Investor’s Best Interest - The Final Retirement Security Rule

On Tuesday, April 23 the US Department of Labor (DOL) issued the final Retirement Security Rule. Department officials said the rule will be active later this year on September 23 requiring investment advisers to follow impartial conduct standards and acknowledge their fiduciary status. Other parts of the rule will not be effective until fall of 2025.

According to retirement legal experts, the DOL is trying to restrain bad actors relative to two big areas of advice: rollovers from 401(k) plans to IRAs and purchases of annuities or similar insurance products.

The rule was proposed in October of 2023 by the Biden administration as an attempt to ensure investment recommendations are in a retirement investors’ best interest. Proponents of the rule argue that it addresses a critical regulatory gap affecting retirement plan-level advice. Assistant secretary of the Employee Benefits Security Administration Lisa Gomez recently spoke at the 2024 NAPA Summit and highlighted that the need for the rule is because of the evolution of the retirement planning landscape. Gomez said “at the time (of establishment of original fiduciary definitions), 401(k)s did not even exist. Most people were in defined benefit plans (pensions), and those plans were managed by professional investment managers.” The current landscape is dominated by 401(k) plans and Individual Retirement Accounts (IRAs), which are participant-directed investment decisions made individually. Gomez explained that if you are a retirement investor, you must have trust and confidence that professionals will give you advice that’s in your best interest.

IRAs tend to have higher fees and current regulations don’t protect investors from allowing financial professionals to recommend a transaction that pays them a higher fee but is not necessarily best for investors. These fees can chip away at investors’ savings. According to data cited in a recent Council of Economic Advisers analysis, Americans rolled over about $779 billion worth of assets from 401(k) type plans to IRAs in 2022. The new rule will require financial professionals to have an obligation to adhere to “impartial conduct standards,” including charging reasonable fees.

Like IRA fees, annuities can also chip away at retirement savings due to conflicts of interest. The Council of Economic Advisers estimates that Americans lose up to $5 billion a year in indexed annuity products because of commissions to insurance agents for the sale of annuities. The rule brings requirements that will hold insurance agents to the same standards of care as fiduciary advisers when making annuity sales.

There are critics of the rule, including insurance firms and industry representatives, who say there is already enough regulation on investment advice and annuities. In the Greenleaf Trust Retirement Plan Division, we believe in the same principles the rule embraces: no conflicts of interest or overcharges for clients using our services. We are proud to have been operating in that fashion since day one.