The Department of Labor’s proposed fiduciary rule will expand the definition of who is an investment advice fiduciary to “close loopholes” and eliminate “junk fees” for fixed index annuities, advice to employers and plan fiduciaries and one-time advice for transactions like 401(k) rollovers, the Biden administration said in a statement.

“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. This can result in reduced returns and higher costs which are junk fees that chip away at many Americans’ savings,” the U.S. Department of Labor said in a statement.

In 2022, Americans rolled over about $779 billion from defined contribution plans such as 401(k)s into IRAs, according to Cerulli Associates.

According to White House, which also cited Cerulli analysis, “conflicted advice” regarding fixed-index annuities alone could cost savers up to $5 billion per year.

“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,” Acting Secretary of Labor Julie Su said in a statement this morning.

The DOL is proposing separate amendments to existing prohibited transaction exemptions (PTE) “to make the exemption conditions more uniform and protective,” the agency said.

Currently, an advisor can meet fiduciary standards or the exemption standards. "These inadequate protections and misaligned incentives have helped drive sales of fixed index annuities up 25 percent year-to-date,” the DOL said.

The proposed amendments to the exemptions would require investment advice fiduciaries to give advice that meets a professional standard of care or duty of prudence, puts the retirement investor first and would prohibit advisors from misleading investors or charging more than reasonable compensation, the DOL said.
“This proposed rule would ensure that when investors entrust their retirement security to such investment professionals, their confidence will not be misplaced, regardless of the type of investment recommended. Workers and their families deserve no less,” Assistant Secretary for Employee Benefits Security Lisa M. Gomez said.

For the first time, the proposal also applies the fiduciary standard to one-time advice to investors to roll assets out of an employer-sponsored plan like a 401(k) and into an IRA or annuity. There is currently a loophole that allows advisors to escape a best interest standard, the DOL said.

“One-time advice is often the most important advice the retirement investor will ever receive,” the agency said.

The proposal will also cover advice to plan sponsors on which investments to make available as options in 401(k)s and other employer-sponsored plans. 

“When advisers make recommendations to plan sponsors, including small employers, about which investments to include in 401(k) and other employer-sponsored plans, that advice is not subject to the SEC’s Regulation Best Interest and right now is not required to be in the customer’s best interest,” the DOL said.
Interested parties will have 60 days to comment on the proposal. The DOL also intends to hold a public hearing about 45 days after the proposals are published, the agency said.

The insurance and annuities industries, which have successfully overturned DOL rules in the past, is poised to challenge the proposal.

Kevin Mayeux, CEO of the National Association of Insurance and Financial Advisors, called the proposal "the offspring of the department’s failed fiduciary-only model for advisory services that would limit consumers’ choices and curtail the access of many middle- and lower-income investors to individualized advice and services. This is the fourth time since 2010 the federal government has tried to expand fiduciary requirements for advisors. This DOL proposal is particularly unfortunate, coming at a time when many Americans are concerned about their economic security and ability to prepare for retirement."

The CFP Board supported the DOL's proposal, saying it was time to update "the nearly 50-year-old framework" established under ERISA. "The outdated law does not prevent advisors from taking advantage of gaps in the regulations to steer their clients into high-cost, substandard investments that pay the advisor well but eat away at retirement investors’ nest eggs over time," the CFP Board said.