By: Evelyn Doran*

In late October, the White House announced that the Department of Labor (DOL) would be publishing a new proposed rule regulating the financial advice provided to 401(k) plan participants.^[1] In its fact sheet on the new rule, the White House described it as “part of [President Biden’s] broader Bidenomics agenda,” linking it to the President’s promises to reduce ‘junk fees’—additional fees attached at the end of transactions that are not clearly explained by the service provider.^[2] Biden first began attacking junk fees in 2022 in the wake of widespread public outrage over the handling of ticket sales for Taylor Swift’s Eras Tour and has since made it a key part of his economic policy agenda.^[3]

The new DOL rule would subject financial service providers advising on retirement savings and investment advisors providing recommendations on 401(k) rollovers to the Employee Retirement Income Security Act (ERISA), under which covered entities and individuals have a fiduciary duty to act in the best interest of retirement plan participants and account owners.^[4] To better understand the potential impact of this rule, we must consider both the way junk fees affect the average individual and the economy at large, as well as what scholars and stakeholders are saying about this regulation’s potential for successfully addressing those effects.

At least 85% of Americans have encountered junk fees in recent transactions, and many complain that the unexpected charges make their previously planned purchases cost-prohibitive.^[5] In one instance, a ticket-buyer found that their tickets to a Drake concert, which originally cost $544, had an additional $541 added at checkout for a service fee, facility fee, and order fee.^[6] Consumer Reports has identified these types of fees as particularly burdensome, noting that they often increase the cost of tickets by around 40%.[7] People also pay these fees in much smaller amounts on a regular basis, like when they pay ATM fees, overdraft fees, or delivery fees.[8] While these smaller fees may cause less sticker-shock, the cumulative effect of frequent micro-transactions has a real impact on consumer’s wallets. According to the Consumer Financial Protection Bureau (CFPB), consumers pay at least $29 billion of these additional charges each year.^[9] What’s more, junk fees are pervasive across sectors; these fees are used by many service providers, including hotels, food delivery services, cable providers, credit card providers, and financial advisors.^[10]

Given the scale of this issue, Biden likely faces an uphill battle as he attempts to eliminate these kinds of surprise fees. So far, his executive action on this issue has focused on the fact that junk fees are hidden or unexpected. For example, this past June, Biden met with ticketing and travel companies to discuss their voluntary decision to provide all-in pricing, applauding the companies for choosing to increase price transparency and improve consumers’ purchase experience.^[11] The proposed DOL rule on one-time financial advice also works toward that end—by requiring investment advisors to act in the best interest of the savers they serve, the DOL in effect requires those advisors to disclose any junk fees or hidden losses to retirement savings, as failing to do so would be a breach of their duties under ERISA.^[12]

Some critics argue that this rule will not actually generate a meaningful reduction in unnecessary costs to consumers. In their eyes, while this may mean that consumers are better informed about the price at checkout, companies may just as easily raise prices to replace the lost fee revenue, thereby rendering consumer savings on fees moot.^[13] Others still argue that the fees are in fact necessary, as companies often need to tailor transaction prices to meet the needs of a wide variety of customers, and say that removing this pricing structure makes things worse by threatening to raise prices for everyone in the absence of specialized pricing.^[14] While approaching it from different angles, both these critiques get to a crucial issue in how we choose to address junk fees: is the issue the fact that the fee is a surprise, or that the service provider is being unreasonable for charging additional prices for seemingly no added benefit to the consumer?

There is, however, some data showing that consumer awareness of the fees, rather than the actual cost of the fees themselves, may in fact be a worthwhile end. According to a study conducted in February of 2023 by The Harris Poll, 64% of Americans intending to travel in 2023 “say they’d prefer to see one total combined price that includes all charges rolled into one, rather than a room rate plus separate fees.”[15] Some of this preference is attributable to the way junk fees make it harder for consumers to effectively select options that best fit their needs and budgets. The Federal Trade Commission described this issue in its 2017 economic report on resort fees, writing that

[i]f resort fees were included in the room rate, consumers could compare rooms at different hotels by simply viewing the room pages at the hotel websites and remembering the prices. With separately-disclosed resort fees, consumers would need to add the room rate to the resort fee and remember the total for each hotel under consideration or keep track of the room rates and resort fees separately for each hotel.[16]

