DOL takes aim at 'junk fees'

The Biden administration is targeting what it calls “junk fees” as it attempts to strengthen investment advice rules for retirement accounts.

The Department of Labor will release a proposal Tuesday designed to curb conflicts of interest around retirement savings recommendations. Called the retirement security rule, it would “close loopholes” and rework the definition of a fiduciary under federal retirement law for advisors who provide advice for a fee to employee benefit plans and individual retirement accounts, according to a White House fact sheet.

The proposal would amend the current five-part test that determines fiduciary status for retirement accounts by making it harder for advisors to avoid fiduciary obligations. It would define as a fiduciary act a one-time recommendation to roll funds from a company retirement plan to an individual retirement account; strengthen advice standards for independent insurance professionals; and apply to insurance products that are not securities. It also would cover advice to plan sponsors about which investments to make available on the menu of company retirement plans.

The proposal seeks to curb conflicts that occur when a financial advisor is paid more to recommend a certain investment product, even though the product could diminish a nest egg because of high fees, said Lael Brainard, director of the National Economic Council.

“President Biden believes that when Americans save their hard-earned money so they can retire with dignity, financial advisors should put savers’ best interests first and not sell them lower-returning products in order to maximize their own fees,” Brainard told reporters Monday evening. “When a retirement saver pays for trusted advice that is actually not in their best interests and comes at a hidden cost to their lifetime savings, that’s a junk fee.”

Advisors can earn as much as a 6.5% commission for recommending certain investment products over others, costing investors up to 20% of their retirement savings, Brainard said. “That’s tens or even hundreds of thousands of dollars per middle-class saver.”

Brainard referred to “kitchen-table economics” and the Biden administration’s goal “to build the economy from the middle out and bottom up.” Part of that effort includes targeting what it says are excessive fees in the banking, airline and entertainment industries — and now the financial advice sector.

“It’s time to get junk fees out of the retirement savings market,” Julie Su, acting DOL secretary, told reporters Monday night. “It’s time to make sure that money goes where it belongs — in the pockets of millions of workers and their families.”

TRY, TRY AGAIN

The proposal is the latest iteration of what has been called the DOL fiduciary rule. The Obama administration proposed a rule that was vacated in 2018 by a federal appeals court in a lawsuit brought by financial industry opponents that argued the measure was overreaching and would sharply increase regulatory burdens and advice costs for investors.

The Trump administration proposed its own fiduciary rule. The financial industry resisted Biden DOL guidance regarding how the measure interpreted the five-part test regarding rollover recommendations. That language was recently challenged successfully in federal courts.

The Biden proposal was already receiving pushback early Tuesday even before the text was publicly released.

Rep. Virginia Foxx, R-N.C. and chair of the House Education and Workforce Committee, said it would harm retirement plans, retirees and savers.

“DOL’s proposal reaches well beyond its jurisdiction,” Foxx said in a statement released early Tuesday morning. “Instead of regulating retirement plans, DOL is trying to regulate what individuals do with their own retirement savings. This kind of overreaching interference spells disaster.”

An insurance trade association was early on the attack.

DOL is "doubling down on a previously failed policy," Wayne Chopus, CEO of the Insured Retirement Institute, wrote in a LinkedIn post Tuesday morning. "Despite labeling the proposal as 'retirement security,' the rule will only increase retirement insecurity and result in millions of lower- and middle-income workers and retirement savers losing access to needed financial advice. Bidenomics is supposed to be about growing the economy from the bottom up and the middle out, but this proposal will drop the bottom out for millions of Americans struggling to achieve their retirement goals."

ROLLOVERS, INSURANCE PRODUCTS

The proposal would address one of the crucial moments in saving for retirement — the rollover decision.

“It’s designed to redefine the circumstances under which someone is a fiduciary to better reflect the context in which there are these kinds of relationships where someone really should be treated as a fiduciary,” said an administration official who spoke on background to reporters. “Part of that is to ensure that one-time advice — especially in the context of rollovers — is covered.”

The proposal also would amend a so-called prohibited transaction exemption that applies to independent insurance agents “to really address circumstances where [they] are providing advice,” the administration official said.

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 administration official stressed that the proposal is not trying to remove insurance investments  from retirement accounts if they are good for the investor.

“The problem that we see right now is that the exact kind of insurance product is too frequently driven by the financial incentives put in place and not by what that customer really needs,” the administration official said.