The Biden Administration Is Cracking Down on Junk Fees in Retirement Plans. Here's How That Could Benefit You

You'll often hear that it's important to save for retirement independently, whether through an employer-sponsored 401(k) or an IRA that you manage yourself. But putting money into these accounts isn't enough. It's also essential you invest the money in your IRA or 401(k) (rather than keeping it in cash), so it's able to grow into a larger sum over time.

Unfortunately, though, when investing your retirement savings, you may end up falling victim to junk fees, which have the potential to erode your returns. The result? A smaller retirement nest egg at the end of your career.

The Biden Administration, however, is taking steps to crack down on junk fees in IRAs and 401(k)s. And if a new proposal is signed into law, it could result in higher savings balances for millions of Americans.

A step in the right direction for retirement savings

The Department of Labor has introduced a rule to minimize junk fees in workplace retirement plans as well as IRAs. The rule is effectively holding financial advisors, brokers, and other professionals who give out investment advice for retirement plans to a higher standard. The rule's goal is to eliminate loopholes that currently allow advisors to recommend investments that aren't in a saver's best interest but may pay higher commissions.

The White House National Economic Council says that these junk fees can reduce a middle class household's retirement savings by a whopping 20%. And if the aforementioned proposal passes, it could positively impact millions of Americans who are actively saving for retirement in an IRA or 401(k).

Implementing the fiduciary standard

The new rule seeks to protect retirement savers by holding advisors to the fiduciary standard. A fiduciary must always put the best interests of a client ahead of their own.

Here's how that makes a difference. If you're working with an advisor who isn't a fiduciary, they can recommend any investment for your retirement plan that's considered suitable for you. They don't necessarily have to recommend the best investment.

So, let's say your advisor is not a fiduciary and can sell you an annuity or another product that they earn a large commission on, or a separate product that they earn a smaller commission on. Both might technically be suitable for you, but the second option may be better for you because it comes at a lower cost. Under the fiduciary standard, your advisor would be legally obligated to recommend the second option only.

How can you lessen the fees you're paying?

Of course, while the above proposal is a step in a positive direction, this change has not yet been signed into law. So for now, one thing you may want to do if you're paying someone to advise you on how to invest for retirement is to ask if they're a fiduciary or not. And if the answer is no, make sure to ask for a detailed financial breakdown of every investment they recommend for you.

Specifically, ask what commission they stand to make on each trade or purchase and whether there's a comparable investment that won't cost you as much. Seeing as how it's your retirement savings on the line, it's important to be vigilant.

There's another simple step you could take as well to avoid paying needless fees in the course of investing for retirement -- start working with an advisor who does hold to the fiduciary standard. That way, you can rest assured that that person will have your very best financial interests in mind.