Working people can rest easier when it comes to getting the best advice on retirement savings, thanks to a new rule from the Biden-Harris administration.
"People should be able to trust that when they get advice from a so-called expert, they're getting real help, not getting ripped off," President Joe Biden said at a news conference announcing the rule.
Finalized in April, the Department of Labor retirement security rule raises the bar for financial professionals who advise people on how to invest their retirement savings. The rule, which goes into effect Sept. 23, will require anyone offering retirement investment advice for a fee to qualify as an "investment advice fiduciary," meaning they put the client's interests above all else.
Prior to the new rule, other types of advisers could fly under the regulatory radar and, in some cases, offer recommendations that benefit their bottom line, regardless of the impact on their customers.
Under the new guidelines, investment advice providers must give "prudent, loyal, honest advice free from overcharges" and avoid suggestions that favor the providers' interests at the retirement savers' expense.
A recent analysis by the White House Council of Economic Advisers of fixed index annuities, a product typically offered by insurance companies for more risk-averse investors, estimated that conflicted advice could cost savers up to $5 billion per year in that category alone.
"For too long, because of loopholes in the regulations, retirement savers have been misled by sales pitches disguised as advice," said Monique Morrissey, a senior economist with the Economic Policy Institute, which supports the new standard. "This rule will help level the playing field for advisors that play fair and expand the market for transparent and competitively priced investments, including annuities. The winners from this rule will be retirement savers and companies selling better products."
The current definition of a fiduciary was adopted almost 50 years ago, when individual retirement accounts were less common and 401(k) plans were nonexistent. At that time, most people relied on traditional pensions for their retirement income and didn't necessarily require the help of an adviser.
In today's much-changed financial world, individual plan participants and IRA owners, who may not be versed in investing, are expected to make these consequential and complex financial decisions. As such, they are more likely to seek help from expert advisers, much like patients seeking a doctor's advice.
"The investment landscape has changed, the retirement landscape has changed, and it is critical that our regulations are responsive to those changes so that workers can reach the secure retirement that they work for decades to finally achieve," said Lisa M. Gomez, assistant labor secretary for employee benefits security.
The retirement rule is part of a larger effort by the Biden-Harris administration to crack down on unfair and illegal pricing by getting rid of exorbitant credit card late fees and other "junk fees" that can pop up anywhere from an internet bill to a ticket purchased for a live music show. According to the Council of Economic Advisers, these efforts are estimated to save consumers around $20 billion annually.
"By making these fair-minded changes to the marketplace, President Biden and Vice President Harris are putting working families first," said IBEW International Secretary-Treasurer Paul Noble, who oversees the union's pension and other benefit plans. "With protections like these in place, we can invest with more confidence and save more of our hard-earned money, giving everyone more peace of mind for their future."