On April 24 the U.S. Department of Labor issued its Retirement Security Rule: Definition of an Investment Advice Fiduciary. The rule issues updated guidance for financial professionals who provide advice to retirement savers.
As elder law attorneys, we do not offer financial advice per se, but any initiatives that help our clients develop and maintain their economic security is of great concern to us. We have been watching the evolution of this rule with great interest since it first came up for consideration in 2016.
Higher Standards for Retirement Advice
The new rule imposes higher standards on those who provide you with advice related to retirement accounts. The regulation primarily focuses on two areas: rollovers from 401ks to IRAs, and certain annuities.
Advisors on retirement accounts will now be required to act as fiduciaries as defined under federal ERISA law. In plain English: advisors will now be required to put your best interest ahead of their own. Recommendations must be made based on the financial product’s suitability for the client, regardless of whether it pays the advisor a higher fee. The financial institutions that oversee advisors must put the appropriate policies and procedures in place to manage potential conflicts of interest and ensure that their advisors follow the new mandates.
Although commission-based sales are not prohibited per se, the new guidelines mandate greater transparency when those are recommended. The new rule dovetails with the Regulation Best Interest Rule put in place in 2019 for broker-dealers.
The main part of the regulation will go into effect on September 23, 2024, with additional changes fully enforceable by September 2025.
Rationale for New Fiduciary Standard
According to the Department of Labor, the old federal fiduciary rule, established in 1975, required modification because today’s retirement environment is very different from that time. Fixed pensions have gone the way of the horse and buggy. 401ks did not exist in 1975; in 2022, Americans rolled over $779 billion from 401k plans into IRAs, according to the Council of Economic Advisors. With people now largely responsible for managing their own retirement funds, the update was needed to protect savers from bad actors. The DOL’s Secretary for Employee Benefits Security Lisa M. Gomez puts it this way: “These new rules update regulations created nearly a half-century ago that simply are not providing the protections America’s workers need and deserve for their retirement savings so that they can retire with dignity. The investment landscape has changed, the retirement landscape has changed, and it is critical that our regulations are responsive to those changes so that workers can reach the secure retirement that they work for decades to finally achieve.”
Supporters and Opponents
The new rule was welcomed by the AARP, the Consumer Federation of America and other groups. Joseph Peiffer, president of the Public Investors Advocate Bar Association issued this statement: “The newly finalized DOL rule, which imposes a fiduciary duty on advisors, ensures that they will have to put their clients’ financial interests ahead of their own. It’s not a minor issue. Conflicted advice costs Americans billions of dollars a year. This rule will finally put a stop to that.”
Many financial industry groups do not share his enthusiasm, to say the least. They argue that the new regulation limits lower- and middle-income retirement savers’ investment choices, and places unnecessary regulatory burdens on advisors. Wayne Chopus, CEO of the Insured Retirement Institute stated: “Based on our preliminary review, in issuing this unnecessary and redundant rule, DOL disregarded data showing how millions of lower- and middle-income consumers will be deprived of access to affordable retirement planning assistance.” Kevin Mayeux, CEO of The National Association of Insurance and Financial Advisors said that 90% of the group’s members believe the rule will “significantly increase their costs and costs for their clients.” The first legal challenge to the new rule is already in play: On May 2 the Federation of Americans for Consumer Choice, a lobbying group for independent insurance professionals, along with several co-plaintiffs, filed a lawsuit in a Texas federal court. The Department of Labor has expressed confidence this legal challenge and any others to come will not hold up in court.
Retirement Savers Must Still Do Their Own Homework
As a retirement saver, you must always proceed with due diligence. A Forbes article (“Key Investor Lessons From The New Department Of Labor Fiduciary Rule,” April 24, 2024) suggests that when you meet with a professional for advice regarding retirement accounts, always ask if he/she is a fiduciary, and if the answer is yes, get it in writing. Understand how the advisor is being compensated, the fee structure, and the reasons a particular strategy is being proposed. Remember, the new fiduciary rule does not prohibit commission-based sales; it only requires that the advisor be transparent about it. “Advisors must provide written explanations for their recommendations, which must be tailored to your specific financial needs and circumstances. This ensures that the advice you receive is not only suitable but crafted to advance your financial goals,” the article states.
You can read a summary of the new rule from the Department of Labor here.
