The Department of Labor is determined to extend fiduciary obligations to annuity sales made with the trillions of retirement plan dollars.
Efforts to do so have been at least a decade in the making. All of the history to this point makes the DOL’s latest attempt at a fiduciary rule feel like its end game.
Regulators sent the long-awaited fiduciary rule rewrite to the White House Office of Management and Budget on Sept. 9. The OMB has 90 days to review a rule before its contents are unveiled for public comment. That process continued as this issue went to press.
The rule is almost certain to end up in court again. Industry trade groups led lawsuit efforts that ended with the first fiduciary rule, published by the Obama administration in 2016, being tossed out two years later by the 5th U.S. Circuit Court of Appeals.
Emboldened lobbyists show no signs of backing down from the latest DOL proposal.
“DOL is plowing ahead with its latest damaging proposal despite the fact that federal courts have repeatedly rejected their efforts to expand the fiduciary rule in recent years, as well as the extensive body of research showing that this type of proposal will significantly harm lower- and middle-income workers and exacerbate the wealth gap for Black and Latino families,” said Wayne Chopus, president and CEO of the Insured Retirement Institute.
Potential changes to Prohibited Transaction Exemption 84-24 is going to attract the most attention in the new rule. Created in 1977 and amended several times over the years, PTE 84-24 allows producers to receive commissions when retirement plans and IRAs purchase insurance and annuity contracts.
Fred Reish, a partner at Faegre Drinker Biddle & Reath, has long expected the DOL to target PTE 84-24 in any fiduciary rule rewrite.
“I think that [PTE 84-24] will be amended to include more-demanding conditions, such as requiring a best interest process, disclosures of conflicts of interest, and a fiduciary acknowledgement,” he said this week.
A spokesman for the DOL’s Employee Benefits Security Administration declined comment on the rule.
As far back as July 2021, Reish wrote that signs indicated that the DOL aimed to strengthen PTE 84-24 and was going about it in a roundabout way. At that point, the Trump administration DOL had created PTE 2020-02, which was allowed to take effect by the incoming Biden administration.
Under PTE 2020-02, if an “investment professional” gives fiduciary advice to a retirement investor, the “financial institution” is also considered a fiduciary. There are strict requirements with this exemption.
In accordance with them, the producer must adhere to “Impartial Conduct Standards.” They include:
• Give advice that is in the best interest of the participant.
• The insurance company and the agent receive no more than reasonable compensation.
• Make no materially misleading statements.
“A significant issue under PTE 2020-02 for insurance companies that work with independent agents is how the insurance company can know if the agent is acting as a fiduciary,” Reish wrote.
As a result, many insurance companies and their producers continued to use PTE 84-24. But Reish warned then that changes were coming: “It is possible — perhaps even likely — that new and more demanding conditions will be added to 84-24,” he wrote.
The 84-24 exemption is one area Chuck DiVencenzo, president and CEO of the National Association for Fixed Annuities, will be watching.
“84-24 probably looks more like the old Obama-era rule,” he said. “They’ll talk about specific disclosures, a person’s compensation and how often it’s received, for instance, and an acknowledgement that there can’t be any material conflict of interest.”
Not everyone opposed
Not everyone in the insurance world is opposed to strong regulation. Michelle Richter-Gordon of MRG Advisors said the rule could help the insurance industry gain equal footing with their investment [40 Act] advisor counterparts who give financial and planning advice, while also managing assets and making investments for clients.
“There’s no reason why we should not receive equal treatment for our expertise with that of investment advisors,” she said. “We insurance people should also get to sell both products and services. We are not a subclass.”
Insurance professionals are saddled with a poor reputation that comes from “bad actors” and the selling mindset, said Richter-Gordon, who co-founded fee-only RIA Annuity Research & Consulting in January.
“We deserve parity with financial professionals,” she said. “We deserve ‘insurance advisement’ as an additional regulatory frame that could be used, just as financial professionals may hold both a brokerage and advisement affiliation.”