DOL pulling a ‘deceptive’ maneuver with new fiduciary rule, analyst says

The Department of Labor faces a delicate task in trying to convince a court that it can extend fiduciary duty to more plan transactions.

By John Hilton

The Department of Labor wrote its new Retirement Security Rule with a big focus on convincing a court that it has the authority to extend fiduciary duty to individual retirement plans.

But one prominent analyst said they have done so in a "deceptive" manner. Brad Campbell, partner at Faegre Drinker, is no fan of the new fiduciary standards and accuses the DOL of choosing to "make their litigation path smoother" over real-world rules.

Campbell once led the Employee Benefits Security Administration under President George W. Bush. He spoke Thursday during a Faegre Drinker "Inside the Beltway" webinar.

The DOL published its latest fiduciary effort April 25, with the initial standards due to take effect Sept. 23. Industry opponents are furiously lobbying to derail the RSR.

In particular, Campbell takes issue with the DOL's much-publicized concession in the final rule that "sales activity" will not trigger fiduciary status. In reality, the rule text doesn't deliver on that promise, Campbell said.

"They claim and they wrote into this rule what they call a sales exclusion. In other words, mere sales activity is not fiduciary advice," Campbell explained. "But the trouble is the way they define fiduciary advice is ... you make an individualized recommendation for a person that's in their best interest.

"Well guess what? That that is the minimum requirement to be a salesperson. ... What the department has done is say, 'We're not making sales activity fiduciary,' but in reality, the activity that is sales is fiduciary under the rules."

In pushing for the rule, the White House points out that in 2022, Americans rolled over approximately $779 billion from defined contribution plans, such as 401(k)s, into individual retirement accounts. That number is growing substantially. In 2010, about 4.3 million people rolled over a total of $300 billion to IRAs, according to the IRS.

'Dual track' approach to rule

Compliance with the RSR starts Sept. 23 when the Impartial Conduct Standards take effect. They include: give advice that is in the best interest of the participant, the agent receive no more than reasonable compensation, and make no materially misleading statements. The ICS requirements take effect in September, Khawar said.

The RSR extended the Impartial Conduct Standards to Prohibited Transaction Exemption 84-24, which most insurance producers use to accept commissions.

Faegre Drinker analysts say these standards are no easy hurdle to clear. With a short four-month deadline looming work and training to get into compliance needs to start now, Campbell noted. A lawsuit filed in Texas seeks an injunction to freeze the RSR, but the outcome is no sure thing.

"We're really having for practical purposes to do a dual track," Campbell said. "Even as folks are litigating against the rule we're going to have to start complying with the rule. Because we probably won't have an answer to the litigation before we have to start abiding by the rule."

A sticky wicket

Campbell and Fred Reish, also a partner at Faegre Drinker, discussed the level of nuance the DOL had to include in the rule to account for the varying relationships in the insurance industry. That is, captive agents who sell for one insurance company only, and semi-captives who also sell for other insurance companies. Then there are the independent agents who sell for many companies.

The DOL is not making the insurance companies fiduciaries, Reish explained. But they will have plenty of work to do to comply with the RSR.

"The insurance company every year has to review all the independent producers that it sells through and make a decision about whether or not it will continue to sell through through them one-by-one individually," Reish said. "I'm sure that will be automated, but that is a requirement."

Captive agents will be required to use Prohibited Transaction Exemption 2020-02, created by the DOL under the Trump administration, Campbell said. It is the primary exemption for investment advice fiduciaries.

The statutory employees, which are insurance producers who have an affiliation with one carrier, but still write for multiple carriers, can now use PTE 84-24 for those carriers they are not primarily affiliated with, Campbell said.

"But when you're recommending the carrier for which you are a statutory employee, then you have to use [PTE] 2020-02," he added. "So it's a slightly wider net."

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.

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.