New Federal Rule Cracks Down on Bad Retirement Savings Advice

Those transactions are currently governed by a patchwork of state laws. Conflict-tainted advice on fixed index annuities alone costs retirees $5 billion a year, the White House says, citing a 2023 study by Cerulli Associates, a financial-services research firm.

The rule features additional provisions that expand the “best interest” standard to cover:

One-time advice. Advice given on a one-time basis, such as whether to roll over a 401(k) into an individual retirement account (IRA) or annuity, would also come under the best-interest standard.

Current federal law largely applies that principle to ongoing financial advice, leaving American workers — who rolled nearly $780 billion from 401(k)-type workplace plans into IRAs in 2022 — vulnerable to conflicted guidance about whether and where to move their nest eggs when they leave or change jobs.

“One-time advice is often the most important advice the retirement investor will ever receive and affects roughly 5 million savers per year,” an administration fact sheet says.

Advice to plan sponsors. Advisers’ recommendations to employers on what investments to include in workplace retirement plans also would come under the best-interest umbrella, meaning they must be guided by what’s best for savers — a “critically important” step, the administration says, because most Americans primarily save for retirement through workplace plans.

Years in the making

The final version of the rule is scheduled to take effect Sept. 23, marking the culmination of a yearslong effort by AARP and other consumer advocates to strengthen protections for people saving for retirement. 

When the current definition of investment advice fiduciary was adopted in 1975, pensions were common, IRAs were in their infancy and 401(k) plans did not exist.

“The investment landscape has changed, the retirement landscape has changed, and it is critical that our regulations are responsive to those changes so that workers can reach the secure retirement that they work for decades to finally achieve,” Lisa Gomez, assistant secretary of labor for employee benefits security, said in a statement.

In 2010, the department began work on a rule requiring financial professionals handling retirement plans to act as fiduciaries — meaning they must put investors’ interests above all other considerations, including their and their firms’ bottom line.

This “fiduciary rule” was finalized in 2016 and implemented the following year, but it was struck down in March 2018 by the U.S. 5th Circuit Court of Appeals. Ruling on a challenge brought by the U.S. Chamber of Commerce and financial-services organizations, the court said the department exceeded its statutory authority in expanding the fiduciary standard.

Later in 2018, the Securities and Exchange Commission issued its rule that finance advisers “act in the best interest” of investors, but critics said the mandate, largely limited to securities transactions, did not adequately protect workers’ retirement savings.

The new rule “ensures Americans of all incomes receive quality and nonconflicted advice. It closes some of the most important loopholes, including critical advice on what folks should do with their life savings right before they retire,” LeaMond said. “Plainly put, this rule formalizes what Americans already expect their financial advisers should be doing.”