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Such recommendations may be tainted by conflicts of interest under current rules, the agency says.
Rollovers are arguably a “main focus” of the regulation, said Katrina Berishaj, an attorney at Stradley Ronon Stevens & Young.
“The Department of Labor was not shy about it,” said Berishaj, co-chair of the firm’s fiduciary steering group.
Rollovers are common, especially for retiring investors.
They often involve moving one’s nest egg from a 401(k)-type plan to an IRA.
By 2022, Americans rolled about $779 billion from workplace retirement plans into IRAs, according to an analysis by the Council of Economic Advisers. Nearly 5.7 million people rolled over money into an IRA in 2020, according to the latest IRS data.
The number and value of these transactions has increased significantly as more baby boomers enter their retirement years. In 2010, for example, about 4.3 million people rolled over a total of $300 billion into IRAs, according to the IRS.
The new Labor Department rule aims to make more investment recommendations “trustworthy.”
A trustee is a legal term. At a high level, it requires financial professionals to provide advice that puts the customer first. They have an obligation to be careful, loyal and truthful when giving advice to clients and to charge reasonable fees, experts said.
Today, many rollover recommendations are not subject to a fiduciary standard under the Employee Retirement Income Security Act, attorneys said.
Labor officials fear it exposes investors to conflicts of interest, whereby advice may not be best for the investor but, for example, brokers earn a higher commission.
If the past is any indication of the future, we can expect millions of rollovers every year.
Katrina Berishaj
attorney at Stradley Ronon Stevens & Young
Under the current legal rules, which date to the mid-1970s, a financial agent must meet five legs to be considered a fiduciary.
One of those tips says they are a fiduciary if they provide advice on a regular basis, lawyers said.
However, many rollover recommendations do not occur as part of an ongoing advisory relationship. Instead, it’s often a one-time event, lawyers said.
That means it’s “very unusual” for a rollover recommendation today to rely on a fiduciary standard, Reish said.
However, the new Minister of Labor rule changes that.
“Under this rule, one-time investment advice to roll assets out of a plan will trigger fiduciary status under ERISA,” said Berishaj, who called the change a “major shift.”
Under the new rule, advisers are generally expected to consider factors as alternatives to a rollover, including the pros and cons of keeping money in a 401(k) plan, Berishaj said.
For example, they would likely compare different fees and expenses for a workplace plan versus an IRA, as well as the services and investments available in both. They would also provide certain information to investors prior to the rollover, such as a description of the basis for that rollover recommendation, she added.
Good advisers probably make an honest effort to do what’s best for their clients, but hopefully the Labor Department rule will “bring the bottom up to a better quality,” Reish said.
“I think the DOL’s intent is to encourage higher quality advice that would get people both better invested and at a lower cost,” Reish said.
However, many financial firms dispute the necessity of the Labor Department’s rule.
For example, the regulation will “harm retirement savers and their access to the professional financial guidance they want and need,” said Susan Neely, president and CEO of the American Council of Life Insurers, an insurance industry trade group.
In addition, the Labor Department has “chosen to ignore the significant progress that has been made to strengthen consumer protections” over the past several years, Neely said. They include rules issued by the Securities and Exchange Commission and the National Association of Insurance Commissioners.
Those rules are “all less demanding than the DOL rule,” Reish said. “So it’s a higher standard across the board.”
That’s especially true of recommendations by insurance agents to roll money from a 401(k) plan into an annuity into an IRA because of differences in current legal rules versus Labor Department requirements, according to lawyers and other financial experts.
“We believe insurance agents will be most exposed to this rule, particularly those selling annuities,” Jaret Seiberg, financial services analyst for TD Cowen Washington Research Group, wrote in a recent research note.
Industry groups are likely to sue to block the rule from taking effect, he said.
