Michael Wyke/AP Photo
Acting Labor Secretary Julie Su speaks at an event in Houston, July 28, 2023.
Acting Labor Secretary Julie Su told the Prospect last week that she is confident that the new retirement security rule announced last week will successfully navigate through the courts and become a way to ensure that workers saving for retirement aren’t ripped off by financial advisers.
“This rule is about a very basic principle that retirees who save their whole lives for a secure retirement should be able to rely on financial advice that they get that’s in their best interest, not in the interest of bad advisers,” said Su, on the sidelines of an event about the care economy on the campus of the University of California, Los Angeles.
It’s kind of incredible that you need a regulation to ensure that investment advisers work in the best interest of their clients. It says so much about who many in the financial industry view as their actual clients: their shareholders, not ordinary people saving for retirement. Indeed, in some cases, advisers are actually paid by the sponsors of the financial products they attempt to foist on unsuspecting savers.
The conservative theory behind things like this is that unscrupulous financial advisers will simply lose market share over time, with business moving to the honest brokers (literally) who help people save. But the reality is that coordination among retirement savers is weak, financial literacy on exotic savings mechanisms is low, and the dishonest advisers who earn more for their businesses (and hence have more money to advertise) tend to crowd out the honest ones. So regulation is indeed required to hold advisers accountable.
“So many things in the labor world, so much of what we codify, are basic dignity and respect,” Su said.
The fight to get investment brokers to act fairly has taken more than a decade. A heroic mid-level staffer at the Department of Labor named Phyllis Borzi battled through two terms inside the Obama administration to put together the so-called “fiduciary” rule (requiring that investment advisers have a fiduciary responsibility to their clients), taking on practically the entire financial industry, their allies in Congress, and opponents within her own administration.
The rule, which was authorized under the Employee Retirement Income Security Act (ERISA), which covers advice given to 401(k) holders, was finalized in 2016 and partially implemented. But the financial industry got their favorite judges on the Fifth Circuit Court of Appeals to invalidate it, after Donald Trump and Mitch McConnell stacked that court with conservative stalwarts. Trump’s Justice Department didn’t appeal, and the rule died.
Through a separate process, the Securities and Exchange Commission released their own rule on investment advisers, called Regulation Best Interest. This was generally supported by the industry, which tells you a lot. But even stipulating that the rule was good, it still contained key gaps for commodities or insurance products that aren’t considered securities. For example, there are insurance products like fixed index annuities, which have naturally gained in popularity given the lack of coverage under the best interest rule. Sales of fixed index annuities are up 25 percent this year, according to a White House fact sheet, and cost savers up to $5 billion per year.
The fight to get investment brokers to act fairly has taken more than a decade.
Last week, Biden’s Labor Department revived its retirement security rule, rebranding it as another in a series of crackdowns on junk fees. These junk fees may have the greatest impact of all: If returns fall by just 1 percent per year as a result of bad advice, that could reduce savings by as much as 20 percent over a lifetime, the White House estimates. That translates to years of assets seniors must come by some other way. It could be the difference between a comfortable retirement and a career as an octogenarian Walmart greeter.
“When you come from a middle-class family like I did, the thing that makes you the angriest is when you’re taken advantage of,” President Biden said at the announcement last week of the retirement security rule. “When a person pays for trusted advice and it comes with a hidden cost, that’s what I call a junk fee.”
Su echoed that rebranding last week in L.A. “It’s a way of charging workers for something that they really shouldn’t have to pay.” Under the proposed rule, if financial advisers don’t act in the best interest of 401(k) holders, they can be forced to pay restitution. That includes one-time advice like how to roll over a 401(k) into an individual retirement account ($779 billion of such transfers happened in 2022) or some other product, which now must be placed in writing. It also includes advice to employers over what options to offer their workers in 401(k)s or other retirement plans. Insurance companies that work with independent advisers will have to conduct a retrospective review of whether those advisers are working in the clients’ best interest.
What is the difference between the rule finalized in 2016 that was struck down by the Fifth Circuit and the current proposed rule? The Fifth Circuit argued that there had to be a “relationship of trust and confidence” between client and adviser, which couldn’t be established with a one-time sales pitch for an annuity. The administration says their version is more narrowly targeted to meet that test. Su said that the rule “does take into account the court’s decision and it takes into account some of industry’s concerns that have been expressed to us too.”
If that’s the case, nobody told the industry, which has came out with guns blazing. Jason Berkowitz, a representative of the Insured Retirement Institute, the trade group for the annuity industry, said the rule was merely “playing around with some words to try and shoehorn this into something that they can argue is consistent with the 5th Circuit decision and the text of ERISA.”
But beyond semantics, the industry’s arguments were the usual stew that the rule would have a “negative impact on Main Street Americans’ access to financial advice,” in the words of Financial Services Institute CEO Dale Brown. The animating idea here is that advisers have to be able to rip workers off, or else workers would have no advice at all. Regardless of this shopworn logic, the industry will almost certainly sue to block the rule, and they know just where to go to get it done: down to the conservative pro-business opinion factory at the Fifth Circuit.
We could see the industry take aim at Su’s acting status to claim that she has no right to issue rules, even though the statute that created the Department of Labor is quite clear that a confirmed deputy receives all the authority to “perform the duties of the Secretary” in the event of a vacancy.
The proposed rule kicks off an administrative process that includes a 60-day notice and comment period and a public hearing. “We expect people to engage. But we also want people to take a look at the real rule,” Su said. “There’s so much misinformation that gets spun up by people who are just going to oppose any policy, and that doesn’t make sense.”
Su was in Los Angeles as part of CareFest, put on by the advocacy group Caring Across Generations, to announce a sample employment guidance for business relationships between care workers and private households. This was previously required in the Biden administration’s executive order on the care economy.
The guidance is nonbinding, but can give clarity to what domestic workers should expect from individuals when hired as nannies, house cleaners, or caregivers for infirm family members, in terms of rate of pay and work conditions. “When you hire a care worker, they are obviously providing an invaluable service,” Su said. “But they are also your employee and they are entitled to rights and protections. And the better you do at the front end about making sure that caring for your loved ones are also valued, the better it is for everybody.”
