DOL hearing parses intersection of ‘best interest’ and annuity sales

Insurance industry advocates and Department of Labor officials wrestled Wednesday over how annuity sales can be conducted in a customer’s best interests without the insurance agent being held to a fiduciary standard.

The discussion was a highlight of the second day of hearings on the agency’s proposal to raise investment-advice standards for retirement savers. Under the retirement security rule proposal the DOL released in October, almost all retirement investing advice would be held to the fiduciary standard in federal retirement law, regardless of whether it is being given by an investment advisor, a broker or an insurance agent.

The agency has said it is trying to establish a consistent regulatory framework to protect investors from conflicted advice when they’re working with an advisor in a relationship of “trust and confidence.”

The DOL has cited sales of fixed indexed annuities as an example of a situation where sales incentives can amount to “junk fees” that line an advisor’s pockets while diminishing a customer’s nest egg.

The insurance industry is strongly resisting the proposal, asserting that it will unfairly make annuity transactions a fiduciary act and curb customer access to the products.

Insurance advocates also say annuity sales are governed by a best-interests standard thanks to the National Association of Insurance Commissioners’ revised annuity suitability rule that has been adopted by 41 states.

Witnesses at Wednesday’s hearing said NAIC’s goal was to establish a standard that was stronger than suitability but less than a fiduciary requirement.

“It is not a fiduciary standard but it is a best interest sales standard,” said Tom Roberts, a principal at Groom Law Group who testified on behalf of the National Association for Fixed Annuities. Earlier in the hearing, he said: “It’s crystal clear for the prospective client that the insurance producer is selling.”

But Tim Hauser, DOL deputy assistant secretary, questioned whether it was that simple. He said insurance sales professionals provide individualized advice on annuities, which can often be complex and hard for ordinary investors to understand, while holding themselves out as acting in customers’ best interests.

“From all of that, what is the thing that makes this not a relationship of trust and confidence?” Hauser said.

There’s difference between a “fiduciary relationship of trust and confidence and a professional sales interaction,” Roberts said. “A professional sales interaction is one where the transaction-based producer seeks to understand the individual’s circumstances and seeks to determine whether or not a product that that individual has available for sale meets a customer’s needs. That’s a best-interest interaction that is short of a fiduciary interaction.”

Hauser brought up transactions involving fixed indexed annuities, an insurance product that the Biden administration says is often a source of investor harm.

“What part of the time … are people told: 'Hey, you really do need to think of me as a salesperson?'” Hauser said. “'I’m just here to sell you this product, and I have an obligation to make sure it’s good enough, but I could actually sell you a worse product because it’s better for me financially.' Is that what I’m understanding you’re saying is a relationship? Because I don’t think that’s probably how people hold themselves out in these communications.”

Roberts responded: “You’re scripting a conversation that bears no relationship with any commercial interaction of any kind. Do they understand they’re dealing with a commission salesperson? Of course, they do. They receive a disclosure of the fact that the person they’re speaking to is compensated only if the product is purchased.”

DOL attorney Megan Hansen also pressed the panel on the difference between a best-interest standard and a fiduciary standard when it comes to annuity sales.

Pam Heinrich, NAFA general counsel and director of government affairs, said the NAIC model rule requires insurance professionals to act in the customers’ best interests but does not impose a duty of loyalty. It also “does not rise to the level of the liability exposure” of the fiduciary standard under federal law, she said.

Like many insurance industry representatives, Heinrich took umbrage at the suggestion that sales incentives drive annuity sales. She said annuities are popular because consumers seek the guaranteed income they provide for their retirement.

“People like and need our products,” Heinrich said. “This is why annuity sales are up – not because of nefarious sales practices. The mere fact that insurance producers are paid not for their advice but for completed sales does not render them inferior.”

Dan Moisand, chair of the Certified Financial Planner Board of Standards Inc., said the discussion demonstrated why the DOL’s retirement security rule is needed.

“The American public should not need a glossary to be properly protected with their retirement savings,” said Moisand, principal at Moisand Fitzgerald Tamayo. “It’s very clear to me from this conversation that the standard that should apply is the fiduciary standard.”

The proposal represents the agency’s latest attempt to promulgate an advice rule for retirement savings after an Obama administration rule was vacated by a federal appeals court in 2018. The public comment deadline is Jan. 2. The agency could release a final rule as soon as the first quarter of next year.