Biden Smacks 'Junk Fees,' May Add Hundreds of Thousands to Retirement Plans

The administration of U.S. President Joe Biden introduced new rules aimed at helping savers get the best out of their retirement plans by demanding financial advisers give their clients the best investment options rather than push products promising higher returns for their business.

Sometimes businesses pay their advisers to promote financial products that may generate lower returns to investors but earn firms higher profits. This is a conflict of interest that hurts American savers, the White House said on Tuesday.

"Some advisers and brokers steer their clients toward certain investments not because it's the best interest of the client; because it means the best payout for the broker," Biden said Tuesday at the White House. "They're putting their self-interest ahead of their clients' best interest. And they're scamming Americans out of hard-earned money."

The president added, "When a person pays for trusted advice and it comes with a hidden cost, that's what I call a junk fee. And I think it's wrong."

The new rules, the White House said, could increase retirement savings of 0.2 percent to 1.2 percent per year, which over the long term could add up to 20 percent of retirement earnings. This could help savers potentially add hundreds of thousands of dollars to their retirement plans, the administration said.

"For example, advice rooted in conflicts of interest regarding the sale of just one investment product—fixed index annuities—may cost savers as much as $5 billion per year. This hurts workers, families, and the American economy," the Biden White House added.

Here are the new rules the White House aims to change.

Close Loopholes

The White House said that regulators require financial advisers to argue a saver's case when suggesting to customers which securities, like mutual funds, to invest in. That rule is governed by the Securities and Exchange Commission (SEC) whose authority isn't as expansive to cover products like fixed index annuities, which tend to be suggested to savers. Typically, state law takes precedence when governing how these products are offered to clients, which are not always aligned across the country.

"These inadequate protections and misaligned incentives have helped drive sales of fixed index annuities up 25 percent year-to-date," the White House said. "The proposed rule would ensure that retirement advisers must provide advice in the saver's best interest, regardless of whether they are recommending a security or insurance product and where they are giving advice."

Tighten 401(k) Plans to Prioritize Savers

Retirement plans, like how to move one's 401(k) savings into an Individual Retirement Account (IRA) at the moment are not mandated to put savers first.

Going forward, the Biden administration will require financial advisers to provide savers with choices that are most beneficial to them rather their own individual business.

This shift of focus will shape the nearly $780 billion that Americans move from their 401(k)s to their IRAs, the White House said.

SEC Best-Interest Regulations

The White House said that another rule change will see employee-sponsored savings plans adhere to the SEC's best-interest regulations, which will help clients determine available savings options.

"Since most Americans primarily save for retirement through their employers, making sure the investments available to them are in their best interest is critically important," the White House said.

The Department of Labor will be taking the lead to usher in these regulations and it said in a statement that the new rules essentially update the fiduciary responsibilities of financial advisers when dealing with their clients.

"This rule ensures that savers of all income levels can work confidently with investment professionals to grow their nest egg and prepare for the joyful retirement they deserve," acting Secretary of Labor Julie Su said in a statement.

Biden said that the new rule will penalize financial advisers or insurance brokers who don't act in the best interests of their clients.

"If they don't, if they breach their fiduciary duty, they could face serious penalties, including having to pay restitution and additional financial penalties," Biden said. "If this rule is finalized as proposed, it's going to protect workers and it's going to [help] those who are saving for their retirements."

The new rules were about fairness, according to Biden.

"People are tired of being played for suckers. And my administration is going to continue to crack down on junk fees across the economy to protect consumers, promote competition and give families across the country, as my dad would say, 'just a little bit of breathing room.'"

Update 10/31/23, 6:30 p.m. ET: This article has been updated to add quotes from President Joe Biden.