President Biden’s latest retirement savings proposal, announced Tuesday, is a nod to the late fiduciary rule, touted as requiring financial advisors to always act in the best interests of their clients.
The proposal, expected to be officially unveiled on Tuesday, will target “junk fees,” including the payment financial advisers receive for recommending one investment product over another, known as a “conflict of interest.” The rule, under the Department of Labor, would “close loopholes and require financial advisors to provide retirement advice in the best interest of the saver, rather than chasing the biggest payday,” the White House said.
“American families save their entire lives so they can retire with dignity. But the junk fees are robbing their savings, going to financial advisors with conflicts of interest instead of American families, and making pensions less secure,” the White House announcement said.
Recommendations could boost returns on pension investments, the White House said, anywhere between 0.2% and 1.2% per year.
To see: Fiduciary vs. Financial Advisor: What’s the Difference?
This latest proposal is in line with the controversial “conflict of interest” rule, also known as the fiduciary rule, proposed under President Obama and killed in court under President Trump. According to the Fifth Circuit Court, the Department of Labor “exceeded” the rule. The Obama administration said the rule would have saved pension investors $17 billion a year from conflicting advice.
The White House announcement Tuesday said just one investment product, along the lines of fixed-index annuities, could cost retirees as much as $5 billion a year. “This is hurting workers, families and the American economy,” the statement said.
“The updated definition of an investment advice fiduciary would apply when financial services firms provide investment advice for a fee to retirement plan participants, individual retirement account owners, and others,” the DOL said in a statement. If the rule is adopted, advisors would be required to adhere to “high standards of care and loyalty.”
The move would also target the transfer of employer-sponsored retirement plans to IRAs. Employer-sponsored retirement plans, such as the 401(k) plan, are protected under the federal law called ERISA, but IRAs are not.
Critics argue the rule is unnecessary and could cause confusion among advisors and clients, or deter some potential clients in need of retirement savings from working with a professional.
This rule differs from some of the other standards already implemented. The Securities and Exchange Commission also has Regulation Best Interest, but the White House said the agency’s authority does not protect investors from advising plan sponsors about investment opportunities in employer-sponsored plans. It also does not cover certain investment products, such as those in commodities and insurance, the White House said. States regulate that advice, which means that governance differs from country to country, the government said.
“These inadequate protections and misaligned incentives have helped drive sales of fixed index annuities up 25% this year,” the White House said in its statement. “The proposed rule would require retirement advisors to provide advice in the interests of the saver, regardless of whether they recommend a securities or insurance product and where they provide advice.”