Social Security: Biden’s Latest Proposed Reform Will Tackle Loopholes and Hold Retirement Planners More Accountable
Written by
Vance Cariaga
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Most Americans depend on private investment accounts such as 401(k)s to build their nest eggs, which means they also depend on retirement planners to make smart investment decisions. This involves a certain amount of trust that retirement planners have their investors’ best interests at heart — something government regulators aren’t always convinced of.
One of those regulators, the U.S. Department of Labor, aims to protect retirement accounts by ensuring more money goes to account holders. In an announcement on Tuesday, the agency’s Employee Benefits Security Administration proposed a retirement security rule that would update the definition of an investment advice fiduciary under the Employee Retirement Income Security Act.
The new rule is intended to align with the Biden administration’s recent efforts to protect retirement investors.
The proposal would require investment advisers to adhere to “high standards of care and loyalty” when they make investment recommendations, according to an Oct. 31 news release. It would also require them to avoid recommendations that favor their financial and other interests at the expense of retirement savers.
Protecting private retirement accounts has taken on added importance in recent years amid concerns about the future of Social Security, which also provides a big source of retirement income for seniors. The program will lose about one-quarter of its funding in a decade when the Old Age and Survivors Insurance (OASI) Trust Fund runs out of money.
Uncertainty over Social Security has led lawmakers on both sides of the political aisle to trot out potential fixes that range from cutting benefits or raising the retirement age to increasing payroll taxes that fund the program. There is heightened pressure on the government to do something.
“The American Academy of Actuaries’ latest review of Social Security data and projections shows a clear, compelling benefit and public good to Congress engaging the reform process sooner rather than later,” Academy Senior Pension Fellow Linda K. Stone said in a statement. “Acting now to address Social Security’s financial challenges would allow Congress to consider reform options that are more moderate, gradual, and give the American people time to adjust to any needed changes in benefits or taxes.”
While Congress and others mull Social Security reform, the Labor Department’s current focus is on protecting private retirement accounts. Under its proposal, the updated definition of an investment advice fiduciary would apply when financial services providers give investment advice for a fee to retirement plan participants, individual retirement account (IRA) owners and others.
“While investment professionals deserve to be paid fairly for helping people meet their savings goals and retire with dignity, there are some financial advisers who put their interests before their clients’ interests,” the news release said. “This can result in reduced returns and higher costs which are junk fees that chip away at many Americans’ savings.”
A Labor Department analysis of one investment product — fixed index annuities — suggests that “conflicted advice” could cost savers up to $5 billion per year for this single product alone.
The proposed rule also aims to ensure investment professionals can compete for business on a level playing field instead of an “unbalanced system” that holds advisers to different standards based on their recommended products.
As the Labor Department noted, the current definition of investment advice fiduciary was adopted in 1975, when IRAs were less common and 401(k) plans didn’t exist. Back then, most Americans relied on traditional pensions for retirement savings. Today, individual plan participants and IRA owners are expected to make financial decisions rather than professional money managers.
“For too many workers, the road to lifelong financial security is unnecessarily paved with uncertainty,” Acting Secretary of Labor Julie Su said in a statement. “This rule ensures that savers of all income levels can work confidently with investment professionals to grow their nest egg and prepare for the joyful retirement they deserve. America’s workers and their families should not have excess fees and lost investment returns chipping away at their retirement savings due to the cost of conflicted investment advice.”
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