A new U.S. Labor Department rule will significantly change the advice many investors receive regarding rolling money over from 401(k) plans to individual retirement accounts, according to legal experts. The rule, known as the “fiduciary” rule, aims to raise the legal standards for brokers, financial advisors, insurance agents, and others who provide retirement investment advice. The Department of Labor issued the rule on April 23, as a way to address potential conflicts of interest that may exist under the current rules. Rollovers are a key focus of the regulation, with millions of investors participating in rollovers each year.
Rollovers are common, especially for investors who are retiring. They involve transferring funds from a 401(k)-type plan to an IRA. In 2022 alone, Americans rolled over approximately $779 billion from workplace retirement plans to IRAs, according to a Council of Economic Advisers analysis. The number and value of these transactions have been on the rise, particularly as more baby boomers reach retirement age. The new Labor Department rule aims to make investment recommendations more fiduciary in nature, which means putting the client’s interests first and charging reasonable fees.
The current legal rules do not necessarily require rollover recommendations to adhere to a fiduciary standard under the Employee Retirement Income Security Act. Financial agents must meet specific criteria to be considered fiduciaries, with one of the requirements being that they provide ongoing advice to clients. However, rollover recommendations often occur as one-time events rather than ongoing relationships, making it unusual for them to adhere to a fiduciary standard. The new Labor Department rule changes this by making one-time investment advice to roll assets out of a plan trigger fiduciary status.
Under the new rule, advisors would need to consider factors such as alternatives to a rollover, fees and expenses of workplace plans versus IRAs, and disclose information to investors before recommending a rollover. The goal of the rule is to encourage higher-quality advice that helps clients make better investment decisions at a lower cost. While some financial companies argue that the rule is unnecessary and may harm retirement savers’ access to professional guidance, others believe it will ultimately benefit investors by improving the quality of advice provided.
The Labor Department rule may have a significant impact on insurance agents, particularly those who sell annuities and recommend rollovers from 401(k) plans to annuity-held IRAs. Industry groups are likely to challenge the rule in court in an effort to block its implementation. The rule represents a higher standard compared to other consumer protection rules issued by regulatory bodies like the Securities and Exchange Commission and National Association of Insurance Commissioners. Critics of the rule argue that it may limit access to financial guidance for investors. However, supporters believe it will lead to better outcomes for investors by prioritizing their interests in rollover decisions.
