Americans for Annuity Protection Meets with DOL

NOTE: Americans for Annuity Protection (AAP) CEO Kim O'Brien and fellow annuity advocates met with Department of Labor officials on the DOL's new fiduciary standard rule in respect to retirement funds.

What We Learned and What you Should Know!

On Tuesday, July 21st, the day comments were due, AAP met with the Directors and staff of the Office of Regulations and Interpretations (in charge of the Conflict of Interest Contract) and the Office of Exemption Determinations (in charge of the PTE 84-24). We were joined by Assistant Secretary Phyllis Borzi.

The meeting went an unprecedented 95 minutes during which we shared relevant, and (as they noted) often new, information about the annuity marketplace, retirement savers and typical annuity buyers. In turn, we listened to the DOL’s thought process and intentions behind the Rule. They frequently expressed their desire to listen and learn so they could “get it right” for consumers.

Americans for Annuity Protection (AAP) would like to share what we learned and, more importantly, to consider what we think it means.

WHAT WE LEARNED

1. When You BECOME a Fiduciary

The current five part test is replaced with a new four part test (which remains unchanged from the 2010 Proposal) which states:

A person will be deemed to provide investment advice if that person provides advice in any one of the following four categories:

1. Investment recommendations: a recommendation as to the advisability of acquiring, holding, disposing of or exchanging securities or other property, including a recommendation to take a distribution of benefits or a recommendation as to the investment of securities or other property to be rolled over or otherwise distributed from the plan or IRA;
2. Investment management recommendations: a recommendation as to the management of securities or other property, including recommendations as to the management of securities or other property to be rolled over or otherwise distributed from the plan or IRA;
3. Appraisals of investments: an appraisal, fairness opinion, or similar statement whether verbal or written concerning the value of securities or other property if provided in connection with a specific transaction or transactions involving the acquisition, disposition or exchange of such securities or other property by the plan or IRA; or
4. Recommendations of persons to provide investment advice for a fee.

WHAT IT MEANS

Test number one appears to be the most frequent application for fixed annuity IRA transactions. While the language throughout the regulation is unclear as to the point in the process when “education” becomes a “recommendation,” this test poses the greatest concern.

We interpret it as essentially the “source of funds” test. Specifically, the phrase “as to the advisability…” Today it is generally accepted in most states that anyone (regardless of licenses held or not held) can have a general discussion with a client or prospect regarding market risk, diversification, market volatility, etc., and not be considered an investment advisor and, therefore, not a fiduciary. However, this language appears to lose the distinction between education and recommendation, and those general discussions might fall under “the advisability” clause.   It appears to many that any discussion about a specific annuity and its features is not education and is investment advice triggering the fiduciary duty.

2. When Education Becomes Investment Advice

Unlike the current law (IB 96-1), the new proposal includes a condition that none of the information and materials may include recommendations with respect to specific investment products or investment managers or the value of a particular security or other property. Specific alternatives or distribution options available under a plan or IRA may not be provided unless such alternative or option is specified by the plan participant, beneficiary or IRA owner.

WHAT IT MEANS

If an agent must steer clear of discussing “the advisability of disposing securities,” what else can she say - and when might she inadvertently trigger the fiduciary duty? This narrowing of IB 96-1 will limit the types of information brokers, bankers, consultants, sales and investor relations personnel can provide to retail plans and IRAs without incurring fiduciary status. But limited information is never good for consumers.

We raised this concern with DOL, and Director Joe Canary clarified and explained that the different features of any specific annuity (i.e., surrender period, bonus, company, etc.) is considered education by the department. The fiduciary duty is triggered, he explained, when the agent or advisor recommends the purchase of the specific annuity.

In turn, AAP offered this scenario to Mr. Canary: Agent A talks about Company X’s Annuity. Agent A explains the features, the surrender, the MVA, etc. and says “well Betty, what do you want to do next based on all the criteria we discussed?” Agent B has the same conversation but says “well Betty, I think you should buy this annuity because it meets all the criteria we discussed.” Joe confirmed that Agent A has stayed within the bounds of education and Agent B has triggered a fiduciary duty.

3. When You are Exempt from the Prohibited Activities (PTE 84-24)

The most significant prohibited transaction for sellers of fixed annuity is, “in the Department’s view,” the receipt of a commission on the sale of an insurance or annuity by a fiduciary that made the recommendation. However, the new proposed PTE 84-24 retains the safe-harbor for non-securities insurance and annuities (i.e., fixed annuities). Unfortunately, the DOL staff told us there are many interested parties “including those from the annuity industry” who are asking them to either retain the variable annuity exclusion as well - or prohibit both.

