Fact Sheet: President Biden will announce new measures to protect retirement security by cracking down on unwanted fees in retirement investment advice
The new proposal builds on the Biden-Harris administration’s work to eliminate unwanted fees and promote competition — a key pillar of the Biden economy
American families spend their entire lives saving so they can retire with dignity. But unwanted fees reduce their savings, go to financial advisors with conflicts of interest instead of American families, and make retirement less secure.
Currently, when a financial advisor provides retirement advice, he or she may be paid by the saver or the company that makes the investment product he or she recommends. Responsible retirement advisors deserve to be paid for their important work. But when a company pays a retirement advisor more to recommend a specific investment product, it creates a conflict of interest that often results in Americans choosing an investment product recommended to them that yields lower returns. This conflict of interest has meaning: an advisor may receive a commission of up to 6.5% for recommending certain insurance products. When a saver pays for advice that is not in their best interest, and comes with a hidden cost to their lifelong savings, that is an unwanted fee.
These costs add up. Asking advisors to make recommendations in the best interests of savers could increase returns for retirement savers by between 0.2% and 1.20% per year. Over a lifetime, this could add up to 20% to retirement savings, and perhaps tens or even hundreds of thousands of dollars per affected middle-class saver, that would otherwise have been lost to unwanted fees. For example, advice rooted in conflicts of interest regarding the sale of just one investment product—fixed index annuities—could cost retirees as much as $5 billion annually. This hurts workers, families, and the American economy.
That’s why today, as part of his broader economics agenda to grow the economy from the middle out and the bottom up, President Biden announced that the Department of Labor will propose a new rule to fill and strengthen gaps. It requires financial advisors to provide retirement advice in the best interest of the saver, rather than chasing the highest payday. This move would reduce unwanted fees in retirement products, enhance competition, and protect the retirement of American workers. Specifically, the rule:
- Closing loopholes so that recommendations for purchasing any investment product are in the interest of savers. Under the SEC’s best interest regulation, advice about purchasing securities such as mutual funds must currently be in the best interest of the saver. However, the SEC’s authority and rules generally do not cover commodities or insurance products such as fixed index annuities, which are often recommended for retirement savers. Instead, advice on purchasing these insurance products is governed by state law, which often varies from state to state. These inadequate protections and inconsistent incentives have helped fixed-index annuity sales increase 25 percent year-to-date. The proposed rule would ensure that retirement advisors are obligated to provide advice in the best interest of the saver, regardless of whether they recommend a security or insurance product or where they provide the advice.
- Cover tips for taking assets out of an employer-sponsored plan such as a 401(k). Under the Employee Retirement Security Act (ERISA), the federal law that governs retirement plans, advice that is given on a one-time basis, such as advice to roll over assets from a 401(k) plan to an individual retirement account (IRA) or annuity, is usually not It is required at the present time to be in the interest of the saver. However, the one-time advice is often the most important advice a retirement investor will ever receive and affects the approximately 5 million savers annually who roll their money out of 401(k)s and into IRAs. There is real money at stake. In 2022 alone, Americans transferred nearly $779 billion from defined contribution plans, such as 401(k), to IRAs. The proposed rule would close this loophole to ensure that such advice is in the best interest of the saver.
- Cover tips for plan sponsors about which investments to make available as options in 401(k) and other employer-sponsored plans. When advisors make recommendations to plan sponsors, including small employers, about investments to include in 401(k) and other employer-sponsored plans, that advice is not subject to the SEC’s “best interest” regulation. At this time, it is not required to be in the best interest of the client. Since most Americans primarily save for retirement through their employers, making sure that the investments available to them are in their best interest is crucial.
The proposed rule builds on the Biden-Harris administration’s efforts to eliminate unwanted fees and put money back into Americans’ pockets. The Federal Trade Commission has proposed a rule that would prevent companies from charging hidden and misleading fees and require them to show the full price upfront and a “click-to-cancel” rule that would make signing up for a service as easy as canceling it. The Consumer Financial Protection Bureau has taken action to require large banks and credit unions to provide basic information to consumers without charging fees. The Department of Transportation has proposed several new rules that would lead to more transparent pricing by airlines and compensation to customers when there are significant changes to their flights.
Today’s announcement also builds on important actions taken by the Biden-Harris Administration to protect the retirements of hardworking Americans. In December 2022, President Biden signed the Secure 2.0 Act into law, which encourages more employers to offer retirement plan benefits to their workers and makes it easier for Americans to save. Additionally, as part of the American Rescue Plan, President Biden signed the Butch Lewis Emergency Pension Relief Act, which protects the pensions of 2 to 3 million workers.