When you walk into a financial adviser’s office, you expect them to put your best interests above all else — in the same way a doctor would, rather than, say, a car salesperson. But many people don’t realize that the rules financial professionals must follow vary, depending on where they work and what products they’re selling.
One of those federal regulations, which governs retirement plans, was just tightened: The Biden administration announced new rules Tuesday that will require more financial professionals to adhere to the highest standards when providing financial advice about your retirement money.
Begins this Fall
Starting Sept. 23, investment professionals who offer services as trusted advisers will be required to act as fiduciaries — that is, they’d be held to the highest standard, across the investment landscape — when customers pay them for advice on individual retirement accounts, 401(k)s and similar buckets of tax-advantaged dollars. The goal is to minimize conflicts of interest or at least ensure that they aren’t influencing investment professionals’ advice that lines their pockets at the customers’ expense. The rule, which will be published in the Federal Register on Thursday, will be fully effective in late 2025.
The changes, issued by the Department of Labor, which oversees retirement plans, close loopholes that made it easier for many investment professionals to avoid fiduciary status — including, for example, when workers roll over their savings from a 401(k) plan to an individual retirement account. Those transactions, which totaled nearly $800 billion in 2022, weren’t always covered by these investor protections, even though these sums often amount to a person’s life savings.
“If you’re a retirement investor looking for help with how to manage your retirement investments, it’s only reasonable that you get advice that is prudent, loyal and doesn’t involve misleading you,” said Tim Hauser, deputy assistant secretary for program operations of the Employee Benefits Security Administration at the Labor Department. “It shouldn’t matter what product you’re recommending, and that’s what the rule does.”
Intense Debate Over Rules
This isn’t the first effort to update the federal retirement law known as ERISA, which was enacted in 1974 to oversee private pension plans before 401(k)s existed. Strengthening its protections has been the subject of intense debate for more than a decade, over three presidential administrations.
Indeed, critics (including financial industry stakeholders) say the new regulation — initially introduced in October — was rushed, but the Labor Department has been working on different versions since it introduced its first proposal in 2010. The Obama administration issued a more stringent rule in 2016, but the Trump administration hit the brakes before it was fully implemented. An appeals court later struck it down in 2018.Agency officials said they took comments from the financial industry and others into account and made several changes that are reflected in the final rule. But Lisa M. Gomez, assistant secretary for Employee Benefits Security, said the investor protections remain. “There is nothing in these clarifications or changes that one should interpret as a watering-down or a real change in position from the proposal,” she said on a media briefing call.
When the onus is on individuals to save and invest for a financially secure retirement, with money that must last through advanced age, investor protections are paramount. Still, individuals might be wondering why they aren’t entitled to fiduciary-level advice on all of their money, all of the time, regardless of what account it sits in or what type of product they’re investing in.
The CFP Board issued a comment applauding the rule. “A recent CFP Board survey found that 92% of Americans expect financial professionals to provide retirement savings advice in their clients’ best interests,” it said. “Further, 97% of investors agree that financial professionals giving retirement savings advice should be required to act in the best interests of their clients, even for one-time advice. Moreover, the DOL rule won’t cause moderate-income investors to lose access to retirement advice.”
However, the Financial Services Institute, another industry group, said it remains concern that the final rule will have a negative impact on Main Street Americans’ access to financial retirement advice. “Our members already adhere to an extensive regulatory regime … We are concerned that the new rule will limit retirement savers’ access to professional financial advice, products and services offered by independent financial advisors and firms and create a more complicated, burdensome and costly regulatory environment,” said FSI President and CEO Dale Brown in a statement.
Brown added a study if did with Oxford Economics found that the proposed rule would result in over $2.5 billion in costs and 120 million pieces of paper annually.
Here’s an overview of how the rules have changed and what it means for you — and how to find fiduciary-level professionals, regardless of the political climate.
What’s changed, and where do these rules apply?
The regulation redefines who is considered an investment fiduciary. Before the changes, financial professionals had to meet a five-part test before they were held to that standard — and one part stated that the person making the recommendation must provide the advice on a regular basis. That means one-time recommendations were not necessarily included, which left 401(k) rollover guidance at risk.
The new rule aims to level the playing field for all financial professionals — including investment brokers and insurance salespeople — who describe themselves as trusted advisers when providing advice about your retirement money. It doesn’t matter whether they’re recommending mutual funds, stock investments, insurance products like annuities, illiquid real estate investments — it’s all covered. Investment brokers selling retirement plans to businesses would also be held to the fiduciary standard.
Rethinking65 added comments from the CFP Board and FSI to this article.
c.2024 The New York Times Company. This article originally appeared in The New York Times.
