Biden’s ‘Junk Fee’ Crackdown Comes for Retirement Advice

Americans rolling over their money into an individual retirement account from a 401(k) will have more protections on the advice they get as part of a Labor Department proposal released Tuesday.

Under a 1974 federal law that governs retirement accounts, employers have a duty to manage 401(k) plans in the best interest of employees, including to vet the investments and fees. Known as Erisa, the law also imposes this fiduciary standard on advisers to act in a client’s best interest when giving advice in 401(k)s.

This fiduciary standard, however, hasn’t historically extended to IRAs or to rollovers.

On Tuesday, the Labor Department proposed that financial advisers, brokers and insurance agents should be held to the fiduciary standard on rollover IRAs. The plan is part of a sweeping regulation the agency is proposing that would govern advice affecting trillions of dollars in retirement accounts.

Proponents of the rule change argue it will reduce the odds of savers ending up in expensive investments that will leave them with less money in retirement. According to the White House, it will increase retirement savers’ returns by between 0.2% and 1.2% a year, potentially boosting retirement savings by up to 20% over a lifetime.

Detractors say it will result in a bigger regulatory burden for advisory firms and could reduce the number of advisers willing to work with investors, especially those with smaller accounts.

With the vast baby-boom generation in or approaching retirement, rollovers of money from 401(k)s to IRAs are big business for financial services companies, which make money on the products and services they recommend. In 2022, retirement investors moved $779 billion into IRAs from 401(k)-type retirement plans, up from $404 billion in 2013, according to research and consulting firm Cerulli Associates.

“People haven’t been educated on how to manage their money and withdraw it for a retirement that could last up to 30 years,” said Fred Reish, an attorney who specializes in employee benefits. “The Labor Department is worried about people’s life savings leaving the 401(k) world, where fiduciary rules apply, to go into IRAs, where prices can be higher and investors may not have the sophistication to identify advisers’ conflicts of interest.”

Ongoing saga

There has been a decadeslong debate in Washington and on Wall Street over what responsibilities advisers have to clients in retirement accounts.

The latest proposal comes on the heels of prior attempts by the Labor Department to impose a fiduciary standard on a wider spectrum of financial advisers and to ensure more interactions between advisers and clients fall under the agency’s oversight. The courts struck down or narrowed those prior regulations.

Now the Biden administration is trying another approach, linking the effort to its campaign against junk fees.

“When a retirement saver pays for trusted advice that is actually not in their best interest and comes at a hidden cost to their lifetime savings, that’s a junk fee,” said Lael Brainard, President Biden’s top economic policy adviser.

Once its proposed regulation goes into effect, some players in the financial-services industry are likely to sue to block it, said Allison Itami, an attorney specializing in employee benefit programs at Groom Law Group. But the Labor Department knows “where courts have poked holes” in the past regulations, giving it better odds of drafting a measure that might withstand legal challenges, she said.

Micah Hauptman, director of investor protection at the advocacy group Consumer Federation of America, said the current standard for insurance agents is generally weaker than what the Securities and Exchange Commission imposes on brokers and investment advisers when handling sales of mutual funds and other securities in rollovers. Insurance agents are regulated under state insurance laws.

Labor Department regulation allows brokers to receive commissions on IRA investments they recommend, provided they adhere to conditions including a fiduciary standard, said Reish. The proposed regulation would require insurance agents to adhere to a similar standard, he added.

The proposed rule might prompt insurers to introduce lower-cost annuities with greater potential for investment gains, Hauptman predicts. He said insurers will have to scrap sales incentives, including trips and dinners, for agents selling annuities as part of a rollover recommendation.

The Insured Retirement Institute, which represents the annuity industry, said there is no need for the proposed regulation since insurance agents are already required to act in the best interest of customers.

What’s next

Under Erisa, commissions are normally prohibited because they might provide incentives for advisers to favor one investment over another to get a higher paycheck, said Reish.

He predicts advisers will offer consumers more services to justify the higher fees many pay in IRAs compared with 401(k)s, which often feature bargain-priced institutional investments.

It could take months before the proposed regulation goes into effect, said Hauptman. The Labor Department must first complete a comment period and write a final version of the regulation, he said.

The proposed rule would revise a five-part test the Labor Department issued in 1975 to determine who is a fiduciary and must act in a client’s best interest, according to administration officials.

One part of the test currently allows advisers and financial-services companies to avoid fiduciary status by making a one-time recommendation, such as to roll over a 401(k) account to an IRA.

Under the proposed regulation, the Labor Department is amending the five-part test to ensure those recommending rollovers are treated as fiduciaries, administration officials said.

The change would also ensure better protection for small 401(k) plans that hire advisers to provide one-time recommendations on plan investment options, said Hauptman. In the past, such advisers have had a financial incentive to favor higher-cost investments that pay them more in commissions or fees. Under the proposed regulation, such advisers would have to serve as fiduciaries, likely leading to lower-cost investment recommendations for small plans, Hauptman said.

Write to Anne Tergesen at anne.tergesen@wsj.com