The Biden administration finalized a rule cracking down on retirement advice last month that one Democrat and Republicans are already pushing to overturn.
Here’s what you need to know about the Retirement Security Rule:
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How the rule works
The rule, finalized last month by the Labor Department, requires investment advisers to provide “prudent, loyal, honest advice free from overcharges” 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 Internal Revenue Code.
Under the new definition, a fiduciary includes any financial services provider who offers investment advice to a retirement investor for a fee and who claims to be acting as a fiduciary or who a reasonable investor understands to be a trusted adviser acting in their best interest.
The update removes the requirement that fiduciaries provide advice on a regular basis, bringing one-time advice under the rule.
The Biden administration has argued that the previous definition, which was written in 1975, is outdated and has not kept pace with changes to the retirement landscape.
“These new rules update regulations created nearly a half-century ago that simply are not providing the protections America’s workers need and deserve for their retirement savings so that they can retire with dignity,” Lisa Gomez, assistant secretary for Employee Benefits Security, said in a statement when the rule was finalized last month.
Key part of the Biden ‘junk fee’ agenda
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The rule comes as part of the Biden administration’s larger effort to crack down on so-called “junk fees.”
“Retirement funds are often the largest savings that 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 trustworthy advice and that the investment savings they’ve worked so hard to build, little by little, paycheck by paycheck, year after year, aren’t being eaten away by junk fees.”
The White House Council of Economic Advisers (CEA) pointed to the potential losses incurred by investors who are encouraged to rollover their retirement savings into fixed index annuities.
Fixed index annuities, which are based on a particular market index, place a floor on losses and a cap on returns for investors.
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These annuities may offer commissions to brokers for their sales, which the CEA suggested can create “strong incentives for brokers to encourage investment in fixed index annuities even if they are not in investors’ best interests.”
The CEA estimates that as much as $5 billion is lost annually due to “conflicted investment advice” on fixed index annuities.
“Millions of Americans, especially seniors, are being targeted by financial advice and insurance brokers selling bad annuities that work for the broker and not for the client,” President Biden said in October.
The Biden administration has sought to limit “junk fees” across several industries, including banking and air travel.
In March, the Consumer Financial Protection Bureau (CFPB) issued a rule capping late fees on credit card payments at $8. Last month, the Department of Transporation finalized rules requiring airlines to automatically refund passengers for canceled or significantly delayed flights and to share extra fees upfront.
Both efforts have been challenged in court, with a federal judge in Texas blocking the credit card late fee rule last week.
Why liberals and industry critics support it
Liberals and industry critics argue that the new rule closes existing loopholes in the retirement advice industry.
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Before the rule was finalized last month, Sen. Elizabeth Warren (D-Mass.) accused large insurance companies of “paying off” retirement advisers with car leases and lavish vacations.
“All these advisers have to do is deliberately give you bad advice, bad advice that puts money in the pockets of these big companies,” Warren said in a video on Instagram. “And it’s all perfectly legal.”
AARP, formerly known as the American Association of Retired Persons, touted the final rule for closing such “legal loopholes.”
“This rule closes legal loopholes that allowed some advisors to recommend investments with excessive fees and unnecessary risks, which collectively cost retirement savers billions of dollars a year, particularly affecting older Americans,” Nancy LeaMond, AARP executive vice president and chief advocacy and engagement officer, said in a statement.
Why Manchin, Republicans and industry oppose it
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 how broadly the rule defines fiduciary.”
“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 of the matter is this 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) — have also come out against the rule.
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They argue that it “leaves retirement savers with fiduciary advisors as their only option for professional financial guidance,” noting that fiduciaries typically work with clients who have at least $100,000 to invest.
“The Department chose to move forward with this fiduciary-only approach despite strong evidence of its adverse impact on retirement savers,” NAIFA CEO Kevin Mayeux said in a statement.
The industry groups also allege that the new rule is “nothing more than a repackaging” of earlier regulations that were struck down in court.
The latest 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 2010 Dodd-Frank Act, which ordered the Securities and Exchange Commission (SEC) to write regulations for broker-dealers and investment advisers.
However, as the commission dragged its feet, the Labor Department stepped in and proposed its own rule in 2016.
Like the latest rule, the Obama-era regulations imposed a “fiduciary duty” on retirement investment advisers, requiring them to put the interests of their clients 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 struck down the rule in 2018.
In 2019, the Republican-controlled SEC approved several measures aimed at enhancing and clarifying rules on broker-dealers and investment advisers while limiting conflicts of interest.
However, the move was criticized by Democrats and consumer advocacy groups, who dismissed the regulations as too weak.
