Busy Year Expected For Insurance Regulation

As 2022 gets underway, it is shaping up to be another big year for political and regulatory changes impacting financial services.

Start at the top, where President Joe Biden enters his second year in office. The clock is ticking on the administration’s ability to get any major priorities through Congress. If precedent holds true, Congress will largely cease to function by the middle of 2022 as members focus on reelection.

Republicans are favored to retake control of the House of Representatives, which which would further hamper Biden’s ability to get major legislation passed. He would not be the first president to ride out his final two years in a political gridlock.

By far, the most interesting big-ticket item on the docket is the Department of Labor fiduciary rule reboot. Biden was in the vice president’s office when the DOL first pushed out a fiduciary rule in 2015. It was tossed out by a federal appeals court two years later.

Whether the DOL can craft a successful fiduciary standard this time around — the new rule is expected to be published in the spring — will be a major 2022 storyline.

Otherwise, Republicans and Democrats might be able to again agree on retirement security legislation. It might be the lone bipartisan issue in all of Washington, D.C. But they are certain to continue haggling over tax policy for the remainder of Biden’s time in office.

All of these issues will have major implications for advisors and their clients.

At the state level, new annuity sales rules continue to take hold, substituting a best-interest standard for suitability. As of press time, 18 states had passed an annuity sales model update pushed out by the National Association of Insurance Commissioners.

The financial services industry is preparing to fight any fiduciary standard at the state and federal levels.

“Unlike a fiduciary-only approach [a best-interest standard], make sure savers, particularly financially vulnerable middle-income Americans, can access information about different choices for long-term security throughout retirement,” said the American Council of Life Insurers and the National Association of Insurance and Financial Advisors in a joint statement.

According to a study by the Hispanic Leadership Fund, a fiduciary-only approach would limit choices for consumers, reduce savings of 2.7 million people by $140 billion, and widen the racial wealth gap by 20%.

Fiduciary Redux

Initially, the Employee Benefits Security Administration planned to issue the new fiduciary rule by December, according to the DOL’s spring regulatory agenda. When it became clear that the deadline would come and go, interest and anxiety picked up.

There isn’t any reason to read anything into the delay, said Bradford P. Campbell, partner at Faegre Drinker Biddle & Reath, during a recent webinar.

“I think probably it’s more like the spring,” Campbell said. “That's because the issues are hard. To their credit, they're spending a lot of time meeting with people and discussing the issues. I think DOL is just taking time to do the rule as best they can.”

In February, the DOL allowed the investment advice rule, written by the Trump administration, to take effect. That rule replaced the Obama-era fiduciary rule tossed out by the Fifth Circuit Court of Appeals.

The DOL is certain to build on the new prohibited transaction exemption 2020-02 included in the investment advice rule, Fred Reish has said. Reish is also a partner at Faegre Drinker Biddle & Reath.

PTE 2020-02 applies to recommendations for rollovers and other movement of retirement money. Broker-dealer representatives and investment advisors can use the exemption to collect compensation for transactions involving 401(k)s or individual retirement accounts. Insurance producers can still use PTE 84-24 for annuity and life insurance sales involving retirement funds.

“I think 84-24 will definitely be modified,” Reish said. “There will be provisions of 2020-02 that'll be moved over to it. Probably the fiduciary acknowledgement, the best-interest standard and maybe specific disclosures of reasonable compensation limitation. It’ll look a lot more like a fiduciary-type rule than it does right now.”

Legislation Potential

Further retirement security measures seemingly got lost in the fall wrangling over Biden’s Build Back Better bill. But administration officials maintain those priorities remain high on their list.
Auto-enrollment of employees into retirement plans was the biggest measure cut from the Build Back Better bill. According to a study conducted by Fidelity, 91% of employees whose companies auto-enroll them into their workplace 401(k) do not opt out.

Industry supporters were hopeful that another major retirement security package, dubbed SECURE Act 2.0, would be passed in December. It includes dozens of provisions to help workers increase retirement savings.

Kathleen Kennedy Townsend, who serves as special assistant to the secretary of labor for retirement, spoke at the Employee Benefit Research Institute’s Winter Policy Forum in December.

The Biden administration wants to support retirement security through a strengthened Social Security system and via workers’ savings, Townsend explained.

In 2016, only 41% of African American families and 35% of Hispanic families had any retirement savings, she said. Even employees who have 401(k) retirement accounts have difficulties translating those dollars to security in retirement, Townsend added.

“We aren’t starting from scratch,” she said. “We still have defined benefit plans and companies that offer annuities. The SECURE Act provided for the creation of PEPs and provided a fiduciary safe harbor for selecting an annuity provider.”

In addition, EBSA is busy writing a rule that will provide savers with a lifetime income illustration.

State Regulation

The NAIC entered 2021 with a goal to get as many states as possible to adopt its annuity sales model update. The financial services industry shared that goal and joined in lobbying state insurance departments.

That hard work paid off. As this issue went to press, Mississippi had just become the 18th state to adopt the new rules. The growing list of states that have adopted the NAIC model includes Arizona, Arkansas, Kentucky, Iowa and Ohio.

In February 2020, the NAIC adopted an update to the Suitability in Annuity Transactions rule that articulates a best-interest standard through the following four obligations: care, disclosure, conflict of interest and documentation. With the outbreak of COVID-19, states were slow to adopt the update in the months that followed.

The NAIC began lobbying state officials last summer and began work on a series of FAQs to help facilitate adoption. How quickly a majority of states adopts the new rules might determine whether a fiduciary standard gains further momentum.

InsuranceNewsNet Senior Editor John Hilton has 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.