‘Major changes’ required of producers under DOL fiduciary rule: analyst

It will require "major changes" from insurers on down for independent producers to get into compliance with the Department of Labor's new fiduciary mandate by September, a leading analyst said.

One day after the DOL unveiled its new Retirement Security Rule – which extends a fiduciary duty to sales of financial products with qualified money – initial analysis of the 476-page rule focused on changes.

In particular, the DOL added language stating that, "sales pitches and investment education can occur without ERISA fiduciary status attaching." One insurance executive said the Prohibited Transaction 84-24, which most independent agents will rely on to receive commissions, is "much improved" from the proposal in that it allows "some room" for differential compensation.

But the industry's assessment of the fiduciary standard is hardly softened. Rumors raced Wednesday of potential lawsuits that could be filed as soon as next week, some speculated. Industry trade associations are expected to lead that legal effort, and those who responded to inquiries offered no denials.

"We believe the core change expanding who is a ‘fiduciary’ remains and is still troublesome," said Kevin Mayeux, CEO of the National Association of Insurance and Financial Advisors. "NAIFA is working with coalition partners and considering all options including litigation."

Fred Reish is a longtime expert on the Employee Retirement Income Security Act and writes frequently on the DOL's ongoing attempts to bring all retirement plans and individual retirement accounts under ERISA law. The 1974 law only permits "reasonable compensation" to service providers, including advisors.

Major effort needed for producers

Changes to soften PTE 84-24 "will help with compliance," Reish said, but "major changes will need to be made." While the rule takes effect on Sept. 23, a one-year grace period will follow before full compliance is required, DOL officials said Tuesday.

One exception is the “Impartial Conduct Standards” established by the DOL in a 2020 rule update. 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 PTE 84-24.

"Insurance companies and intermediaries will need to help independent producers with the initial compliance requirements" of the ICS and fiduciary acknowledgment, Reish said.

"Of those, satisfaction of the duty of care and the duty of loyalty for rollover recommendations will be the most problematic," Reish explained. "That is a big change and will require education and information support for independent producers."

Otherwise, the DOL further tweaked its definition of a fiduciary, Reish said. The final language:

The person either directly or indirectly (e.g., through or together with any affiliate) makes professional investment recommendations to investors on a regular basis as part of their business and the recommendation is made under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation is based on review of the retirement investor’s particular needs or individual circumstances, reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances, and may be relied upon by the retirement investor as intended to advance the retirement investor’s best interest;

'Significant change'

Of this definition, this section is new to the final rule: "reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances."

"The highlighted language is the most significant change and limits the definition," Reish explained. "I believe the goal of the DOL is to have a definition that will satisfy the 'trust and confidence' standard used by the 5th Circuit."

In 2018, a federal appeals court threw out the Obama administration's 2016 fiduciary rule. A three-judge panel ruled 2-1 that it went beyond the DOL's mandate from Congress to regulate workplace retirement plans.

The court decision examined the common law meaning of the word “fiduciary,” which requires a relationship of trust and confidence, and determined that Congress codified that common law meaning in the statutory text.

During remarks Tuesday, Ali Khawar, deputy assistant secretary for the Employee Benefits Security Administration, insisted that the RSR is a different rule.

"The Fifth Circuit's opinion was quite focused on what they termed relationships of trust and confidence," Khawar said. "What this rule does is to say that in those circumstances, we have this trusted advice professional that is providing individualized advice that is purported to be in a customer's best interest. That kind of is the hallmark of this relationship of trust and confidence."

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.

© Entire contents copyright 2024 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.

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.