How retirement advice morphed into a decade-long political fight

In two announcements separated by a little over seven and a half years, successive Democratic presidents have made a run at reforming the retirement advice industry. In 2016, it was then-President Obama who announced a Department of Labor rule that aimed, among other things, to ban the conflicted advice a typical worker can receive when rolling over a 401(k) into an Individual Retirement Account (IRA) or annuitizing savings. His administration had been working on a proposal since the beginning of that decade. But those fiduciary responsibility rules were struck down by the Fifth US Circuit Court of Appeals two years later. Fast forward to this week: President Biden announced his own plans that — while framed as part of his administration’s ongoing battle against “junk fees” — covers much of the same ground. Like Obama, Biden also focuses on fiduciary responsibility, specifically the one-time advice given to savers when they consider rolling over retirement assets into an IRA or annuity. While some of the legal framing has been changed, the two efforts across two Democratic administrations are “remarkably similar [and] policy-wise, they’re going after the same goal,” Allison Itami, a lawyer specializing in employee benefit programs at Groom Law Group, said in an interview this week. The question, of course, is whether Biden’s effort will meet the same fate. A legal fight appears to be inevitable, although the parameters of any case are still being fleshed out as the proposed rule is finalized in coming months and faces what are almost sure to be legal challenges beginning next year. One group that has already pledged to fight the proposal is the Insured Retirement Institute (IRI), a trade association. The group’s chief legal and regulatory affairs officer, Jason Berkowitz, told Yahoo Finance that the Biden Administration has “tried to structure this proposal in a way that allows them to exert jurisdiction and overrule the recommendations and IRA advice but, in our view, it doesn’t work in terms of what the Fifth Circuit said in 2018.” Advocates contend that the new rules are different enough to stand up to legal scrutiny. Julie Su, Biden’s acting Secretary of Labor, told Yahoo Finance Friday that the Biden administration took the 2018 ruling and additional input from industry into account “and so we are confident that we have struck the right balance here.” In any case, the stage appears set for a fight that has already proven remarkably rancorous in just the few days since it was unveiled, with both sides saying the outcome has high stakes for savers. The Biden administration and its allies say conflicted retirement advice can cost Americans up to 20% of their potential retirement gains over a lifetime. Industry advocates, on the other hand, cite a Deloitte study that found the more restrictive 2016 rules — while they were in effect — lessened the supply of financial professionals and effectively left some less-well-off savers to fend for themselves.

Differences in some of the details — but not the public rhetoric

In the public arena, the rhetoric and stated aims in both the 2016 and 2023 efforts are remarkably similar. “The goal here is to put an end to Wall Street brokers who benefit from backdoor payments or hidden fees at the expense of their clients,” said then-President Obama in 2015 at a White House Conference on Aging. “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,” President Biden said this week. Under the hood, there are some legal differences that could change the court cases to come. The 2016 rules focused on individual advisers, Itami said, while Biden wants to put more of the onus on the companies that employ these advisers. It remains to be seen whether that difference in emphasis changes the legal questions at play, but Itami notes it could increase the resistance from the industry no matter what. The rules — depending on how they are finalized — could also potentially deem entire businesses ineligible for some exceptions by forcing everyone in a company into a single exemption. It’s a change that could threaten to put some companies out of business if they can’t reach the more exacting standards. “It’s more than they had to do,” Itami says of the scope of the Biden administration’s efforts this week, adding “anytime you annoy or disrupt or make more people uncomfortable, the more resistance you’re going to get.”

An acrimonious fight ahead

Beyond the legal nuances, another key difference may be in the political arena. The debate over the rules in 2016 and 2018 spanned the changeover from Obama to Donald Trump. As the case was being considered in 2017 and 2018, Trump’s Republican appointees declined to defend the rule or appeal the circuit court’s decision striking it down. And the fight ahead has already proved remarkably bitter with personal charges being leveled back and forth. President Biden on Tuesday charged that at least a subset of financial advisers and brokers are “scamming Americans out of hard-earned money.” Berkowitz at the IRI shot back, saying that Biden was “dragging annuities through the mud [which is] highly offensive to the millions of financial professionals across this country who work hard every day.” Another battle line has already been drawn on the issue of the length of the comment period over the coming weeks. “It’s really not a conducive environment for them to get real, meaningful, valuable, substantive feedback to help inform their decision-making process,” Berkowitz said.