Biden wants to protect your retirement savings from junk fees? Will it work?

President Joe Biden wants to safeguard your retirement savings with a new rule that would require a range of financial professionals to work only in your best interests. 

The so-called Retirement Security Rule, proposed by the Department of Labor (DOL) on Tuesday, aims to close “loopholes” in current law that allow advisors to recommend investments that pay higher commissions but aren't’ necessarily the best options for their clients. When this happens, Americans lose with lower returns and higher “junk fees,” the DOL said.

Those junk fees are the “hidden costs” of these types of financial conflicts in retirement plans that saddle clients with higher expenses and smaller returns, Lael Brainard, director of the White House National Economic Council, told reporters in a call.

The new rule would increase retirement savers’ returns by between 0.2% and 1.2% a year, potentially boosting retirement savings by up to 20% over a lifetime, the White House said. 

Opponents argue the new rule would increase regulatory burdens and costs, resulting in fewer advisors and options for investors, especially those with smaller account balances. 

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“The rule will only increase retirement insecurity and result in millions of lower- and middle-income workers and retirement savers losing access to needed financial advice,” said Wayne Chopus, president and chief executive of the industry organization Insured Retirement Institute (IRI). 

How would the rule protect Americans’ retirement? 

The “fiduciary standard” requiring advisors to put their clients' best interest above their own will apply to: 

• Retirement advisers, regardless of whether they are recommending a security or insurance product and the state in which they're located. Currently, certain products like commodities or insurance products aren’t covered by the fiduciary standard. Instead, states regulate advice linked to those investments. 
• One-time advice to Americans rolling 401(k) plans into individual retirement accounts (IRAs). “One-time advice is often the most important advice the retirement investor will ever receive and affects roughly 5 million savers per year who are rolling their money out of 401(k)s and into IRAs.” the White House said. “In 2022 alone, Americans rolled over approximately $779 billion from defined contribution plans, such as 401(k)s, into IRAs.” 
• Advice to plan sponsors about which investments to make available as options in 401(k)s and other employer-sponsored plans. “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 White House said. 

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What happened to the DOL fiduciary rule in 2016? 

When the Obama administration tried to pass a similar rule in 2016, it sparked intense opposition from the financial industry.  

The 2016 rule was broad, automatically elevating all financial professionals who work with retirement plans or provide retirement planning advice to the level of a fiduciary. In 2018, a court struck down the rule saying the DOL exceeded its authority to change the existing rule, “but not before 10 million smaller retirement account owners, with more than $900 billion in retirement savings, lost the ability to work with their preferred financial professionals,” Chopus said. 

How is the new rule different? 

The DOL said the new Retirement Security Rule is narrower than the 2016 rule. 

The new rule applies to financial services providers giving investment advice for a fee to retirement plan participants, individual retirement account owners and others. It also expands coverage to other popular retirement products like indexed annuities, a popular insurance product that’s not regulated as a security.

Will the new rule hold up? 

Only time will tell.  

The proposal includes a 60-day public comment period, and the DOL said it plans a public hearing approximately 45 days after the proposals are published. 

Meantime, “IRI will fight this proposal just as we did with DOL’s 2016 poorly concocted fiduciary rule that also masqueraded as consumer protection but instead caused extensive harm,” Chopus said. 

“Bidenomics is supposed to be about growing the economy from the bottom up and the middle out, but this proposal will drop the bottom out for millions of Americans struggling to achieve their retirement goals,” he added. 

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.