The Biden administration is cracking down on so-called “junk fees” on retirement accounts.
Under new proposals, Americans will have more protections when transferring money from a 401(K) to an individual retirement account.
The U.S. Department of Labor said it would raise the bar for financial advisors, brokers and insurance agents who provide investment advice to Americans putting money into 401(K) plans, IRAs and other savings vehicles.
The rule is intended to close ‘gaps’ in current regulations so that ‘recommendations to purchase any investment product must be in the best interests of the saver’.
These changes, the White House estimates, could help savers increase their returns by between 0.2 percent and 1.2 percent per year — or increase their retirement savings by as much as 20 percent over their lifetime.
“American families save their entire lives so they can retire with dignity,” the White House said in a statement Tuesday. “But the junk fees are robbing their savings, going to financial advisors with conflicts of interest instead of American families, and making pensions less secure.”
The Biden administration is cracking down on so-called ‘junk fees’ on retirement accounts — offering Americans more protections when transferring money from a 401(K) to an individual retirement account
A financial advisor could be paid a commission of as much as 6.5 percent by a company to recommend a particular product, which could lead Americans to make an investment that yields lower returns, the White House warned.
Under the Employee Retirement Security Act (ERISA), a 1974 federal law, employers have a duty to manage 401(K) accounts in the best interests of employees, including health insurance costs.
However, this fiduciary standard has not traditionally applied to IRA rollovers – which the proposal aims to change.
“One-time advice is often the most important advice the retirement investor will ever receive, affecting approximately 5 million savers each year who move their money out of 401(K)s into IRAs,” the White House statement said.
“In 2022 alone, Americans transferred approximately $779 billion from defined contribution plans, such as 401(K)s, to IRAs. The proposed rule will close this loophole and ensure that this advice is in the best interest of the saver.”
The rule also targets financial advice in commodities or insurance products such as fixed index annuities, which are often recommended to retirement savers. They are generally not subject to the Securities and Exchange Commission’s best interest regulations.
The White House estimates that advice rooted in conflicts of interest related to the sale of fixed-index annuities could cost American savers as much as $5 billion a year.
The proposal also aims to provide guidance to plan sponsors on which investments should be made available as options in 401(K)s and other employer-sponsored plans.
Lael Brainard, director of the White House National Economic Council, said on a press call that the “hidden costs” of financial conflict in pension plans amount to “junk costs.”
They could reduce a middle-class household’s retirement savings by 20 percent — which amounts to tens or even hundreds of thousands of dollars over a lifetime, she said.
Lael Brainard, director of the White House National Economic Council, said on a press call that the “hidden costs” of financial conflict in retirement plans amount to “junk costs.”
The proposals build on the Biden administration’s ongoing crackdown on junk fees across industries
Critics say the proposed legislation would put an increased regulatory burden on advisory firms, making them less willing to work with savers, especially those with smaller accounts.
Senator Bill Cassidy and Congresswoman Virginia Foxx wrote to the Department of Labor in August that the efforts were “misguided” and would cause instability for pension plans, retirees and savers.
The Labor Department also tried to rewrite similar rules under the Obama administration, but the measure was rejected in court.
The proposals build on the Biden administration’s ongoing crackdown on junk fees across industries.
The government has pledged to cut hidden costs, which are estimated to cost Americans around $65 billion annually.
These extra add-ons are widespread in everyday life, driving up prices and making it difficult for consumers to know exactly how much they will ultimately have to pay for a hotel, flight, ticket or banking service.
Under the Junk Fee Prevention Act, Biden wants to “provide relief to consumers and make our economy more competitive, especially for new and growing businesses.”