'Weary of being taken advantage of? President Biden has suggested a new retirement rule that may save 'tens of thousands of dollars' for Americans. Here's how it works.
Biden admin's new rules for financial advisers© Chip Somodevilla / Getty Images
The administration of President Joe Biden has suggested a new law that will shield citizens from dishonest financial advisors defrauding them of their retirement funds.
Biden stated, "This is about basic fairness," at a press conference on October 31 to announce the proposed rule. "People are sick and tired of being taken advantage of."
The proposal from the Department of Labor seeks to overcome governance gaps and mandate that financial advisors advise clients on retirement plans that prioritize saving for the long term over pursuing the biggest payoff.
According to Biden, unethical financial advisers acting in their own self-interest can provide retirees bad advice that costs them up to 1.2% of their annual investment returns. "It may not seem like much, but if you live a long life, that's a significant amount of money."
"It can add up to 20% less money when they retire over the course of a lifetime. That can add up to tens of thousands of dollars over time for a middle-class household.
The Biden administration wants to help you save and build your funds so you may have a safe and secure retirement. Here are the specifics of their proposals.
The Biden administration holds the opinion that some financial advisors, if not all of them, are caving in to conflicts of interest by endorsing particular investment products in order to receive a higher commission, which can reach as high as 6.5%, even though those products don't produce the best returns for retirement savers.
Biden claimed, "They are defrauding Americans of their hard-earned money and putting their own interests ahead of those of their clients." "People ought to be able to... seek advice from a purported expert with the knowledge that they are receiving genuine assistance and not being conned."
The White House emphasized fixed index annuities as a potentially harmful product that might cost retirement investors up to $5 billion annually and is rife with conflicts of interest.
Similar to Social Security, many annuities can provide stable, dependable retirement income when properly advised, according to Biden. However, annuities deplete people's resources and provide far less than they anticipate when the advise is self-serving.
They can also be ambiguous and perplexing. There may be hidden costs in the fine print. They don't give back much and they cost too much. However, some brokers push poor annuities because they receive large commissions, which over time add up to thousands of dollars and go into the broker's pocket rather than the client's.
A new regulation to safeguard retirement security.
All financial advisors who offer retirement advice and sell retirement products would be required by the new proposed rule to act in their clients' best interests rather of just looking for the biggest payoff.
The Employee Retirement Income Security Act of 1974 (ERISA), which created minimum requirements for pension systems in the private sector, already owes many advisers this fiduciary obligation.
That was the year that the first 401(k) plan was introduced, as well as the year when individual retirement accounts were established. As Biden noted, "Things are different now, but the rules haven't caught up."
When suggesting assets like mutual funds, financial advisors are bound by the assets and Exchange Commission's (SEC) Regulation Best Interest (Reg BI), which requires them to take retirement savers' best interests into account. However, since commodities and insurance products like fixed index annuities are subject to state legislation, Reg BI usually does not apply to them.
The White House briefing stated that "these inadequate protections and misaligned incentives have helped drive sales of fixed index annuities up 25% year-to-date."
The proposed regulation would eliminate that governance gap and guarantee that retirement planners adhere to the same fiduciary requirements regardless of the context in which they provide advice or if they are promoting securities or insurance products.
Under this new rule, advisers who violate their fiduciary duties risk severe consequences, such as having to make restitution and incur further financial penalties.
Enhancing guidance concerning 401(k)s
In order to guarantee that employees don't lose money when they quit their job and sign up for their new employer's 401(k) plan, Congress passed legislation last year, which the Biden administration hopes to build upon.
Advice to rollover funds from a 401(k) plan into an IRA or an annuity, for example, is not currently required under ERISA to be in the best interest of the saver.
The White House briefing states that "real money at stake" is involved. Americans turned over roughly $779 billion in defined contribution plans (401(k)s, for example) into individual retirement accounts (IRAs) in 2022 alone. In order to guarantee that savers receive the best advice possible while receiving one-time rollover counsel, the Biden administration has proposed a rule to close this loophole.
It would also contain suggestions on which investments to add to 401(k) and other employer-sponsored plans for sponsors of the programs, including small businesses.
The CEO of AARP, a nonprofit organization that addresses issues impacting Americans over fifty, Joanne Jenkins, stated during the news conference that "tens of millions of people across the country have invested their hard-earned money into retirement accounts." "They must have faith that the advice provided by their financial advisors is exclusively and totally in their best interests."
