By Jarrett Renshaw
(Reuters) – The administration is set to unveil new rules on retirement plan providers aimed at closing loopholes that enable the industry to sell products that prioritize their own revenue over the best interests of customers. This move is part of the administration’s ongoing efforts to combat the prevalence of so-called junk fees.
The proposed rules by the Labor Department will mandate that retirement plan providers only offer commodities and insurance products, like annuities, to clients when it is in the customer’s best interest.
These rules will also hold Wall Street to a higher standard when it comes to providing advice on rolling over assets from an employer plan to another account, such as moving from an employee-sponsored 401(k) to an Individual Retirement Account (IRA).
“Financial advisors should prioritize the best interests of savers and avoid selling them products with lower returns simply to maximize their own fees,” stated Lael Brainard, director of the White House National Economic Council.
“When retirement savers pay for trusted advice that ultimately works against their best interests and incurs hidden costs to their lifelong savings, it becomes a junk fee,” added Brainard.
President Joe Biden has teamed up with companies like Airbnb (ABNB.O) and Live Nation (LYV.N) in their efforts to combat junk fees, which are excessive charges that customers often incur when booking concert tickets, hotels, and flights. By addressing “junk fees,” Biden and his allies are demonstrating their commitment to helping people manage expenses, a priority for many Americans who are dissatisfied with the current state of the economy.
The proposed Labor Department rule aims to compel brokerage firms to prioritize investors’ needs rather than selling products that generate higher payouts for themselves.
While Securities and Exchange Commission rules already mandate that advice for purchasing securities, such as mutual funds, is in the saver’s best interest, this authority does not extend to commodities or insurance products like fixed index annuities, which are commonly recommended to retirement savers.
The proposed rule, according to senior administration officials, will ensure that retirement advisers must always provide advice in the best interest of the saver, regardless of whether they are recommending a security or an insurance product, and regardless of where the advice is being given.
The federal law governing retirement plans does not always require retirement advisers, when providing one-time advice, such as during a rollover from a 401(k) plan into an Individual Retirement Account (IRA) or annuity, to strictly prioritize the saver’s interest.
In 2022 alone, approximately $779 billion was rolled over by Americans from defined contribution plans, such as 401(k)s, into IRAs. The proposed rule aims to close this loophole and ensure that this advice is always in the saver’s best interest.
(Reporting By Jarrett Renshaw; Editing by Michael Perry)