The Biden administration has proposed a retirement security rule to update the definition of an investment advice fiduciary to ensure investment advisers prioritize retirement savers' interests over their own.
“Investment professionals routinely hold themselves out as giving expert advice based on the financial interest of the retirement investor, rather than the investment advice provider’s financial interests,” said Lisa Gomez, assistant secretary for the Department of Labor's Employee Benefits Security Administration (EBSA). “This proposed rule would ensure that when investors entrust their retirement security to such investment professionals, their confidence will not be misplaced, regardless of the type of investment recommended.”
Under the proposal, the definition of an investment advice fiduciary would be updated to apply when they give advice for a fee to retirement plan participants, individual retirement account (IRA) owners, and others. It would seek to ensure fair compensation for advisers while preventing conflicts of interest that can harm clients, regardless of their recommended products, the Labor Department said.
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The existing definition of an investment advice fiduciary was adopted in 1975 when IRAs were less common and 401(k) plans did not exist, the agency said.
Reduced returns and higher costs, which the Labor Department calls "junk fees," chip away at Americans' ability to save over the long term. In an analysis of just one investment product – fixed index annuities – the agency found that conflicted advice could cost savers up to $5 billion annually.
Junk fees in the crosshairs
The proposal builds on the Biden administration's efforts to eliminate junk fees and promote competition. At present, a financial advisor may be paid by the saver or by the firm that makes the investment product that is being recommended, the Biden administration said in a statement.
While advisers deserve to be paid for their work, "when a firm pays a retirement adviser more to recommend a specific investment product, that creates a conflict of interest that often leads to Americans selecting an investment product recommended to them that generates lower returns," the administration said. "These conflicts of interest are meaningful: An adviser may receive a commission as high as 6.5 percent to recommend some insurance products. When the saver pays for advice that is not in their best interest, and it comes at a hidden cost to their lifetime savings, that’s a junk fee."
The Labor Department also proposed amendments to related existing administrative prohibited transaction exemptions. The changes would require investment advice fiduciaries to give advice that meets a professional standard of care and prioritizes the retirement investor's interest. They also would prohibit advisers from charging excessive fees or misleading investors.
The proposed update to the definition as well as the proposed amendments to the prohibited transaction exemptions are subject to a public comment period, which is available at the Labor Department’s Employee Benefits Security Administration website. The agency also plans to hold a public hearing in December.
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