Boosting Saver Protections: Expected Government Action

In 2022, IRAs accumulated approximately $11.5 trillion, nearly double the $6.6 trillion in 401(k) plans, as reported by the Investment Company Institute. The Investment Company Institute also stated that a staggering 55 million American households, accounting for more than 40%, are IRA owners.

The primary source of assets within IRAs stems from rollovers.

According to IRS data, a total of $618 billion was rolled over to IRAs by 5.7 million individuals in 2020 alone. This amount is more than double the $300 billion rolled over a decade earlier.

This figure is also seven times greater than the direct contributions made to IRAs. In 2020, 74% of new pre-tax IRAs (also known as “traditional” accounts) were funded through rollovers, according to ICI.

According to Phyllis Borzi, former head of the Labor Department’s Employee Benefits Security Administration during the Obama administration, a “tsunami of assets” is transferring from workplace plans to IRAs.

While there are advantages and disadvantages to rolling over funds to an IRA, one potential drawback is the higher fees associated with these accounts compared to 401(k) plans. Pew Research Center estimates that investors who moved money to an IRA in 2018 will lose approximately $45.5 billion in fees over 25 years.

Additionally, most rollover advice provided by brokers, insurance agents, and others is not held to a “fiduciary” standard of care, which means investors may not receive advice that aligns with their best interests, as highlighted by Fred Reish, partner at law firm Faegre Drinker Biddle & Reath.

Attorneys suggest that the Labor Department plans to address these concerns.

Borzi, who spearheaded the Labor Department’s efforts to establish “fiduciary” rules during the Obama era, aimed to reduce conflicts of interest among brokers and other professionals providing investment recommendations to retirement savers.

Although the rule was overturned in court, the Labor Department is now attempting to reintroduce it, albeit in a more limited scope, experts predict.

In September, the Labor Department submitted a proposed rule titled “Conflict of Interest in Investment Advice” to the Office of Management and Budget. After a 90-day review period, the Labor Department will release the proposal publicly, according to Borzi.

Based on recent legal indications, it is anticipated that the Labor Department will aim to raise the standards for all rollover advice provided by the financial industry.

This change would be significant, according to retirement law expert Andrew Oringer, partner at The Wagner Law Group. He states that financial firms and their agents would need to prioritize investors’ best interests when promoting rollovers, fundamentally altering their behavior.

One major consequence of ERISA protections is that investors would gain the ability to sue for bad rollover advice, a right that is currently unavailable to them when dealing with investment advisors, brokerage firms, insurers, banks, or trust companies, explains Reish.