Hardworking Americans can cheer new rules regulating financial advisers

Wednesday, April 24, 2024 | 2 a.m.

Kudos to the Biden-Harris administration for taking bold action to protect Americans’ retirement savings from unscrupulous financial advisers.

On Tuesday, the administration announced new Department of Labor regulations and updates to the Employment Retirement Income Security Act’s definition of investment advice fiduciary.

The changes, which are collectively referred to as the “retirement security rule,” will protect millions of workers who hire financial planners, advisers, brokers, insurance agents and other professionals for advice on how to invest and manage the retirement money workers spend their entire lives saving.

While most of these professionals act responsibly and in the best interests of their clients, the law must protect against bad actors and bad firms seeking to take advantage of the growing number of people trying to navigate retirement planning on their own.

The change matters because fiduciaries are required by law to act in the interest of the client. There is real teeth to the “fiduciary” designation, and individuals and companies that operate inappropriately as fiduciaries can be subject to criminal prosecution as well as civil suits.

Federal regulations have long created fiduciary responsibilities for certain types of financial planning and advice. But many of the existing rules, including the current definition of investment advice fiduciary, were written before 401(k) plans existed, when individual retirement accounts (IRA) were much less common and when Americans relied on traditional pensions for retirement security — pensions professionally managed at a state or corporate level.

Today, 52% of Americans contribute to a personally managed retirement savings account such as a 401(k) or IRA, making the need for trusted and reliable professional advice greater than ever. Yet regulatory loopholes allow financial professionals in certain circumstances to recommend insurance products and services that maximize fees for the adviser but may not be in the best interests of the client.

By implementing the new rules, the Biden administration is trying to close the loopholes and ensure that workers’ retirement savings are protected better from bad actors moving forward. The new regulations would not change the status of investment decisions that have already been realized.

Assistant Secretary for Employee Benefits Security Lisa Gomez told CNBC that certain types of retirement products and services, including employer-sponsored 401(k) plans, which she said are “by far the single biggest sources of (retirement) savings” for many Americans, were particularly susceptible to unnecessary rollovers with high professional fees and few consumer benefits.

A recent analysis by the Council of Economic Advisers suggests that another retirement product — fixed index annuities — is also susceptible to abuse. The analysis found that Biden’s updated regulations could address conflicts of interest regarding the sale of fixed index annuities that cost American savers as much as $5 billion per year.

In too many circumstances, Gomez said, there’s “no obligation” to act in retirement customers’ best interests. “That’s not right,” she concluded.

We agree.

Under the new rules created by the Biden-Harris administration, fiduciary duties will apply to any person who gets paid to provide investment advice to retirement plan participants, individual retirement account owners and officials responsible for managing retirement plan assets. These fiduciaries will be required to give prudent, loyal, honest advice in the best interests of the client and avoid recommendations that favor the investment advice providers’ interests — financial or otherwise — at the retirement savers’ expense.

The new rules also require financial institutions who employ investment and retirement advisers to adopt policies and procedures to manage conflicts of interest and ensure that financial advisers follow the updated guidelines.

“America’s workers and their families rely on investment professionals for guidance as they save for retirement,” said acting Labor Department Secretary Julie Su in a statement. “This rule protects the retirement investors from improper investment recommendations and harmful conflicts of interest. Retirement investors can now trust that their investment advice provider is working in their best interest and helping to make unbiased decisions.”

Similar efforts were undertaken by the Obama administration in 2016 as part of a larger plan to incentivize retirement savings. That administration’s updated fiduciary rules were much simpler and more straightforward than Biden’s, but were also significantly broader in scope, which made them vulnerable to court challenges. They required all financial advisers to act in their clients’ best interests regarding their retirement accounts.

Upon taking office, Donald Trump quietly shuttered offices responsible for implementing Obama’s retirement program and delayed implementation of the new fiduciary rules until a coalition of financial service groups concluded a lawsuit challenging executive authority to implement such broadly applicable regulations.

It should come as no surprise that Trump was unable to envision a circumstance in which a business could be profitable while also being honest and looking out for its customers. The notoriously conservative Fifth Circuit Court of Appeals ruled in favor of the Trump-backed coalition of businesses and struck down the Obama-era consumer protections.

The Biden-Harris administration hopes that the narrower scope of the retirement security rule will protect it from a similar fate in the courts.

The administration has spent years advocating for a secure financial future for all Americans by eliminating junk fees related to retirement accounts; increasing incentives and tax credits for employers to offer retirement savings plans and for employee contributions; pushing back against GOP-led efforts to raise the age of eligibility for Social Security and Medicare, and launching a White House initiative to protect senior citizens from fraud, scams and other forms of financial abuse.

These are noble pursuits by the Biden-Harris administration that should be applauded and rewarded by every hardworking American.