Changing exemptions for life insurance sales in qualified plans

Life insurance in qualified retirement plans is a useful strategy to provide a pre-retirement death benefit to participants and their beneficiaries. This can possibly self-complete a retirement plan for survivors as well as use a noncorrelated asset in overall portfolio diversification.

But regulatory change that could tighten up the rules governing these sales is in the works.

Since 2010, much attention has been focused on protecting individuals from conflicted retirement plan advice. A fiduciary rule published in the Federal Register on April 8, 2016, would have phased in the rule that would take effect Jan. 1, 2018. Eight industry trade groups challenged the new rule and back-and-forth guidance with changing administrations. Fast-forward to Jan. 1, 2018 — the fiduciary rule went into effect.

As of the writing of this article in early October, the Department of Labor sent the latest revision of the fiduciary rule to the Office of Management and Budget for review. It is hard to determine what is in this latest version; public view was planned for some time in October. Some industry speculation has a view that transfers and rollovers from qualified retirement plans to individual retirement accounts and fixed products (life insurance and annuities) will be subject to more stringent conditions.

What this means to advisors establishing qualified retirement plans is that you are likely a fiduciary and must comply with “impartial conduct standards.” Generally, you must (i) provide advice that is in the best interest of the individual, (ii) charge no more than reasonable compensation and (iii) make no misleading statements. 

There are many dealings with a qualified retirement plan that are prohibited, and unless there is a prohibited transaction exemption, the advisor, acting in a fiduciary capacity, and any other plan fiduciary are prohibited from certain actions with the plan. For purposes of this article, common prohibited transactions including receiving compensation from the plan or buying and selling life insurance or annuities to or from the plan. However, there are two PTEs — specifically PTE 2020-02 and PTE 84-24 — that allow such actions. A full discussion of both PTEs is beyond the scope of this article.

The two PTEs mentioned previously deal with variable market-driven investments and fixed insurance company investments. Under PTE 2020-02, if the advisor is considered a fiduciary, then they must comply with the PTE and:

1. Acknowledge their fiduciary status in writing.

2. Disclose their services and material conflicts of interest.

3. Adhere to “impartial conduct standards,” essentially that the advice is in the best interest of the individual.

4. The insurance company and the advisor receive no more than reasonable compensation.

5. Make no materially misleading statements.

When adding fixed life insurance company products to the asset lineup (life insurance and/or fixed annuities), the advisor would need to rely on PTE 84-24, which applies to insurance sales. It also applies to the receipt of commissions. 

Under PTE 84-24, the sale of insurance products and the receipt of commissions require that:

1. The transaction must be affected by the insurance company or agent in the ordinary course of its business.

2. The transaction must be on terms at least as favorable to the participant as an arm’s-length transaction with an unrelated party would be.

3. The combined total of all fees, commissions and other consideration received by the insurance company or agent must be “reasonable.”

4. The advisor must make certain disclosures to an independent fiduciary of the plan (generally, the plan sponsor or committee), including any affiliation between the agent and the insurance company whose policy is being recommended, the sales commission payable in connection with the recommended transaction, and any other costs associated with the purchase, holding, exchange, termination or sale of the recommended contract. 

5. The independent fiduciary must approve the transaction in writing.

Depending on what happens with the drafting of this latest revision, it would appear PTE 84-24 would be more aligned with PTE 2020-02.

Stay tuned.

Ernest J. Guerriero, CLU, ChFC, CEBS, CPCU, CPC, CMS, AIF, RICP, CPFA, national president of the Society of Financial Service Professionals, is the director of qualified plans, business markets for Consolidated Planning. He may be contacted at [email protected].