The ongoing debate about financial professionals handling retirement money has resurfaced as the U.S. Labor Department prepares to release a final rule that would require more professionals to act as fiduciaries. This rule would hold advisers to the highest standard when providing advice on retirement money destined for tax-advantaged accounts. The standard is currently in place for most retirement plan administrators overseeing 401(k) plans, but not necessarily when individuals roll over their money into IRAs. The evolution of this issue began during the Obama administration and has resurfaced under the Biden administration.
As it currently stands, investment professionals must meet a five-part test under the ERISA retirement law before being held to the fiduciary standard. This test can allow professionals to avoid fiduciary status if they only make one-time recommendations. However, under the new rule, fiduciaries must avoid conflicts of interest and implement policies to protect investors from conflicts affecting their compensation. The goal is to ensure that advisers are making decisions in the best interests of their clients. This level of protection is particularly important given the impact that inappropriate advice can have on retirement investments.
There is confusion surrounding the varying “best interest” standards for different types of advisers, investment products, and accounts. Registered investment advisers are held to a fiduciary standard under the 1940 law that regulates them, while brokerage firms may be subject to the securities industry’s best interest standard. Annuity sellers are governed by state insurance commissioners, but their best interest code of conduct is considered weaker than that of investment brokers. Stakeholders in the financial services and annuities industries argue that the current standards are sufficient, including Regulation Best Interest enacted by the SEC in 2019.
The new rule would require more financial professionals to act as gold-standard fiduciaries when providing investment advice. This would apply when professionals hold themselves out as trusted advisers or control/manage someone else’s money. The Labor Department aims to address gaps and ensure that all advice related to retirement accounts is held to a high standard. It is expected that the rule would challenge financial services providers to change certain policies, ensure more balanced compensation structures, and curb sales incentives and contests.
Financial professionals who sell retirement plans, recommend investment menus to businesses, or sell annuities inside retirement accounts would be held to the fiduciary standard under the new rule. This is in line with the ongoing effort to extend more stringent protections over investors’ retirement money, especially given the changes in the financial advising landscape. While legal challenges are expected, experts believe that regulators have designed the rule with these potential challenges in mind. The final rule is expected to be released this spring after review by the Office of Management and Budget.
