The Department of Labor is poised to introduce a new proposal, known as the Retirement Security Rule, aimed at addressing conflicts of
interest related to retirement savings advice. This proposal is set to overhaul the definition of a fiduciary under federal retirement law, closing existing loopholes and making it more challenging for advisors who provide fee-based advice to avoid fiduciary obligations. The primary objective is to ensure that financial advisors prioritize the best interests of savers, reducing the influence of conflicts of interest.
The proposed rule seeks to amend the current five-part test that determines fiduciary status for retirement accounts, with the intention of holding advisors more accountable for their recommendations. One key aspect of the proposal is to categorize as a fiduciary act a one-time recommendation to
roll funds from a company retirement plan into an individual retirement
account (IRA). This change ensures that advisors remain bound by fiduciary responsibilities, even for such transactions.
Additionally, the proposal strengthens advice standards for independent insurance professionals, promoting transparency and reducing potential conflicts. It also expands its reach to cover insurance products that are not classified as securities, broadening the range of products subject to fiduciary obligations. Furthermore, the proposal extends to advice given to
plan sponsors regarding the selection of investments available within company retirement plans, ensuring that these recommendations also
prioritize the best interests of savers.
The primary aim of this proposal is to mitigate the conflicts that arise when financial advisors are incentivized to recommend certain investment products that may not be in the best interest of the client but result in higher fees for the advisor. Lael Brainard, the director of the National Economic Council, emphasized the importance of safeguarding the retirement savings of Americans. Brainard noted that President Biden’s stance is that financial advisors should prioritize the best interests of savers, rather than promoting lower-returning products to maximize their own fees.
In an effort to eliminate what is referred to as “junk fees,” the proposal seeks to address the issue of financial advisors potentially earning up to a 6.5% commission for recommending specific investment products. These
commissions can result in investors losing as much as 20% of their retirement savings, significantly impacting their financial well-being during retirement.
Julie Su, acting DOL secretary, emphasized the importance of channeling money where it rightfully belongs: in the pockets of workers and their families. The proposed Retirement Security Rule is aligned with the Biden
administration’s goal of addressing excessive fees across various industries, including banking, airlines, and entertainment. The financial advice sector is now under the spotlight as part of the administration’s broader efforts to build the economy from the middle out and bottom up.
The key takeaway from this proposal is the emphasis on transparency and a commitment to putting the interests of retirement savers first. By closing loopholes and redefining the obligations of fiduciaries, the Department of Labor aims to create a more equitable retirement savings landscape, ensuring that Americans can save their hard-earned money with confidence and retire with dignity. The proposed rule, if implemented, has the potential to protect millions of workers and their families from the harmful impact of hidden and excessive fees in the retirement savings market, ultimately contributing to a fairer and more secure financial future for all.