The Biden administration last month finalized rules governing retirement recommendations that Democratic and Republican lawmakers are already trying to overturn.
Here’s what you need to know about retirement security rules.
How the rules work
The rule, finalized last month by the Labor Department, requires investment advisers to provide “smart, faithful, and honest advice without overcharging” and avoid recommendations that favor their own interests at the expense of their clients. It is mandatory to do so.
Additionally, the definition of investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code has been updated.
Under the new definition, a fiduciary includes a financial services provider who provides investment advice for a fee to retirement investors and claims to act as a fiduciary, or who a reasonable investor would act in the best interest of. These include financial service providers who we understand to be trusted advisors.
This update removes the requirement for trustees to provide advice on a regular basis and now includes one-off advice in the rules.
The Biden administration argues that the previous definition, written in 1975, is outdated and has not kept up with changing retirement circumstances.
“These new rules update regulations enacted nearly half a century ago that do not provide the protections retirement savings need and deserve so that American workers can retire with dignity. ” said Lisa Gomez, Assistant Secretary for Employee Benefits and Security. Statement when this rule was finalized last month.
A key part of Biden’s ‘junk fee’ agenda
The rules were introduced as part of the Biden administration’s larger effort to crack down on so-called “junk fees.”
“Retirement funds are often the largest savings people have,” Acting Labor Secretary Julie Su said at an event announcing the proposed retirement provisions last October.
“They have a right to know that their financial advisor is giving them advice they can trust, and that junk fees aren’t eating into the investment savings they’ve built up over the years with their paychecks.”
The White House Council of Economic Advisers (CEA) pointed to the potential losses suffered by investors who are encouraged to roll over their retirement savings into fixed index annuities.
Fixed index annuities, which are based on a specific market index, provide investors with a loss floor and a gain ceiling.
These annuities may offer sales commissions to brokers, and CEA says this could create “strong incentives for brokers to encourage investments in fixed index annuities even when it is not in the best interest of investors.” suggested that there is.
CEA estimates that up to $5 billion is lost annually due to “inconsistent investment advice” regarding fixed index annuities.
President Biden said in October that “millions of Americans, especially seniors, are being targeted by insurance brokers who sell financial advice and unscrupulous annuities that work for the brokers, not the customers.” Ta.
The Biden administration is seeking to limit “junk fees” in several industries, including banking and air travel.
In March, the Consumer Financial Protection Bureau (CFPB) announced a rule capping late fees on credit card payments at $8. Last month, the Department of Transportation finalized rules requiring airlines to automatically refund passengers on canceled or significantly delayed flights and prepay additional fees.
Both efforts have been challenged in court, and a federal judge in Texas last week blocked the credit card’s late fee policy.
Why liberals and industry commentators support it
Liberals and industry commentators say the new rules close existing loopholes in the retirement advice industry.
Before the rules were finalized last month, Sen. Elizabeth Warren (D-Mass.) accused big insurance companies of “compensating” retirement advisors with car leases and lavish vacations.
“All these advisors have to do is intentionally give bad advice. They just give bad advice that puts money in the pockets of big corporations,” Warren said in an Instagram video. Ta. “And it’s all completely legal.”
AARP, formerly known as the American Association of Retired Persons, touted the final rule to close such “legal loopholes.”
“This rule closes a loophole in the law that allowed some advisors to recommend investments with excessive fees and unnecessary risk, which collectively cost retirement savers billions of dollars annually. dollars and especially affects older Americans,” said Nancy Leamond, AARP Executive Vice President and Chief Advocacy and Engagement Officer. said in her statement.
Why Manchin, Republicans and industry oppose it that
Earlier this week, Sen. Joe Manchin (D-Va.) and 15 other Republican senators introduced a resolution to overturn the retirement provision, saying the retirement provision is “broad in its definition of fiduciaries, They will no longer have access to investment advice.”
“This Department of Labor rule is an example of dangerous overreach by the federal government,” Manchin said in a statement. “While I understand the administration’s desire to protect Americans’ retirement savings, the truth of the matter is that this is doing exactly the opposite.”
Several industry organizations also participated, including the American Council of Life Insurers (ACLI), the National Association of Insurance and Financial Advisors (NAIFA), Finseca, the Insurance Retirement Institute (IRI), and the National Fixed Annuities Association (NAFA). It violates the rules.
They argue that “for retirement savers, fiduciary advisors remain the only option for professional financial guidance,” and that fiduciaries typically work with clients who have at least $100,000 in investment funds. points out.
“Despite strong evidence of the negative impact on retirement savers, the Department has chosen to proceed with a fiduciary-only approach,” NAIFA CEO Kevin Mayeux said in a statement. Stated.
The industry group also argues that the new rules are “merely a repackaging” of previous regulations that were struck down in court.
The latest chapter in a 10-year battle
The Biden administration’s rules represent the latest attempt to enact fiduciary rules after more than a decade of partisan wrangling.
The story begins with the 2010 Dodd-Frank Act, which ordered the Securities and Exchange Commission (SEC) to create regulations for broker-dealers and investment advisers.
But when the commission stalled, the Department of Labor stepped in and proposed its own rules in 2016.
Like the most recent rules, the Obama-era regulations imposed a “fiduciary duty” on retirement investment advisers, requiring them to put their clients’ interests ahead of their own.
Several major industry groups sued the Obama administration, arguing that regulation should have come from the SEC. A federal appeals court ultimately struck down the rule in 2018.
In 2019, the Republican-led SEC approved several measures aimed at strengthening and clarifying rules for broker-dealers and investment advisers while limiting conflicts of interest.
But the move was criticized by Democrats and consumer advocacy groups, who dismissed the regulations as too weak.
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