The Department of Labor is certain to take another crack at establishing a true fiduciary standard, a pair of experts agreed Wednesday.
Speaking during the LIMRA virtual annual conference, Fred Reish, partner at Faegre Drinker Biddle & Reath, and Phyllis Borzi, former assistant secretary for Employee Benefits Security at the DOL, said the writing is on the wall.
"Number one is to simplify the definition of fiduciary advice such that any recommendation of a financial product to a retirement account is fiduciary advice," Reish said in summing up what the DOL is likely working on.
The DOL’s spring 2021 Regulatory Agenda confirmed that it will be rewriting the definition of fiduciary. The Employee Benefits Security Administration plans to issue the notice of rulemaking by December 2021, the agenda stated.
That timeline will surely be delayed, Reish said.
In February, the Department of Labor allowed the investment advice rule, written by the Trump administration, to take effect. That rule replaced the 2015 fiduciary rule worked on by Borzi while a member of the Obama administration. A federal appeals court later vacated the fiduciary rule.
The DOL's efforts to simplify and harmonize the rules are going to be difficult, the speakers noted. For starters, the department has no authority to regulate Individual Retirement Accounts. It can regulate rollovers into IRAs, but not the IRAs themselves, Reish explained.
Secondly, other rules are on the books, some at other agencies. The Securities and Exchange Commission's Regulation Best Interest took effect in 2020 and is an established regulation. Reg BI requires that four factors be considered in developing a recommendation for a retail customer: the customer’s investment profile, potential risks and rewards, and costs.
Finally, Congress is considering changes that would enlarge retirement plan participation, a development that concerns Borzi.
"If some of these coverage proposals on the legislative front are adopted, it's more and more money leaving the protected, by that I mean fiduciary protections in the qualified plan system into the IRA marketplace, without comparable fiduciary consumer and investor protections," she said.
Build On What's There
For now, the DOL is certain to build on the new prohibited transaction exemption 2020-02, included in the investment advice rule, Reish said.
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 IRAs. 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."
The thing to watch is how the DOL ends up treating fixed indexed annuities, he added. Regulators have tried for years to apply tougher regulations to these products.
"Fixed indexed annuities would be the one type of annuity most impacted by [rewriting 84-24]," Reish said.
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.