I’m a Financial Expert: This New Rule Will Change the Retirement Advice I Can Give You
Written by
Vance Cariaga
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Daria Uhlig
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A new proposal from the U.S. Department of Labor that aims to protect retirement investors could have a profound effect on the advice financial experts can provide to clients — and those experts are not happy about it.
The rule, initially proposed last fall by the Labor Department’s Employee Benefits Security Administration, would update the definition of an investment advice fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA). Among other things, the rule would require advisers to avoid recommendations that favor their interests at the expense of retirement savers.
Last month, the Biden administration issued a final rule on the proposal, CNBC reported. The final rule expands the scope of when a broker, financial advisor or other intermediary must act as a fiduciary by providing advice that puts the client first.
Before the final rule, advice provided on a “one-time” basis — such as a recommendation to roll retirement savings out of a workplace retirement plan and into an IRA — was not treated as fiduciary advice, according to a May 6 blog from Davis Wright Tremain LLP, a Seattle-based business and litigation law firm. That’s because the advice “failed to meet the requirement that such advice be provided on a ‘regular basis.'”
Under the new rule, however, one-time advice to roll over retirement funds to another account will now be considered fiduciary advice subject to ERISA. That’s the case even if the advisor doesn’t manage the account where the funds are rolled over and/or even if they don’t advise on how to invest the rolled funds, according to DWT.
“Market participants cautioned that this will result in less advice to plan participants facing a rollover decision, but only time will tell if this prediction turns out to be accurate,” the DWT blog added.
Katrina Berishaj, an attorney at Stradley Ronon Stevens & Young and co-chair of the firm’s fiduciary governance group, told CNBC that rollovers are a “chief focus” of the new rule.
“The Department of Labor was not shy about that,” said Berishaj.
Many legal and financial experts say the rule is designed to reduce potential conflicts of interest regarding how financial professionals provide advice on rollovers as well as annuities and other insurance products.
Lisa Gomez, assistant secretary of the Employee Benefits Security Administration, echoed that sentiment in an April 22 press conference. As CNBC reported, Gomez said financial advice is often tainted by “significant conflicts of interest.” Moreover, in many circumstances there’s “no obligation” to act in the best interests of retirement customers, Gomez added.
The final rule is scheduled to take effect on Sept. 23, but it might never reach that point. Industry groups will likely sue to block the rule, according to a research note from Jaret Seiberg, financial services analyst for TD Cowen Washington Research Group.
“We believe insurance agents will be most exposed to this rule, especially those who sell annuities,” Seiberg added.
In fact, DWT reported that the Federation of Americans for Consumer Choice and five insurance industry plaintiffs have already sued the Labor Department in Texas federal court over the final rule.
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