The Biden administration on Oct. 31 unveiled its new fiduciary rule that extends fiduciary standards and aims to close loopholes that some say cost retirement savers money.
The proposed Department of Labor (DOL) rule, called the Retirement Security Rule: Definition of an Investment Advice Fiduciary, updates the definition of an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA). It would ensure that financial advisors, brokers and insurance agents be held to the fiduciary standard on rollover IRAs.
Proponents say updated fiduciary rules can better position employees for a more sound retirement: Requiring advisors to make recommendations in the savers' best interest can increase retirement savers' returns by between 0.2 percent and 1.2 percent per year, the White House said. Over a lifetime, that can add up to 20 percent more retirement savings.
According to a fact sheet about the new proposed rule released by the White House, the rule would:
Close loopholes so that recommendations to purchase any investment product must be in the savers' best interest. Under the Securities and Exchange Commission's (SEC's) Regulation Best Interest, advice to purchase securities such as mutual funds must currently be in the saver's best interest. However, the SEC's authority and rule does not generally cover commodities or insurance products like fixed index annuities. Advice to purchase these insurance products is governed by state law and can vary. The proposed rule would require retirement advisors to provide advice in the saver's best interest, regardless of what product they are recommending or where they are giving advice.
Cover advice to roll assets out of an employer-sponsored plan like a 401(k). Under ERISA, advice that is provided on a one-time basis, such as advice to roll over assets from a 401(k) plan into an IRA or annuity, is not presently required to be in the saver's best interest. "The proposed rule will close this loophole to ensure this advice is in the saver's best interest," according to the fact sheet.
Cover advice to plan sponsors about which investments to make available as options in 401(k)s and other employer-sponsored plans. "When advisors make recommendations to plan sponsors, including small employers, about which investments to include in 401(k) and other employer-sponsored plans, that advice is not subject to the SEC's Regulation Best Interest and right now is not required to be in the customer's best interest," the White House said. "Since most Americans primarily save for retirement through their employers, making sure the investments available to them are in their best interest is critically important."
Although they are not intended targets of the new DOL fiduciary rule, the rule may impose unintended consequences on employer plan fiduciaries, said Jason Levy, of counsel at law firm Covington.
For example, he said, a key focus of the rule is to capture rollover recommendations as fiduciary investment advice. "If the proposal is enacted, this rule would impose new obligations on many service providers whose rollover communications will be subject to the fiduciary standard," he said. "However, the rule does not provide clarification as to employer plan fiduciary's obligations with respect to monitoring such rollover communications."
Levy added that the DOL should "address this ambiguity and make clear that the DOL does not intend to put employer plan fiduciaries in the position of having a duty to monitor their service providers' compliance with the rule."
There's a 60-day period for the public to submit comments on the proposal.