Rollovers, exemption 84-24 among areas targeted in new fiduciary rule

The Department of Labor unveiled nearly 500 pages worth of new fiduciary rulemaking today and, at first glance, industry trade groups panned the effort.

As expected, the rulemaking effort will survive or die based on how closely regulators can hew to a 2018 decision by the Court of Appeals for the Fifth Circuit. In a 2-1 decision, the court tossed out the 2016 fiduciary rule put forth by the Obama administration.

Administration officials held a Monday press briefing ahead of the rule release, with one saying there are "fairly significant differences" between the new rule and the 2016 version. In particular, the new rule sets a very narrow interpretation of the five-part test established in 1975 to determine fiduciary status, an administration official said.

Jason Berkowitz is chief legal and regulatory affairs officer for the Insured Retirement Institute. The five-part test "would go away under this proposal," he said today, "and be replaced by a new framework, essentially, that would make all financial professionals" who work with retirement savers fiduciaries.

That distinction could be crucial at some point. In its decision, the Fifth Circuit ruled that the expansion of the statutory term “fiduciary” was not authorized under ERISA [Employee Retirement Income Security Act].

“When enacting ERISA, Congress was well aware of the distinction,” Judge Jones wrote, “between investment advisers, who were considered fiduciaries, and stockbrokers and insurance agents, who generally assumed no such status in selling products to their clients. The Fiduciary Rule improperly dispenses with this distinction.”

Fred Reish, partner with Faegre Drinker, is an expert in ERISA law and the various fiduciary efforts. He pointed to two major changes in the new rule. For starters, it makes any rollover recommendation from an retirement plan a fiduciary recommendation, Reish explained.

Secondly, any money made from a rollover, for example, brokerage commissions or a commission on an annuity, would be considered a "prohibited transaction," Reish said. And the exemption normally used, Prohibited Transaction Exemption 84-24 "has some really burdensome requirements that are particularly imposed on independent agents, independent producers."

There is also "a heightened duty of supervision placed on the insurance companies of those independent agents," Reish added.

'Trust and confidence'

The Fifth Circuit decision included an examination of the common law meaning of the word “fiduciary,” which requires a relationship of trust and confidence, and determines that Congress codified that common law meaning in the statutory text.

An administration official took note of the words "trust and confidence" in remarks and said the new rule is meeting that test.

Berkowitz disagreed.

"Under this proposal, there would be an assumption that if you're a broker-dealer, recommending a rollover transaction, and you're making that recommendation in the client's best interest, you're a fiduciary and you're subject to all of the consequences of fiduciary status," he said. "And that is going to have a very negative impact on advisors willingness to work with lower-middle-income Americans."

ERISA law gives the Labor Department the legal authority to regulate workplace plans, but officials are still trying to extend that right further than the law allowsm Berkowitz said.

"They are still trying to bring advisors under the fiduciary umbrella without a real true relationship of trust and competence as required by the Fifth Circuit," he said. "It seems to me that they've just sort of re shuffled the deck chairs on the Titanic, but we're still headed for that same iceberg."

The rules come with a 60-day public comment period, but that, too, is woefully inadequate, Berkowitz said. IRI will be requesting a longer comment period, which is significant since the clock is ticking on the Biden administration. If the president loses the 2024 election, his successor can withdraw any rule that is not on the books for a set time.

Attack on annuities?

Berkowitz contrasted the new DOL rule with the Biden administration's endorsement of annuities in the recent SECURE Act of 2019 and the SECURE 2.0 legislation signed in 2022.

The companion bills made a host of changes, many of which will enable annuities to be sold into retirement plans.

"Yet you have this one agency within the federal government that has decided to put a target on the back of these products and argue that they are somehow in need of greater scrutiny than other options that are available," Berkowitz said. "And that's simply outdated thinking."

Administration officials tried to distinguish between the two during the rule rollout. While highlighting Biden signing the SECURE legislation, officials claimed that retirement savers are losing a lot of money to "junk fees."

"When a firm pays a retirement adviser more to recommend a specific investment product, that creates a conflict of interest that often leads to Americans selecting an investment product recommended to them that generates lower returns," an accompanying news release said. "These conflicts of interest are meaningful: an adviser may receive a commission as high as 6.5 percent to recommend some insurance products."

Trade group have a strong record taking regulators to court over various attempts to tighten regulation. Berkowitz demurred when asked whether another lawsuit is inevitable.

"That is something that we would not jump into without going through a very thoughtful and extensive process," he said. "We're certainly very far from that point at this stage."

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.

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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.