The Biden administration finalized a rule last month cracking down on retirement advice that a Democrat and a Republican are already working to overturn.
Here’s what you need to know about the retirement security rule:
How the rule works
The rule, finalized last month by the Labor Department, requires investment advisers to provide “prudent, fair and honest advice without excessive fees” and avoid recommendations that favor their interests at the expense of their clients.
It also updates the definition of an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code.
Under the new definition, a fiduciary includes any financial service provider who offers investment advice to a retired investor for a fee and who purports to act as a fiduciary or who a reasonable investor would consider to be a trusted advisor acting to the best of his ability. interest.
The update removes the requirement for fiduciaries to provide advice on a regular basis, thereby introducing one-off advice under the rule.
The Biden administration argued that the previous definition, written in 1975, was outdated and had not kept up with the changing retirement landscape.
“These new rules update regulations created nearly half a century ago that simply do not provide the protections American workers need and deserve for their retirement savings so they can retire with dignity,” said Lisa Gomez, assistant secretary for employee benefits security. a statement when the rule was finalized last month.
A key part of Biden’s ‘junk fees’ agenda
The rule is part of the Biden administration’s broader efforts to combat “unwanted fees.”
“Retirement funds are often the largest savings people have,” Acting Labor Secretary Julie Su said at an event unveiling the proposed retirement rule last October.
“They deserve to know that their financial advisors are giving them reliable advice and that the investment savings they have worked so hard to build, little by little, paycheck to year, are not being eaten away by unwanted fees.” »
The White House Council of Economic Advisers (CEA) has highlighted the potential losses incurred by investors who are encouraged to rollover their retirement savings into fixed index annuities.
Fixed index annuities, based on a particular market index, set a floor on losses and a ceiling on returns for investors.
These annuities may offer commissions to brokers for their sales, which the CEA says can create “strong incentives for brokers to encourage investment in fixed index annuities even if they are not in the best interests of the brokers.” investors.”
The CEA estimates that up to $5 billion is lost each year due to “conflicting investment advice” on fixed index annuities.
“Millions of Americans, especially seniors, are targeted by financial advice and insurance brokers who sell bad annuities that work for the broker, not the customer,” President Biden said in October.
The Biden administration has sought to limit “unwanted fees” in several sectors, including banking and airlines.
In March, the Consumer Financial Protection Bureau (CFPB) issued a rule capping late fees on credit card payments at $8. Last month, the Transportation Department finalized rules requiring airlines to automatically reimburse passengers for canceled or significantly delayed flights and share additional costs up front.
Both efforts have been challenged in court, with a federal judge in Texas last week blocking the late fee rule on credit cards.
Why liberals and industry critics support it
Liberals and industry critics say the new rule closes existing gaps in the retirement advice industry.
Before the rule was finalized last month, Sen. Elizabeth Warren (D-Mass.) accused big insurance companies of “paying off” retirement advisors with car rentals and lavish vacations.
“All these advisors have to do is deliberately give you bad advice, bad advice that puts money in the pockets of these big companies,” Warren said in an Instagram video. “And it’s all perfectly legal.”
AARP, formerly known as the American Association of Retired Persons, touted the final rule to close these “legal loopholes.”
“This rule closes legal loopholes that allowed some advisors to recommend investments with excessive fees and unnecessary risks, which collectively cost savers billions of dollars annually, particularly affecting older Americans,” Nancy LeaMond, vice-president AARP Executive President and Director of Advocacy and Engagement. , said in a statement.
Why Manchin, Republicans and industry oppose each other he
Earlier this week, Sen. Joe Manchin (D-W.Va.) and 15 Republican senators introduced a resolution to overturn the retirement rule, arguing that it would cause people to lose access to investment advice due to scope of the definition of the fiduciary rule.
“This Department of Labor rule is yet another example of dangerous federal overreach,” Manchin said in a statement. “While I understand the administration’s intent to protect Americans’ retirement savings, the truth is that it does the exact opposite.”
Several industry groups – including the American Council of Life Insurers (ACLI), the National Association of Insurance and Financial Advisors (NAIFA), Finseca, the Insured Retirement Institute (IRI) and the National Association for Fixed Annuities (NAFA) – are also came against the rule.
They argue that this “leaves retirement savers with fiduciary advisors as their only option for professional financial advice,” noting that fiduciaries typically work with clients who have at least $100,000 to invest.
“The Department has chosen to move forward with this fiduciary-only approach despite strong evidence of its negative impact on pension savers,” NAIFA CEO Kevin Mayeux said in a statement.
Industry groups also say the new rule is “nothing more than a repackaging” of previous regulations that were struck down by courts.
The final chapter in a decade-long fight
The Biden administration’s rule represents the latest attempt to enact the fiduciary rule after more than a decade of partisan battles.
The saga stems from the Dodd-Frank Act of 2010, which directed the Securities and Exchange Commission (SEC) to draft regulations for broker-dealers and investment advisers.
However, as the commission dragged its feet, the Department of Labor stepped in and proposed its own rule in 2016.
Like the last rule in effect, the Obama-era regulations imposed a “fiduciary duty” on retirement investment advisors, requiring them to put their clients’ interests ahead of their own.
Several major industry groups sued the Obama administration, arguing that the regulations should have come from the SEC. A federal appeals court ultimately overturned the rule in 2018.
In 2019, the Republican-controlled SEC approved several measures aimed at improving and clarifying rules for broker-dealers and investment advisers while limiting conflicts of interest.
However, the move was criticized by Democrats and consumer advocacy groups, who said the regulations were too weak.
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