Taking into consideration the different decisions consumers might make when they are aware of the transaction’s total cost at the outset, rules like those proposed by the Biden administration may stand to save Americans money. As people are aware of how much their transaction will actually cost, they are better able to make informed decisions about what they choose to spend on, and may then save money by selecting options with lower total costs.[17]

The question of how effectively Biden’s proposed rules on junk fees address the problem is therefore one of scope. Is the problem that consumers need to have adequate notice of how much money they are spending when they first consider making a purchase, or is it that we need to stop companies from hiking up prices with seemingly no added benefit to their customers? Untangling these two issues has become increasingly difficult, as the rise in the prevalence of junk fees has been paralleled by a rise in how much these fees cost.[18] Thus, the issue is both that consumers are now more likely to be blindsided by hidden fees, and that such hidden fees may no longer reflect the cost of the services they proport to represent. As regulation in this area continues to evolve, stakeholders may have to consider whether their efforts to alleviate these costs to consumers may be misplaced, and if so, how best to recenter the conversation on the actual costs to consumers.

[1] Fact Sheet: President Biden to Announce New Actions to Protect Retirement Security by Cracking Down on Junk Fees in Retirement Investment Advice, White House (Oct. 31, 2023), https://www.whitehouse.gov/briefing-room/statements-releases/2023/10/31/fact-sheet-president-biden-to-announce-new-actions-to-protect-retirement-security-by-cracking-down-on-junk-fees-in-retirement-investment-advice/#:~:text=The%20proposed%20rule%20would%20ensure,like%20a%20401(k) [hereinafter Fact Sheet].

[2] Fact Sheet, supra note 1; see also, Emma Kinery, White House Hammers Economic Issues with Attack on ‘Junk Fees’ Two Weeks Out from Election Day, CNBC (Oct. 26, 2022), https://www.cnbc.com/2022/10/26/white-house-hammers-economic-issues-with-attack-on-junk-fees-two-weeks-out-from-election-day.html (noting that the Biden Administration has levied sustained pressure against companies that charge ‘junk fees’, namely through changes in regulatory guidance); Emma Kinery, Five Key Economic Points in Biden’s 2023 State of the Union Address to Congress, CNBC (Feb. 7, 2023), https://www.cnbc.com/2023/02/08/five-key-economic-points-in-bidens-2023-state-of-the-union-address-to-congress.html (describing how President Biden focused portions of his 2022 State of the Union address on his “war on ‘junk fees’”); Karen Bennet & Brian Beers, What Are Junk Fees?, Bankrate (Apr. 4, 2023), https://www.bankrate.com/banking/junk-fees/ (“The term ‘junk fees’ can be applied to a broad range of charges that may be unexpected by consumers and not clearly explained by the financial institution or other service provider that imposes them.”).

[3] Alexandra Canal, Biden Targets Junk Fees in Wake of Ticketmaster’s Taylor Swift Fiasco, yahoo!finance (June 15, 2023), https://finance.yahoo.com/news/biden-targets-junk-fees-in-wake-of-ticketmasters-taylor-swift-fiasco-185234243.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAM8wUz3xi3VV6zl8m8dDGJcsLHKRt3VqunjWYmjZQTu2wzF5ACbdCFnZhSF0twhxs6DqBnC-ksOUG84eafittwel_DLgPVu-ehKJUkG5DQSGPCgUJKnpY99xwH56XoGxDxkQWiyijya4NsF7PMfcvyh0ACXPVSnfEmgFssERrsEm.

[4] Fact Sheet, supra note 1; News Release: U.S. Department of Labor Announces Proposed Rule to Protect Retirement Savers’ Interests by Updating Definition of Investment Advice Fiduciary, U.S. Dep’t of Lab. (Oct. 31, 2023), https://www.dol.gov/newsroom/releases/ebsa/ebsa20231031 [hereinafter DOL News Release].

[5] Nik Popli, Biden Praises Companies for Ending Junk Fees. Here’s What the Changes Mean for You, Time (Feb. 8, 2023) (updated June 16, 2023), https://time.com/6254113/what-are-junk-fees-biden-ban/ (citing Penelope Wang, Protect Yourself from Hidden Fees, Consumer Reports (May 29, 2019), https://www.consumerreports.org/money/fees-billing/protect-yourself-from-hidden-fees-a1096754265/).

