As of April 23, 2024, the United States Department of Labor announced the completion of a retirement security rule. This measure, taken by the administration of President Joe Biden, aims to protect workers who save for retirement, ensuring that they receive reliable advice to invest their retirement savings safely and profitably.
The rule comes into force from September 23, 2024 and, in the text of the executive decision, updates the definition of “investment advisory trustee” and seeks to avoid conflicts of interest in financial advice. In this article, we will explain in detail what this rule consists of and how it will impact workers and financial advisors.
Redefining the Retirement Investment Fiduciary
This new rule redefines who is considered an investment advisory trustee under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. Supporters of this decision claim that the update was necessary because the previous definition, written in 1975, had already become obsolete and does not reflect the significant changes in retirement panoramas and contemporary counseling practices.
Being considered a fiduciary means that the financial advisor has the obligation to act in the best interests of his clients, advising them so that the investment is as fruitful as possible. Under the Biden administration’s new definition, any financial services provider that offers investment advice for a fee and is perceived as a trusted advisor must act as a fiduciary.
This includes providing prudent, loyal and honest advice, free of excessive charges, and avoiding recommendations that favor your personal interests over those of your clients.
What Does It Mean To Be a Fiduciary Under the New Rule?
The acting Secretary of the Department of Labor, Julie Su, emphasized that this rule protects retired investors from inappropriate investment recommendations and harmful conflicts of interest. The idea is that investors can trust that their financial advisors are giving them the information of their greatest interest and working to make impartial and safe decisions.
The rule also eliminates the requirement that fiduciaries provide advice on a regular basis. Put another way, a simple counseling visit can make this advisor be considered a fiduciary. As a result, more financial advisors will be subject to these fiduciary rules, which should improve the quality of advice that savers receive for retirement, or at least that’s what this new regulation is trying to do.
Biden’s Efforts Against “Junk Fees”
The administration of Democrat Biden has been working to eliminate so-called ” junk fees” in various industries, including banking and air travel. This broader struggle is now joined by retirements. Julie Su emphasized that retirement funds are often the largest savings a person has and that workers deserve to know that their financial advisors provide them with reliable advice without their savings being eaten up by unnecessary fees.
The new rule has received support from liberals and critics of the retirement counseling industry. For example, Democratic Senator Elizabeth Warren accused big insurance companies of paying retirement advisors with benefits such as car leasing and luxury vacations in exchange for deliberately giving bad advice. This is a very serious accusation that has not gone down well at all in the industry, which has rejected it outright.
The American Association of Retired Persons (AARP) has added its support to this regulation, stating that certain legal loopholes allowed until now some advisors to recommend investments with excessive fees and unnecessary risks, which put the beneficiaries’ entire life savings at risk.
Opposition from Manchin, Republicans and the Industry
On the other hand, the rule has encountered opposition from some lawmakers and industry groups. Senator Joe Manchin and 15 Republican senators introduced a resolution to repeal the rule, arguing that it would cause people to lose access to investment advice because of the broad definition of fiduciary.
Several industry groups, including the American Council of Life Insurers and the National Association of Insurance and Financial Advisors, also oppose the rule, arguing that it limits financial counseling options for retirement savers.
Will Biden’s New Rule on Retirement Really Work?
The Certified Financial Planner Board praised the Biden administration’s decision, saying in an official statement that the rule addresses regulatory loopholes and protects Americans. “The CFP Board applauds the DOL for issuing the Retirement Security final rule, which expands the definition of fiduciary advice under the Employee Retirement Income Security Act (ERISA),” according to the statement.
“The DOL’s final rule addresses regulatory loopholes and helps protect Americans from the costly effects of conflicts of interest by requiring financial professionals to provide retirement investment advice in the best interests of their clients.”
Do People Trust Their Retirement Advisors?
The most interesting thing here is that most Americans rely on their financial advisors to give them the best retirement advice. A recent survey found that 92% of people expect financial professionals to provide them with advice that is in the best interest and benefit for their savings.
In parallel, 97% of investors said they agree that financial professionals should be required to provide the correct and honest advice for retirement savings.
According to the Biden administration’s Council of Economic Advisers, Americans lose an inordinate $5 billion a year to conflicts of interest over one category of retirement investment: fixed-index annuities.
These fixed-index annuities are financial products designed to provide income during retirement. They are based on a particular market index, such as the S&P 500, and combine the characteristics of traditional fixed annuities with the growth potential linked to long-term market performance.
