DOL fiduciary rule causing DC-plan record keepers to change business with insurance agents

Principal has communicated that independent agents must change their business models to keep receiving compensation

Jul 24, 2017 @ 3:19 pm

By Greg Iacurci

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Independent insurance agents have been among the most affected by the Department of Labor's fiduciary rule, and it appears some defined-contribution-plan record keepers have been contributing to that upheaval.

Record keepers such as Principal Financial Group have told independent agents who sell or service retirement plans, and who are not licensed with a broker-dealer or registered investment adviser, that they can't receive compensation after January without changing their business model, in the name of compliance with the regulation.

As of July 1, Principal is only accepting new sales of group variable annuities — a type of DC-plan funding vehicle — that are made as a securities-licensed adviser of a broker-dealer or RIA, or if agents "have a non-fiduciary (education only) fee-for-service arrangement directly with the plan sponsor," according to a company memo reviewed by InvestmentNews.

Principal also told agents to validate their new model for existing client business by Sept. 1, and that compensation will stop in January for any business where the firm doesn't have validation of a compliant model.

A Principal spokeswoman wasn't able to comment by press time.

Some observers, such as Marcia Wagner, principal at The Wagner Law Group, believe this is a route several record keepers of DC plans will take.

Such compliance steps would be ones taken by insurance-company record keepers. There are a few different funding vehicles for a 401(k) plan: a basic trust agreement, custodial arrangement or group insurance annuity contract, Ms. Wagner said.

Group variable annuity contracts fall under the latter, sold largely to smaller employers by insurance companies.

Nathan White, managing principal at SLW Retirement Plan Advisors, which oversees roughly $750 million in DC assets, said he's heard from insurance agents that Voya Financial has communicated plans similar to Principal's. But not all companies are going this route. Based on his conversations, Mr. White believes that John Hancock hasn't initiated similar plans.

Spokespeople for Voya and John Hancock didn't return requests for comment.

Gregory Tucker, spokesman for Transamerica, another insurance-company record keeper of DC plans, said the firm is "awaiting further clarity with respect to the final form of the rule before making changes to the compensation structure for affiliated financial advisers and others who may be affected by the proposed requirements."

Prudential Financial spokeswoman Frances Denmark declined comment because independent agents "are not a key part of Prudential's business."

The Trump administration is currently reviewing the fiduciary rule, and may delay or change the regulation due to that exercise. Some of the rule's provisions went into effect in June.

"To me, any steps being taken to worry about the Jan. 1 date have to be tempered with the knowledge that things may change significantly and probably will change significantly by the start of the year," said Andrew Oringer, partner and co-chair of the employee benefits and executive compensation group at Dechert.

The fiduciary rule, which raises investment-advice standards in retirement accounts such as 401(k) plans and IRAs, has had far-reaching effects on the retirement industry, and record keepers and other parties have responded in numerous ways. Independent insurance agents have had a more difficult time than most complying with the rule.

To continue receiving variable forms of compensation like commissions and 12b-1 fees from retirement plans after January, when the rule is scheduled to fully take effect, brokers and agents must comply with a portion of the rule known as the best-interest contract exemption.

However, BICE is only available to brokers and agents who are representatives of a "financial institution," including broker-dealers, RIAs, banks and insurance companies. Many independent agents aren't affiliated with such institutions.

"As an independent insurance agent, you are likely not eligible for the BICE," states the Principal memo, which was published in May.

In order for agents selling Principal products to receive compensation for these retirement plans after Jan. 1, they must find an organization that can acknowledge fiduciary status under BICE, assess a level advisory fee under an RIA, or adopt a non-fiduciary, education-only model, according to the company memo.

Under the latter model, the agent wouldn't receive commissions or provide investment recommendations or suggestions, but would serve in a purely educational role to clients.

Mr. White of SLW Retirement Plan Advisors said some independent agents he's spoken with are planning to pursue the non-fiduciary route, whereby they provide services such as participant education meetings or help manage retirement-plan vendors.

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