DOL fiduciary adds significant legal liability to producers, panel agrees

SAN ANTONIO -- The Department of Labor fiduciary rule proposal has been picked over relentlessly by analysts and industry trade associations since the agency first introduced the concept in 2010.

But that doesn't mean everyone is prepared for it. In fact, a producer selling a simple life insurance policy could be in for a big surprise if the rule is finalized, said Tom Roberts, principal at Groom Law Group.

"They may often find themselves talking with someone who has life insurance needs, and part of an overall strategy may be funding that life insurance need through a distribution from a qualified plan," Roberts said. "Under this rule, even though you're selling a product that is not going to be owned by the plan, if you're having a conversation about the purchase of that product, with a participant who's going to fund through a distribution, you, congratulations, are a fiduciary."

Roberts sat on a panel titled, "Evaluating the Department of Labor's Fiduciary Advice Effort" at the Life and Annuity Conference, sponsored by LIMRA, LOMA, SOA and ACLI. The panel -- featuring Jim Szostek, vice president and deputy, retirement security, American Council of Life Insurers; and Tyler Brown, assistant vice president, government affairs, Sammons Financial -- found no disagreement on the merits of the rule.

Like most of the insurance side of financial services, they don't feel the rule has any.

"The Fifth Circuit had, I think, the right view of the law," Szostek said, referring to a 2018 decision by the Court of Appeal striking down the 2016 fiduciary rule. "[The Department of] Labor doesn't and we're probably going to end up back in the Fifth Circuit at some point again."

Introduced on Halloween, the latest iteration of the fiduciary rule is expected to be published any day -- "Blink twice for me if it comes out while we're talking," Brown quipped -- and be as harsh and unwelcomed as previous versions.

Compensation and liability

The panel reflected the frustrations held by many DOL rule opponents: the rule adds liability and takes away compensation.

The DOL wants to bring all retirement plans and individual retirement accounts under Employee Retirement Income Security Act of 1974 rules. ERISA’s fiduciary responsibility rules mandate that ERISA plans pay no more than “reasonable compensation” to service providers, which includes advisors.

The DOL has yet to define what it considers "reasonable compensation." The new rule offers prohibited transaction exemptions that allow for additional forms of conflicted compensation, but there are limitations.

"Distributors of insurance products typically are compensated for their sales activity. They're typically compensated for that sales activity primarily in the form of commissions that are paid by the product manufacturer," Roberts explained. "Once that salesperson is rebadged as a fiduciary, the commissions he or she receives become prohibited kickbacks that are per se illegal unless a Department of Labor exemption is available."

The big changes in the fiduciary rule proposal deal with two exemptions, which allow annuity sellers to collect a commission: Prohibited Transaction Exemption 84-24, which dates to 1977, and PTE 2020-02, an alternative created by the Trump administration.

Amended several times over the years, PTE 84-24 allows producers to receive commissions when retirement plans and IRAs purchase insurance and annuity contracts. Under PTE 2020-02, if an "investment professional” gives fiduciary advice to a retirement investor, the “financial institution” is also considered a fiduciary.

A 'financial institution' hurdle

Finding the "financial institution" to stand with independent producers is going to be difficult, Roberts said, and will likely limit those insurance producers to PTE 84-24.

PTE 2020-02 "would be available if the insurance company product manufacturer ... acknowledged fiduciary status with respect to that sale," Roberts said. "But within within the insurance company product manufacturing community there's a real reluctance to do that."

A big reason is the wide variety of products a typical independent producers sells.

"A lot of times it's a very big shelf that they've got to offer," Brown noted. "That's one of the strengths of the independent distribution channel. There's a product in there that is great for consumer, but how do we as an insurance company, take that step to be a co-fiduciary when we don't have access to that shelf?"

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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