Biden cracks down on 'junk fees’ in 401(k) plans with proposed DOL fiduciary rule

The Biden administration on Tuesday proposed new rules for retirement plan advisors to crack down on so-called junk fees. The U.S. Labor Department’s Retirement Security Rule would require providers to sell commodities and insurance products only when it is in the customer’s best interest.

“Financial advisors should put savers’ best interests first and not sell them lower- returning products in order to maximize their own fees,” said Lael Brainard, director of the White House National Economic Council. “When a retirement saver pays for trusted advice that is actually not in their best interest and comes at a hidden cost to their lifetime savings, that’s a junk fee.”

In 2022, retirement investors moved $779 billion into IRAs from 401(k)-type retirement plans, up from $404 billion in 2013, according to research and consulting firm Cerulli Associates.

“People haven’t been educated on how to manage their money and withdraw it for a retirement that could last up to 30 years,” said Fred Reish, an attorney who specializes in employee benefits. “The Labor Department is worried about people’s life savings leaving the 401(k) world, where fiduciary rules apply, to go into IRAs, where prices can be higher and investors may not have the sophistication to identify advisors’ conflicts of interest.”

According to a White House fact sheet, the rule would:

• Close loopholes so recommendations to purchase any investment product must be in the saver’s best interest. Under the Securities and Exchange Commission’s Regulation Best Interest, advice to purchase securities such as mutual funds currently must be in the saver’s best interest. However, the SEC’s authority and rule generally do not cover commodities or insurance products such as fixed index annuities.
• Cover advice to roll assets out of an employer-sponsored plan such as a 401(k). Under the Employee Retirement Security Act, advice currently provided on a one-time basis, such as recommendations to roll over assets from a 401(k) plan into an IRA or annuity, typically is not required to be in the saver’s best interest.
• 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 currently is not required to be in the customer’s best interest.

However, advisors should keep in mind that this is only a proposed rule at this time, and experts are still sorting out the implications for the industry.

“It may be a long time before there is clarity on the likely key focus on the new fiduciary rule — whether rollover recommendations are subject to the fiduciary standard,” said attorney Jason Levy of Covington in Washington, D.C. “This question has been the subject of active litigation, and it is likely that this aspect of the forthcoming rule will be challenged in court.”

Advisors will gain a better understanding of what the rule means to the industry as more details emerge.

“While rollovers may grab the headlines, there likely will be other aspects of the new fiduciary rule that will impact financial advisors and financial institutions,” he said. “So the details here will matter. For example, an important detail is whether the rule will acknowledge differences between communications to retail investors and large, sophisticated plans.”

The American Retirement Association supports a provision that would extend plan-level protection to small-business owners and participants in 401(k) plans.

“The ARA supports the Labor Department’s proposed retirement security regulation, because it will close a regulatory gap that could leave small-business owners establishing a retirement plan for their employees without any investor protections,” CEO Brian Graff said. “The proposed rule will ensure that advice with respect to investments in small-business retirement plans will always be subject to ERISA’s fiduciary standards.”

However, detractors said the rule will result in a larger regulatory burden for advisory firms and could reduce the number of advisors willing to work with investors, especially those with smaller accounts. The Insured Retirement Institute, which represents the annuity industry, said there is no need for the proposed regulation, because insurance agents already are required to act in the best interest of customers.

Related: Another fiduciary rule? Lawmakers push DOL to stop further ‘confusing’ rulemaking

After the proposed regulation goes into effect, some players in the financial-services industry are likely to sue to block it, said Allison Itami, an attorney specializing in employee benefit programs at Groom Law Group. But the Labor Department knows “where courts have poked holes” in the past regulations, she said, giving it better odds of drafting a measure that might withstand legal challenges.

It could take months before the proposed regulation goes into effect, said Micah Hauptman, director of investor protection at the advocacy group Consumer Federation of America, The Labor Department first must complete a comment period and write a final version of the regulation.