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New Federal Rule Cracks Down on Bad Retirement Savings Advice

AARP backs new requirements that financial advisers act solely in savers’ best interest

spinner image AARP CEO Jo Ann Jenkins speaking at the podium in the State Dining Room at the White House on October 31, 2023 in Washington, DC.
AARP CEO Jo Ann Jenkins introduces President Joe Biden at a White House event on retirement security.
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More financial professionals advising investors on saving for retirement will be required to act solely in those clients’ best interests, under a new federal regulation unveiled Oct. 31.

The Department of Labor (DOL) proposal targets loopholes in current regulations that the White House says allow advisers to boost their bottom lines by steering savers toward retirement products that pay the advisers higher commissions but may not best fit clients' needs, resulting in “junk fees” that collectively cost savers billions of dollars a year.

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“When you come from a middle-class family like I did, it makes you angry to be taken advantage of,” President Joe Biden said in announcing the rule at a White House event, where he was introduced by Jo Ann Jenkins, CEO of AARP. “Hidden junk fees make it even harder for families to have a little bit of that breathing room.”

AARP and consumer protection groups have long sought tighter rules for financial advisers handling retirement savings vehicles such as individual retirement accounts (IRAs), 401(k)s and annuities.

Jenkins, in her remarks before introducing the president, called the proposal “a critical step” to better protect Americans’ retirement funds.

“Tens of millions of people across this country have invested their hard-earned money into retirement accounts,” Jenkins said. “They need to be able to trust their financial advisors to give them advice that is — solely, and completely — in their best interests.”

Crackdown on conflicts

According to the administration, cracking down on conflicts of interest in retirement advice could boost savers’ returns on retirement accounts by 0.2 percent to 1.2 percent a year, or up to 20 percent over a lifetime.

The proposed regulation, called the Retirement Security Rule, would update the definition of an “investment advice fiduciary” as applied to financial professionals providing paid services to retirement savers. Once the new regulation takes effect, they will always have a “fiduciary duty” to act in clients’ best interest, Biden said.

The rule features three provisions that expand the “best interest” standard to cover:

More types of transactions. Retirement advisers would be required to act in the saver’s best interest regardless of the type of investment they are recommending.

This builds on an existing Securities and Exchange Commission (SEC) rule that sets the best-interest standard for advice on purchasing securities such as mutual funds but does not cover insurance products like fixed index annuities that are increasingly marketed to people saving for their retirement.

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Those transactions are currently governed by a patchwork of state laws. Conflict-tainted advice on fixed index annuities alone costs retirees $5 billion a year, the administration says, citing a 2023 study by Cerulli Associates, a financial-services research firm.

One-time advice. Advice given on a one-time basis, such as whether to roll over a 401(k) into an individual retirement account (IRA) or annuity, would also come under the best-interest standard.

Current federal law largely applies that principle to ongoing financial advice, leaving American workers — who rolled nearly $780 billion from 401(k)-type workplace plans into IRAs in 2022 — vulnerable to conflicted guidance about whether and where to move their nest eggs when they leave or change jobs.

“One-time advice is often the most important advice the retirement investor will ever receive and affects roughly 5 million savers per year,” an administration fact sheet says.

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Advice to plan sponsors. Advisers’ recommendations to employers on what investments to include in workplace retirement plans also would come under the best-interest umbrella, meaning they must be guided by what’s best for savers — a “critically important” step, the administration says, because most Americans primarily save for retirement through workplace plans.

The new rule was published in the Federal Register Nov. 3, triggering a 60-day public comment period. Individuals and organizations can submit comments on the proposal through Jan. 2, 2024. 

Years in the making

The proposed regulation is the latest step in a yearslong effort by AARP and other consumer advocates to strengthen protections for people saving for retirement.

In 2010, the DOL began work on a rule requiring financial professionals handling retirement plans to act as fiduciaries — meaning they must put investors’ interests above all other considerations, including their and their firms’ bottom line.

This “fiduciary rule” was finalized in 2016 and implemented the following year, but it was struck down in March 2018 by the U.S. Fifth Circuit Court of Appeals. Ruling on a challenge brought by the U.S. Chamber of Commerce and financial-services organizations, the court said the DOL exceeded its statutory authority in expanding the fiduciary standard.

Later in 2018, the SEC issued its rule that finance advisers “act in the best interest” of investors, but critics said the mandate, largely limited to securities transactions, did not adequately protect workers’ retirement savings.

“The action we’re taking today is, I believe, long overdue,” Biden said. “The bottom line is, this is about basic fairness.”

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