3 ways Biden's 'retirement security rule' could affect financial advisors

November 14, 2023 4:24 PM

President Joe Biden unveils a new Department of Labor rule for retirement advice on Oct. 31, 2023.

In recent years, few things have stirred as much controversy in the world of wealth management as the "retirement security rule" proposed by the Biden administration.

The way the White House presents it, the proposal is simply a way to expand the fiduciary rule — the legal requirement for wealth managers to serve their clients' best interests — to cover all areas of retirement advice.

Under current law, the administration argues, "loopholes" exempt some counsel from this standard — including guidance on rollovers, advice to retirement plan sponsors and recommendations of insurance products, including annuities. The new rule, which would be implemented by the U.S. Department of Labor, aims to fix that.

"Some advisors and brokers steer their clients toward certain investments not because it's in the best interest of the client, but because it means the best payout for the broker," President Joe Biden said as he unveiled the proposal on Oct. 31. "They're putting their self-interest ahead of their clients' best interest. And they're scamming Americans out of hard-earned money."

That's not how everyone sees it. Advocates for the insurance industry, which sells annuities, have loudly protested the proposal as cumbersome and unnecessary.

"The president's attempt to impose another harmful regulation on America's workers and retirees despite federal court rulings and evidence of its devastating consequences is inexplicable," Wayne Chopus, president of the Insured Retirement Institute, said in a statement. "IRI and our members will once again work to protect retirement savers from this regulatory overreach."

On the other hand, the reaction from financial advisors themselves has been more muted. In many cases, that's because the new policy is unlikely to change much for them — registered investment advisors (RIAs), after all, are already governed by the fiduciary rule.

"The rule would have no impact on my business or any ethical practice," said Carol Fabbri, founder of Fair Advisors in Lakewood, Colorado. "The ethical standard that the SEC and this rule require is not a challenging or difficult threshold."

But some financial professionals, including broker-dealers, are not covered by the fiduciary rule. Instead, they're held to a slightly less stringent standard: the SEC's Regulation Best Interest, or Reg BI, which merely requires brokers try to avoid conflicts of interest or disclose them. Biden's proposal is largely designed to patch holes in that regulation.

Here's a closer look at how the change could affect retirement advisors and their clients — and the fierce debate surrounding it:

Insurance products

The first area Biden's rule would address is advisors' recommendations of investment products, including insurance products. In particular, the Biden administration has its eye on annuities, which provide a pension-like income during retirement.

"Some brokers sell bad annuities because these brokers get big commissions … that amount to thousands of dollars over time," Biden said. "They're going into the broker's pocket instead of the client's pocket."

According to the White House, Reg BI already covers most insurance products — but not certain types of annuities. In particular, the regulation has a blindspot for fixed index annuities — complex products whose returns are tied to the performance of an index fund.

"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," the White House said in a statement. "Instead, advice to purchase these insurance products is governed by state law, which often varies state by state."

Biden's solution is to fill in Reg BI's gaps with the fiduciary rule. For IRAs — and broker-dealers with good consciences — this would simply mean more consistent enforcement of the principle they've been following all along: acting in their clients' best interest.

The counterargument, made by the insurance industry, is that this policy is superfluous to laws already on the books and would make advisors' work harder and more expensive for consumers.

"This unnecessary, redundant and harmful proposal will have a significant adverse impact on the ability of lower- and middle-income workers to access professional retirement planning assistance and affordable retirement planning products, including guaranteed lifetime income products such as annuities," Chopus said.

Rollovers

One of the most important topics a wealth manager can advise on is the transferring — or "rolling over" — of retirement savings from one account to another. In one rollover, a client may relocate their single largest pool of life savings. And yet because that action typically takes place in one shot, it's not currently covered by the Employee Retirement Security Act (ERISA) — the law that created the fiduciary rule.

"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," the White House said.

To fix this, the "retirement security rule" would expand the fiduciary rule to cover rollover advice.

"The proposed rule will close this loophole to ensure this advice is in the saver's best interest," the White House said.

But at least so far, the Biden administration has provided little information on what this would mean for advisors. Would rollovers now involve more paperwork, or more legal exposure? Details are sparse. Some wealth managers worry the new regulation could mean additional headaches — maybe even enough to deter some advisors from recommending a rollover.

"I hope care will be exercised in any moves by regulators to limit an advisor's ability to recommend that retiring clients roll their accounts to an IRA," said Robin Hovis, a financial advisor at LPL Financial in Millersburg, Ohio. "For one thing, most [employer-sponsored] plans do not permit former employees to stay in the plan, and the range of investment options is so much better for clients in an IRA account."

Advising plan sponsors

Wealth managers don't just advise investors; many of them also advise retirement plan sponsors. Small businesses, for example, sometimes hire financial advisors to help them design retirement benefits for their employees.

But as the Biden administration has pointed out, that advice eventually filters its way down to investors. For instance, when an advisor helps choose the investments that go into a 401(k), it's the individual workers who depend on those investments for their retirements. And yet in its current form, Reg BI does not cover this advice.

"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," 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."

The "retirement security rule" proposes to solve this problem the same way as the others: by letting the fiduciary rule step in where Reg BI held back. Once again, the Biden administration argues this will clarify the rules for the majority of advisors who already serve their clients' best interest — and create accountability for the few broker-dealers who don't.

"If they breach their fiduciary duty, they could face serious penalties, including having to pay restitution and additional financial penalties," Biden said. "If this rule is finalized as proposed, it's going to protect workers that are saving for their retirements."

Time will tell whether this argument wins over the rule's critics. For now, not everyone is convinced. In Congress, House Republicans have already introduced a bill to block funding for the rule's enforcement. And both insurance advocates and some financial advisors have raised strong concerns — not over the proposal's intentions, but about its potential redundancy.

"Civil litigation, arbitration procedures and multiple compliance rules already exist as remedies for the abuses described by the administration," Hovis said. "Apply those to take away licenses from the abusers. Don't tie the hands of honest advisors from helping their clients."