2 Ways This 401(k) Rule Could Thwart Your Retirement Plan
Written by
Vance Cariaga
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Daria Uhlig
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A new federal government rule designed to bolster the performance of 401(k)s and other retirement plans might actually do the opposite, according to a group of Republican lawmakers who want to overturn it. The rule was unveiled by the U.S. Department of Labor last fall and immediately criticized by trade organizations and Wall Street investors.
As previously reported by GOBankingRates, the rule was announced by the Labor Department’s Employee Benefits Security Administration. Its aim was to update the definition of an investment advice fiduciary by applying it to all financial services providers who give investment advice for a fee to retirement plan participants, individual retirement account owners and others
Under the rule, investment advisers are required to adhere to “high standards of care and loyalty” when they make investment recommendations. It also requires 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. The program will lose about one-quarter of its funding next decade when the Old Age and Survivors Insurance (OASI) Trust Fund runs out of money.
The fiduciary rule was finalized in April 2024. Under the rule, “These fiduciaries must adhere to high standards of care and loyalty when they recommend investments and avoid recommendations that favor the investment advice providers’ interests — financial or otherwise — at the retirement savers’ expense,” according to a Department of Labor press release.
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 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, one-time advice to roll over retirement funds to another account will now be considered fiduciary advice subject to the Employee Retirement Income Security Act of 1974. That’s the case even if the advisor doesn’t manage the account where the funds are rolled over and/or they don’t advise on how to invest the rolled funds.
Critics say the rule could make it more difficult for investors to get advice regarding opening and managing their retirement accounts. It could also make it more difficult for employees to keep track of their accounts when they change jobs because they’d be on their own to decide whether and how to roll over their funds, according to the Investment Company Institute, a trade association for regulated investment funds.
As Bloomberg recently reported, multiple insurance industry associations have sued the Labor Department over the fiduciary rule, which they claim exceeds the agency’s authority and adds “burdensome costs to businesses.” Many on Wall Street have opposed it as well.
And earlier this month, Congressional Republicans advanced a measure to overturn the rule. In a 23-18 vote that largely went along party lines, the House Committee on Education and the Workforce approved a resolution under the Congressional Review Act to get rid of the Labor Department rule, according to Bloomberg.
Committee Chair Virginia Foxx (R-N.C.) called the rule a “reckless overreach” that will “eliminate options for working-class Americans, reduce their ability to retire and limit their access to financial advice.”
But the rule has plenty of supporters as well, especially among unions. A letter from dozens of unions, including the AFL-CIO, asked lawmakers to reject the Republican CRA resolutions, calling them the “latest weapon in a war on workers waged by special interests.”
“We ask that you not allow private equity, the financial industry, multinational franchisors, unionbusters or other special interests to use this tool to undo the progress that workers are making via federal rulemaking,” the union letter said. “We strongly urge you to stand with working families and vote no on all such CRA resolutions.”
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