Thursday, November 2, 2023

New Department of Labor Fiduciary Rule Proposal

In an address on Halloween, President Biden announced his support for a new rule proposal from the Department of Labor.  The rule would impose a fiduciary duty on persons giving advice about retirement assets.  His remarks framed the issue as addressing "junk fees" in financial services.

The rule targets critical transactions.  In 2022, Americans moved about $800 billion from 401(k) type plans into individual retirement accounts.  The decisions people make when moving their funds out of their 401(k) and into something else matter.  It's also often a vulnerable point for many.  We know that cognitive decline affects a greater percentage of the population as they age. Yet our regulatory infrastructure does not currently impose consistent standards on persons giving advice about that pot of money.

The kind of advice a retiree receives depends on the person and product at issue.  A registered investment adviser will owe a fiduciary duty under the Investment Advisers Act.  A stockbroker will owe an obligation to give advice in the investor's "best interest" under the SEC's regulation "Best Interest." 

What about the duties owed by insurance producers who often aim to divert retirement savings into insurance products?  An insurance agent selling equity-indexed or fixed-indexed annuities will owe an obligation defined by state law.  Although the NAIC has a "best interest" regulation, that regulation makes the odd decision to explicitly exclude commissions or other compensation from its definition of a conflict of interest.  The regulation actually provides that "'Material conflict of interest' does not include cash compensation or non-cash compensation."   The Council of Economic Advisers estimates that "the amount lost to conflicted investment advice could be as high as $5 billion annually" for fixed-indexed annuities alone.

The proposed regulatory change is significant and information can be found at these links:

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