President Joe Biden today announced new steps to protect American investors from so-called “junk fees” in retirement investment advice as part of his economic agenda, Bidenomics.
According to the White House, junk fees are eroding Americans’ savings, benefiting financial advisers with conflicts of interest, and undermining retirement security.
“I can tell you what, if you come from a middle-class family like I did, the thing that makes you the angriest is when you’re taken advantage of,” President Biden said at a White House event to unveil the new rules to curb junk fees.
“Research shows without realizing that folks can end up paying 20 percent more because of hidden fees than they would have paid if they could have known upfront,” he added.
As part of the crackdown, the Department of Labor will propose a new rule to “close loopholes” and ensure that financial advisers deliver retirement saving advice that is in the best interests of their clients rather than the adviser’s highest potential compensation. Hence, the rule requires recommendations to buy any asset class to be in savers’ best interests. These assets include commodities or insurance products like fixed index annuities that aren’t generally regulated by the Securities and Exchange Commission (SEC).
Currently, state law governs advice to purchase insurance products, for example, and these laws vary widely from state to state while providing inadequate protections to investors, according to the White House.
The White House claims that requiring advisers to make recommendations in the best interests of their clients can enhance retirement savings returns by 0.2 percent to 1.20 percent each year.
“That doesn’t sound like much. But if you’re living long, it’s a lot of money,” Biden said.
“Over a lifetime, that can add up to 20 percent less money when they retire. For middle-class households, that can amount to tens of thousands of dollars over time.”
The White House estimates that pensioners lose as much as $5 billion annually due to conflicted investment advice, such as the sale of fixed index annuities.
The new rule also covers saving advice about rolling over funds from a 401(k) plan into an Individual Retirement Account (IRA) or annuity.
In 2022 alone, Americans rolled over nearly $779 billion from defined contribution plans, such as 401(k)s into IRAs. Currently, one-time financial advice over transactions like a 401(k) rollover is often not required to meet a fiduciary standard under the Employee Retirement Income Security Act, the federal statute that governs retirement plans. The new rule is intended to close this loophole.
“People should be able to trust that when they get advice from a so-called expert, they’re getting real help, not getting ripped off,” President Biden said.
