The U.S. Department of Labor announced last week that it has proposed a new rule aimed at protecting retirement investors, according to Advisor Hub.
The rule would update the definition of an investment advice fiduciary under the Employee Retirement Income Security Act. It would apply when financial services providers give investment advice for a fee to retirement plan participants, individual retirement account owners and others.
The DOL said its proposal would “require trusted investment advisers to adhere to high standards of care and loyalty when they make investment recommendations and avoid recommendations that favor their financial and other interests at the expense of retirement savers.”
The department noted that some financial advisers put their interests before their clients’ interests, resulting in reduced returns and higher costs for investors. As an example, it cited an analysis of fixed index annuities which found that conflicted advice could cost retirement savers up to $5 billion per year.
At a White House announcement, President Biden said the proposal would close loopholes and require financial advisors to pay penalties and restitution for putting their interests ahead of their clients. “Some advisors and brokers steer their clients toward certain investments not because it’s the best interest of the client [but] because it means the best payout for the broker,” Biden said.
The DOL’s proposal is known as the Retirement Security Rule: Definition of an Investment Advice Fiduciary. It would ensure that financial advisors, brokers and insurance agents be held to the fiduciary standard on rollover IRAs.
The standard would also apply if the financial advisor recommends investments or receives any compensation, as well as if the investors “would reasonably expect” to receive advice guided by their best interests, according to the DOL fact sheet.
“Amounts held in workplace retirement accounts often represent the largest savings an individual has, and financial services providers often have a strong economic incentive to recommend that investors roll money into one of their institutions’ IRAs or annuities,” the Department of Labor said.
The DOL noted that the current definition of investment advice fiduciary, adopted in 1975, was written at a time when IRAs were less common and 401(k) plans did not exist, so most Americans relied on traditional defined benefit pensions retirement savings. The update become necessary under the current circumstances, in which individual plan participants and IRA owners rather than professional money managers are expected to make important decisions about their retirement plans.
The attorneys at Hyman Cotter PC include former senior attorneys at the SEC whose legal experience and industry knowledge make them uniquely qualified to provide counsel on securities regulatory, compliance and enforcement matters. Our attorneys fully understand the regulatory scrutiny financial professionals and their firms face from the various regulators that oversee the financial services industry. If your firm is facing an investigation from a regulatory agency, please contact Hyman Cotter PC at 312-291-4600 or through our online contact form.
