Biden issues rule to clamp down on bad retirement savings advice - which White House claims could boost YOUR savings by 20%

The Biden administration has confirmed its crackdown on retirement plan 'junk fees' which could help boost around 5 million workers' savings.

Under a new rule outlined by the US Department of Labor today, Americans will have more protections when they roll over money from a 401(K) into an individual retirement account (IRA).

Agency officials said the final rule, which takes effect on September 23, will ensure financial advisors, brokers and insurance agents work in the best interests of their clients. 

The White House previously estimated it will affect 5 million savers and increase their returns by between 0.2 percent and 1.2 percent per year - or boost their lifetime savings by up to 20 percent.

The Biden administration has confirmed its crackdown on retirement plan 'junk fees' which could help boost around 5 million workers' savings

Under new rules outlined by the US Department of Labor, Americans will have more protections when they roll over money from a 401(K) into an individual retirement account (IRA)

At current, a financial advisor can be paid a commission as high as 6.5 percent by a firm to recommend a particular product. It means they can direct savers to such investments - even though they might not offer the highest yields. 

Under the Employee Retirement Security Act (ERISA), a 1974 federal law, employers have a duty to manage 401(K) accounts in the best interest of employees - including vetting fees.

This fiduciary standard, however, has not traditionally extended to IRA rollovers and purchases of insurance products like annuities - which the new rules will change.

Previously a financial professional was only considered a fidicuary if they met criteria from a five-part test, with one part stating the person must provide advice on a regular basis.

It left a loophole meaning an advisor making a one-time recommendation like a rollover did not have to adhere to the standards.

Lisa Gomez, assistant secretary of the Employee Benefits Security Administration, said this led to advice being tainted by 'significant conflicts of interest' as professionals had 'no obligation' to act in their clients' best interests.

'That's not right,' Gomez told a press conference Tuesday. 

'For too many people the retirement savings they have through their job are by far the single biggest source of savings they have.

'These important and tax preferred savings deserve protection, and it is the Department of Labor's job to make sure they are protected.'

The law resurrects a more stringent proposal under the Obama administration in 2016 which was struck down by an appeals court two years later. 

According to calculations by the Council of Economic Advisors, Americans rolled over around $79 billion from 401(K)-type plans into IRAs in 2022.

At current, a financial advisor can be paid a commission as high as 6.5 percent by a firm to recommend a particular product. It means they can direct savers to such investments - even though they might not offer the highest yields

The rule is also targeting financial advice in commodities or insurance products like fixed index annuities, which are often recommended to retirement savers. They are generally not covered by the Securities and Exchange Commission's regulation on best interest.

The White House estimates that advice rooted in conflicts of interest regarding the sale of fixed index annuities may cost American savers as much as $5 billion per year. 

When the regulations were first proposed back in October, Lael Brainard, director of the White House National Economic Council, likened the 'hidden costs' of financial conflicts in retirement plans amount to 'junk fees.' 

They can reduce a middle-class household's retirement savings by 20 percent - amounting to tens or even hundreds of thousands of dollars over a lifetime, she said.