WASHINGTON (CN) — Loopholes that allow trusted financial advisers to earn higher commissions by giving less-than-ideal retirement savings advice to clients will be stitched up under a new rule proposed by the Biden administration Tuesday.
“When you pay someone for retirement advice, they must give you advice that's in your best interest, not whether it gets them the best payday,” said President Joe Biden, explaining the new Department of Labor rule at a White House press conference Tuesday.
He was joined by Acting Secretary of the Department of Labor Julie Su, who spoke Tuesday on the gravity of the proposed rule change.
“Retirement funds are often the largest savings that people have,” Su said. “They deserve to know that their financial advisers are giving them trustworthy advice, and that the investment savings they worked so hard to build, little by little, paycheck by paycheck, year by year, are being eaten away by junk fees.”
The crackdown on so-called retirement account junk fees, or hidden charges not disclosed to consumers upfront, takes aim at industry professionals who recommend lower-return products to savings clients in order to maximize the amount they can charge for services.
“When you come from a middle class family, like I did, the thing that makes you the angriest is when you're taken advantage of, even if it's a little bit,” the president said. “Junk fees take real money out of the pockets of Americans, and they add up to hundreds of dollars, weighing down family budgets and making it harder to pay the bills.”
Biden’s rule change would mandate retirement plan advisers only sell products, like indexed annuities, or commodities like gold, to retirement savers if such a purchase is in the client’s best interest. The proposal would expand the Securities and Exchange Commission’s Regulation Best Interest rule, which currently applies to advice given to consumers who purchase securities like mutual funds.
“Millions Americans have investments, so-called annuities, and retirement accounts. Annuities is supposed to work like a pension plan. You might buy with one you might buy one with a one time payment and then when you retire, you get the sum of sale amount of money back year after year after year.” Biden said. “That’s how it's supposed to work when advice is sound. Many annuities can be steady, reliable sources of retirement income, much like Social Security. Same principle. But when the advice is self-serving, annuities drain people’s savings and deliver much less than expected.”
The president emphasized that most financial advisers give clients good advice at a fair price and are honest with them, but that's not always the case and that this proposal is meant to stop the exceptions.
The rule would also mandate that one-time advice provided to savers who roll over investments from employer-sponsored plans to individual retirement accounts be in the savers’ best interest. According to the White House, in 2022 alone Americans rolled over approximately $779 billion from employee contribution plans like 401(k)s into IRAs.
“One-time advice is often the most important advice the retirement investor will ever receive and affects roughly 5 million savers per year who are rolling their money out of 401(k)s and into IRAs,” the White House noted in a press release alongside the proposed rule.
The rule also would demand that best-interest advice go to plan sponsors about which investments to make available to savers.
“When advisers make recommendations to plan sponsors, including small employers, about which investments to include in 401(k) and other employer-sponsored plans, that advice is not subject to the SEC’s Regulation Best Interest and right now is not required to be in the customer’s best interest,” the White House’s release continued. “Since most Americans primarily save for retirement through their employers, making sure the investments available to them are in their best interest is critically important.”
Biden said the ultimate goal is to encourage basic fairness for people seeking retirement advice.
“People are tired of being played for suckers,” the president said, “and my administration is going to continue to crack down on junk fees across the economy to protect consumers, promote competition and give families across the country, as my dad would say, ‘just a little bit of breathing room.’”
The administration also rolled out new guidelines aimed at eliminating junk fees in July that took aim at digital economy giants like Apple, Amazon, Alphabet and Meta. Alphabet and Meta; landlords; and perpetrators of price-gouging in the food industry.
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