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Key Takeaways
- A proposed Biden administration rule would make financial advisors recommend investments in the client’s best interests in certain situations where they don’t already, such as IRA rollovers.
- Currently, advisors can recommend products that pay them commissions, which the White House calls a conflict of interest that costs investors billions in returns they might otherwise get.
- The rule is part of a broader effort to crack down on “junk fees” throughout the economy.
When it comes time for a retirement account rollover, proposed rules would require your financial advisor to recommend the option that would serve you best—not the one that would earn them the most commission.
The administration of President Joe Biden proposed a set of new rules Tuesday that would require financial advisors to act as fiduciaries, that is, in the best interests of their clients, when advising savers on transferring funds from their employer-sponsored 401k retirement plans to an IRA. That’s a change from the current rules, which allow advisors to collect a commission by recommending certain investments during a rollover—an exception from general rules that require advisors to act as fiduciaries in most situations.
IRA rollovers are a common type of transaction that many people will do at least once as they prepare for retirement. In 2022, people moved $779 billion from 401ks to IRAs, according to an analysis by consulting firm Cerulli Associates cited by the White House.
Research has found that investors get better returns on accounts offered under fiduciary requirements, with savers earning up to 1.20% per year more on their accounts, which adds up to 20% more over a lifetime, the White House estimated.
The administration is tying the new fiduciary standard to the Biden administration’s broader effort to crack down on financial and other kinds of fees, which it has referred to as “junk fees.”
For retirement savers, the rule means “more money in their retirement savings because it disallows a form of junk fee, that is, padding to the bottom line that doesn’t benefit retirement savers, but benefits brokers who are selling them products not in their best interest,” said Jared Bernstein, chair of the White House Council of Economic Advisors.
Financial advisors oppose the rule, arguing that it’s not necessary and would harm the consumers it’s meant to protect.
“Investors should have a choice to work with advisors whose compensation model best suits their needs,” Mark Briscoe, senior director of strategic communications for the National Association of Insurance and Financial Advisors, a trade group, wrote in an email. “Some are better served by a commission-based business model, while others are better served paying fees for the services they receive.”
The new rules would expand fiduciary duties in a few other situations as well. It would cover advice to 401k plan sponsors such as small employers, and products like fixed-indexed annuities, which are offered by insurance companies and therefore regulated by state laws rather than federal rules on securities.
The Biden administration cited fixed-indexed annuities as an example of a product that advisors earn high commissions for recommending—as much as 6.5% for clients under 75—but which doesn’t necessarily serve the interests of the client, since better options may be available.
Certain mutual funds, for example, may offer clients similar advantages with potentially lower fees and better returns, they said. The administration estimated investors missed out on $5 billion in returns annually because of “conflicted advice” in this category of investment.
The Department of Labor rule proposed Tuesday is not the government’s first attempt to expand requirements for financial advisors to act as fiduciaries. Former President Barack Obama’s administration proposed a fiduciary rule in 2016, but the regulations were thrown out by a federal court after legal challenges.
Bernstein said he was confident the new rule is better prepared to withstand legal scrutiny. One major difference between then and now: a 2019 Securities and Exchange Commission rule requires brokers to act in the best interest of clients when selling securities. The rule provides a legal precedent for the rule proposed Tuesday, which would cover transactions and types of investments not currently covered by the SEC regulation.
The proposed rule could go into effect in a matter of months, after a public comment period is complete.
“Going after junk fees in every area we find them, we think, is really important to help give families a bit more breathing room at the end of the day,” Bernstein said.
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