eliminating “junk fees” from the retirement savings market and ensuring that funds reach the pockets of workers and their families. The proposed rule seeks to provide working Americans with the peace and security they deserve in retirement.
Expanding the Definition of Fiduciary Investment Advice
This new rule introduces amendments to the 1975 regulation that initially defined fiduciary investment advice. It eliminates the second component of a five-part test that previously restricted fiduciary advice to those offering it “on a regular basis.” The significance of one-time advice cannot be understated, as it impacts approximately 5 million savers annually who transition their 401(k) savings into IRAs, as highlighted in a White House fact sheet.
In 2022, Americans rolled over an astounding $779 billion from defined-contribution plans such as 401(k)s into IRAs, as reported by Cerulli Inc.
Strengthening Oversight and Limiting Exemptions
In addition to broadening fiduciary standards, the Department of Labor (DOL) plans to propose modifications to the exemptions that investment advisers use to charge fees for their services. The administration intends to streamline the number of available exemptions to just two and enhance regulatory oversight over advisers working with retirement plans and participants.
The Fourth Attempt at Expansion
The upcoming announcement will mark the fourth time since 2010 that the federal government has endeavored to expand fiduciary standards. Previous attempts faced challenges, with the Obama administration’s first effort abandoned under Wall Street pressure, and its second rule overturned by a US Court of Appeals for the Fifth Circuit panel in 2018. A Trump-era exemption introduced a broader interpretation of the 1975 fiduciary definition, which was further clarified under the Biden administration but faced legal challenges in Florida and Texas.
The current regulatory package distinguishes itself by retaining the five-part test, which was discarded by the Obama-era rules. It also amends the regular-basis requirement, a factor that contributed to the failure of the most recent interpretation. Labor Department officials aim for a balanced approach that adheres to court precedents.
Prioritizing Client Interests
Fiduciary standards focus on investment advisers prioritizing their clients’ interests. Advocates argue that advisers earning commissions may have a financial incentive to promote riskier products with higher management fees, inferior market performance, and limited accessibility. However, critics contend that the commission model helps keep overall service costs down for retail investors, and a broader fiduciary rule could price out many workers and retirees seeking professional advice to achieve their retirement objectives.
The Fight Against “Junk Fees” Continues
The campaign against “junk fees” in the financial industry has been a central concern for President Biden. The Federal Trade Commission recently proposed a rule that would prohibit companies from misrepresenting their fees and require them to disclose any hidden charges, thereby fostering transparency and consumer trust.
Director of the National Economic Council, Lael Brainard, notes that when retirement savers pay for trusted advice that does not align with their best interests, it results in a “junk fee.” The proposed rule seeks to address these concerns and promote the financial security of Americans as they plan for their retirement.
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