President Biden warned financial advisors Tuesday not to recommend high-fee investment products that line their own pockets rather than help their clients build a nest egg, as he promoted a proposal to raise advice standards for retirement accounts.
“Most advisors give their clients good advice at a fair price and are honest with them. But that’s not always the case,” Biden said at a White House event marking the introduction of a Department of Labor rule proposal that would require more advisors to act as fiduciaries and mitigate conflicts of interest when making retirement savings recommendations. “Some advisors and brokers steer their clients toward certain investments, not because of the best interests of their clients but because it means the best payout for the broker. I get it. I understand it. But I just want you to know we’re watching.”
Biden’s involvement in launching the proposal illustrated that it’s one of his priorities. The Obama administration proposed a similar rule that was struck down by a federal appeals court in 2018.
When advisors put their interests ahead of their clients’ best interests, “they’re scamming Americans out of hard-earned money,” Biden said. “When a person pays for trusted advice and it comes with a hidden cost, that’s what I call a junk fee, and I think it’s wrong.”
The 494-page proposal and related amendments to advice regulations are designed to ensure that fiduciary standards contained in federal retirement law — the Employees Retirement Income Security Act — “uniformly apply” to all advice retirement investors receive “from financial professionals who hold themselves out as trusted advice professionals,” the proposal states.
The proposal would define as a fiduciary act a one-time recommendation to roll over funds from a company retirement plan to an individual retirement account. It also would apply a fiduciary standard to the sale of insurance products that are not securities, such fixed index annuities.
Biden pointed to annuities as an example of an investment product that can harm investors. He said that when “advice is sound,” annuities can be a good source of retirement income, like Social Security. But when the advice is “self-serving,” annuities rife with “hidden fees” can erode retirement savings.
“Right now, millions of Americans, especially seniors, are being targeted by financial [advisors] and insurance brokers selling bad annuities that work for the broker, not for the client,” Biden said. “I’m not saying all brokers. I’m saying some.”
Conflicted advice can cost retirement savers up to 1.2% annually in lost investment, or tens of thousands of dollars over time for a middle-class household, Biden said. In a statement, the DOL said conflicts of interest related to the sales of fixed index annuities cost investors $5 billion annually.
Insurance industry trade associations took umbrage at annuities being in the cross hairs of what the DOL calls the retirement security rule. The criticism ignores more than a decade of work by financial firms as well as recent legislation that has increased the transparency of annuities and made them easier to understand, said Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute.
“I feel very much like this is a broadside attack on the annuity industry,” said Berkowitz, whose organization represents the retirement-income providers. “I’m struggling to figure out why the [DOL] has such a strong negative view of products that are important to people trying to plan for retirement.”
The American Council of Life Insurers took issue with the term “junk fees,” a theme in Biden administration efforts to reduce consumer costs related to air travel, entertainment, banking and, now, financial advice.
“Conflating legitimate retirement costs with junk fees is a scare tactic to push regulations that will hurt Americans in need of greater financial certainty,” ACLI executive vice president and general counsel Jillian Froment said in a statement. “The proposal is out of touch with the anxieties of regular people who are worried about savings lasting through retirement, the effect of volatile markets on 401ks, and the high cost of living. [G]uaranteed lifetime income through annuities lets people create their own pensions. That’s why annuity ownership is up.”
The DOL proposal is meant to fill a gap not covered by Regulation Best Interest, the broker standard of conduct written by the Securities and Exchange Commission that went into force in 2020. Reg BI doesn’t apply to commodities or to insurance products that are not registered as securities, such as fixed indexed annuities.
“The retirement security rule makes ERISA do in 2023 what it intended in 1975 … make all investment recommendations meet a real fiduciary standard,” Knut Rostad, president of the Institute for the Fiduciary Standard, wrote in an email. “The rule closes huge loopholes — the size of the Grand Canyon — such as 401(k) rollover and fixed index annuities. If enacted and enforced, this rule will make retirement plan advice reliably fiduciary again.”
Investor advocates like Kate McBride filled the White House room where Biden spoke.
“I think there’s a lot of momentum behind this [proposal],” said McBride, founder of FiduciaryPath, a fiduciary training and consulting firm. “It’s a kitchen-table issue for President Biden. It’s something investors should be behind.”
The DOL proposal will be open for public comment for 60 days following its publication in the Federal Register. The agency also plans to hold a public hearing on the measure.