[6] Popli, supra note 5.

[7] Trade Regulation Rule on Unfair or Deceptive Fees, 88 Fed. Reg. 77420 (proposed Nov. 9, 2023) (to be codified at 16 C.F.R. pt. 464) (referencing a comment on the notice of proposed rulemaking made by Consumer Reports).

[8] See Karen Bennett & Matthew Goldberg, Survey: ATM Fees Hit Record High While Overdraft and NSF Fees Fell Sharply, Bankrate (Aug. 30, 2023), https://www.bankrate.com/banking/checking/checking-account-survey/; Trade Regulation Rule on Unfair or Deceptive Fees, 88 Fed. Reg. 77420 (summarizing comments to proposed rulemaking that discuss the pervasiveness of excessive financial services fees).

[9] Popli, supra note 5.

[10] Id.; Fact Sheet, supra note 1, Trade Regulation Rule on Unfair or Deceptive Fees, 88 Fed. Reg. 77420.

[11] Private Sector Ticketing and Travel Companies to Eliminate Hidden Junk Fees and Provide Millions of Customers with Transparent Pricing, White House (June 15, 2023), https://www.whitehouse.gov/briefing-room/statements-releases/2023/06/15/president-biden-recognizes-actions-by-private-sector-ticketing-and-travel-companies-to-eliminate-hidden-junk-fees-and-provide-millions-of-customers-with-transparent-pricing/.

[12] Fact Sheet, supra note 1; DOL News Release, supra note 4.

[13] Allison Pohle & Joe Pinsker, What Biden’s Crackdown on ‘Junk Fees’ Could Mean for Travelers, Concertgoers, and Credit Cards, Wall St. J. (Feb. 8, 2023), https://www.wsj.com/articles/what-bidens-crackdown-on-junk-fees-could-mean-for-travelers-concertgoers-and-credit-cards-11675884986?mod=Searchresults_pos1&page=1.

[14] See Howard Beales & Todd J. Zywicki, Junkyard Dogs: The Law and Economics of “Junk” Fees, 2023 CPI Antitrust Chronicle (arguing that the type of pricing scheme that Biden seeks to remove is in fact the valid result of competitive markets); Katy Marquardt Hill, Why Biden’s War on Junk Fees May Not Save You Money, CU Boulder Today (Aug. 9, 2023), https://www.colorado.edu/today/2023/08/09/why-bidens-war-junk-fees-may-not-save-you-money (interviewing Amit Bhattacharjee, associate professor of marketing at the University of Colorado Boulder Leeds School of Business) (“Some of these fees serve important economic functions. . . . The bank still has to cover those costs, and they’ll pass them on to consumers one way or another.”).

[15] Sally French, Americans Prefer to Know Hotel Costs Upfront—Fees and All, NerdWallet (Mar. 15, 2023), https://www.nerdwallet.com/article/travel/americans-prefer-to-know-hotel-costs-upfront-fees-and-all (citing an online survey conducted by market analytics company The Harris Poll that studied the preferences of American adults planning on vacationing in 2023).

[16] Mary W. Sullivan, FTC Bureau of Econ., Economic Analysis of Hotel Resort Fees, 2-3 (2017).

[17] FTC, Statement of Chair Lina M. Khan Regarding the Advanced Notice of Proposed Rulemaking on Unfair or Deceptive “Junk” Fees (Oct. 20, 2022).

[18] See Sullivan, supra note 16, at 2 (“Moreover, the amount consumers are paying in resort fees is increasing. In 2015, consumers paid resort fees estimated at about $2 billion, 35 percent higher than the previous year.”); Rachel DePompa, ‘Junk Fees’ Cost Americans Almost $65 Billion Each Year, WALB News (Sept. 4, 2023), https://www.walb.com/2023/09/04/junk-fees-cost-americans-almost-65-billion-each-year/?outputType=apps  (describing the CFPB’s position that credit card late fees have come to far exceed their necessary rates, and instead have become “a profit center” for card companies).

*Evelyn Doran is the Lead Managing Editor for JLI Vol. 42.