WHAT THAT MEANS

As in the 2010 proposed rules, fixed annuity commissions will continue to be “okay” under the proposed safe harbor. This much is good to avoid the onerous and difficult task of navigating through the deep and complex compliance and legal waters the PTE prescribes. Unfortunately, the commission must be “reasonable” with no definition or even guidance on what “reasonable” means.

However, the proposal does not exempt the following types of compensation: revenue sharing, administrative fees, marketing payments and payments from a source other than insurance companies.

We need to fight hard to retain the current safe harbor and push that annuities are insurance against the risk of outliving your savings, with growth potential along with paying guaranteed income or a death benefit.

We must also establish our own definition of “reasonable” based on today’s marketplace standards and practices.

4. When You Sell a Fixed Annuity IRA For a Commission (use the Exemption)

It doesn’t matter if you are already an investment advisor, or a broker or an insurance agent. The proposed Rule would require that all categories of advisor comply with the new standards. The new requirements are that the individual adviser and the firm employing that adviser or agent, must “adhere to” the “Impartial Conduct Standards” which follow the “Best Interest Contract Exemption.” In that regard, the advisor or agent is required to:

1. Contractually acknowledge fiduciary status and do so annually;
2. Commit to adhere to basic standards of impartial conduct;
3. Adopt policies and procedures reasonably designed to minimize the harmful impact of conflicts of interest;
4. Disclose basic information on their conflicts of interest; and,
5. Provide detailed disclosure of fees associated with investments and the compensation received by investment advice fiduciaries in connection with the transactions.

WHAT THAT MEANS

The Department offers the rationale that “the exemption ensures that IRA owners have a contract-based claim to hold their fiduciary investment advisers accountable if they violate basic obligations of prudence and loyalty.” This essential requires a written contract that must be reviewed by an independent fiduciary, and under which the advisor or agent is liable for any breach. An unaddressed issue is whether the firm behind the advisor or agent will be independently considered liable for a breach. It is all too common for insurance companies to disavow an agent after receiving a consumer complaint, thereby attempting to limit the firm’s responsibility for the agent’s actions.

In addition, the agent and the insurance company would be required to maintain or cause to be maintained for six years and disclosed upon request the records necessary for the Department, Internal Revenue Service, plan fiduciary, contributing employer or employee organization those members are covered by the plan, plan participant, beneficiary or IRA owner, to determine whether the conditions of this exemption have been met.

CONCLUSION

Nothing is final. We still have detractors to our goal of ensuring all Americans have affordable access to annuity advice from the experienced professional of their choice.

The Consumer Federation of America praised DOL’s redraft, stating in its comment letter that “because of loopholes in the definition of fiduciary investment advice under ERISA, broker-dealers, insurance agents and other sales-based ‘advisors’ are able to evade their fiduciary responsibilities to put the interests of their customer first. When they recommend high-cost, risky or otherwise inferior investments because they happen to be highly profitable for the seller, the retirement saver can end up paying a heavy price in the form of tens of thousands of dollars of lost retirement income.”

AARP supports the Department’s determination to reconsider its 1975 regulation and to provide that anyone who offers investment advice for a fee or other compensation, direct or indirect, be considered a fiduciary under the Act.

Secretary Perez says there is a “misalignment between the person giving advice and the best interest of the client and [t]he suitability standard is facilitating this misalignment.” There has been an “undeniable shift toward the need for a best interest standard,” Perez added.

In the face of all this commentary, we must engage in a grassroots effort with legislators to show how fixed annuity buyers are better served by the current state regulatory framework. In addition, we must show that any protections that could be added, can be accomplished with a less prescriptive, paper intensive, and confusing proposal. The existing proposal will cause the wholesale disruption of today’s fully functioning, well-regulated annuity marketplace with the highest consumer satisfaction of any other retirement or investment marketplace.

When you are called to action, either by your own trade association, or Americans for Annuity Protection, YOU MUST TAKE ACTION! Legislators can help us maintain the existing annuity protections and well-regulated marketplace without your support! If you don’t, be prepared for less competitive products, less innovation and product choice, sales disruption in the short term, more expenses and legal exposure for your business in the long term. Your clients deserve better, consumers deserve annuities for their financial prosperity.

Americans for Annuity Protection

WE PROTECT ANNUITIES! ANNUITIES PROTECT AMERICANS!

Kim O’Brien, The Annuity Advocate, was president and CEO of the National Association for Fixed Annuities for 12 years. Before then, she worked in the industry in many capacities, including product development. Contact Kim at [email protected].

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