Ahead of today’s anticipated rollout of a new fiduciary rule, the Biden Administration has issued a fact sheet previewing its content—including an issue of long concern to the American Retirement Association.
The fact sheet focuses on the issue of conflicted advice, specifically calling out what it calls “junk fees” and the impact they have on retirement security. Acknowledging that while “responsible retirement advisers deserve to be paid for their important work,” it continues that “but when a firm pays a retirement adviser more to recommend a specific investment product, that creates a conflict of interest that often leads to Americans selecting an investment product recommended to them that generates lower returns.” That said, it called out insurance products for special attention—specifically fixed-index annuities—that it said may cost retirees as much as $5 billion per year.
A Key Provision
A key issue raised by the American Retirement Association—advice to plan sponsors—was specifically referenced in the fact sheet. It notes that “when advisers 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.” This provision has been of growing concern with the anticipated expansion of new workplace retirement plans fostered by the provisions in the SECURE 2.0 Act of 2022. American Retirement Association CEO Brian Graff commented that “this is an issue that we have been concerned about for a very long time. We are glad to see that it seems to have been addressed in the proposal.”
Regular Basis Test
The fact sheet also referenced the issue of rollovers and the implications of a key element of the so-called “five-part test”—the requirement that in order to be considered advice, it must be part of an ongoing relationship. That “regular basis” element would now appear to be gone. The fact sheet notes that under ERISA “advice that is provided on a one-time basis, such as advice to rollover assets from a 401(k) plan into an Individual Retirement Account (IRA) or annuity, is typically not presently required to be in the saver’s best interest. Yet, one-time advice is often the most important advice the retirement investor will ever receive….” The fact sheet says the proposed rule “will close this loophole to ensure this advice is in the saver’s best interest.”
Insurance Products
As noted above, insurance products appear to be a specific target in the proposed rule. The fact sheet notes that while “under the Securities and Exchange Commission’s (SEC) Regulation Best Interest, advice to purchase securities like mutual funds must currently be in the saver’s best interest,” the SEC’s authority and rule “does not generally cover commodities or insurance products like fixed index annuities, which are often recommended to retirement savers.” Describing the state law(s) that normally govern such things (the fact sheet comments that “inadequate protections and misaligned incentives have helped drive sales of fixed index annuities up 25 percent year-to-date”), it notes that the proposed rule “would ensure that retirement advisers must provide advice in the saver’s best interest, regardless of whether they are recommending a security or insurance product and where they are giving advice.”
The fact sheet also harkens back to the passage of SECURE 2.0, “which encourages more employers to offer retirement plan benefits to their workers and makes it easier for Americans to save,” as well as the Butch-Lewis Emergency Pension Plan Relief Act, which protects the pensions of two to three million workers.
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