The insurance industry really doesn't like the DOL's proposed rule

The Biden administration has singled out annuities in the DOL’s proposed fiduciary rule, and the stakes are high for independent insurance agents.

In the long-awaited proposal released Tuesday, the Department of Labor explained that financial professionals who make one-time recommendations for rollovers from 401(k) plans to annuities will not get a free pass on fiduciary status. Aspects of the proposal echo those of a 2016 rule in the late days of the Obama administration — one that was dismantled in court two years later and replaced by a more industry-friendly rule in the Trump era.

The proposed changes will almost certainly make it more difficult to sell annuities via 401(k) rollovers.

In comments Tuesday, President Joe Biden called out annuity sales in particular, noting that some advisors are “putting their self-interest ahead of their clients’ best interest. And they’re scamming Americans out of hard-earned money.”

The industry's reaction was immediate. Even before the text of the actual rule proposal and amendments to several prohibited transaction exemptions were published, trade and lobbying groups issued statements rebuking the administration. The Insured Retirement Institute said in a statement that the DOL would “needlessly cause millions of lower- and middle-income workers to lose access to the financial advice they need.” The American Council of Life Insurers said that Biden conflated “legitimate retirement costs with junk fees,” which “is a scare tactic to push regulations that will hurt Americans in need of greater financial certainty.”

TRICKY EXEMPTIONS

Fiduciary status is a cumbersome title, lawyers noted. Advisors subject to it can’t receive compensation tied to products, unless they use one of several prohibited transaction exemptions — the qualifications for which can be difficult to meet.

Annuities usually pay commissions, which means that those who recommend them through 401(k) rollovers will have to use exemptions under the proposed changes. Insurance company employees will have to use the more stringent one, known as PTE 2020-02, while independent agents would use the less cumbersome PTE 84-24.

That isn’t news to big insurance companies with footprints in the annuities market, as they had prepared for the requirements under the Obama-era fiduciary rule. But independent agents have not had to use exemptions before, so this would be a massive change for them, said Fred Reish, partner at law firm Faegre Drinker.

“Those insurance companies and the independent agents are subject to rules much more burdensome and demanding than anything else they’ve had to deal with before,” Reish said. The insurance companies would have to collect more data on contracts sold through those agents than they do currently under state laws to help ensure that they are adequately monitoring them, he noted.

Insurance companies will likely feel that the requirements put them at greater regulatory risk, and “it will be hard on the independent agents,” as those agents don’t have the legal resources of compliance staffs that insurance companies do, he said.

And even as insurance company employees will have to rely on the much newer, more burdensome exemption 2020-02, big insurers are already operating as if the DOL’s 2016 rule never went away, Reish said. Insurance company statutory employees will have insurers act as co-fiduciaries, he said. “I don’t see this having any additional impact on them, because they’re basically already complying.”

ADVICE, ANYONE?

Compensation for annuity sales takes into account that “you have to do more work to sell an annuity at all” than a mutual fund, said Tamiko Toland, whose firm provides annuities consulting and market intelligence. “There is more licensing … It’s a different type of product — it’s not a fund. [Commissions are] not an unreasonable thing.”

The Biden DOL appears to be focused mostly on fixed indexed annuities rather than variable annuities, as the latter type requires a securities license to sell, Reish said. But part of the reason the agency may be concerned is simply that fixed indexed annuity sales have been rising, Toland said. Unlike variable annuities, fixed indexed annuities don't include mutual funds as underlying holdings, but they link account values to index performance.

The DOL “seems to really suggest that a fee-only model is better … but not everybody has access to that,” Toland said. The proposals would have the effect of shrinking the pool of people who have access to advice, a result that would be at odds with the administration’s goal of improving retirement security, she said. “Those things seem to contradict each other.”

The proposed rule could lead to more money staying within 401(k) plans after people retire, rather than seeing more of that leave through rollovers, which would reduce the access that some people have to lifetime income products, Toland said.

While the DOL and Congress have moved to make 401(k) plans friendlier to in-plan annuities, adoption of those products has been slow at best.

Even if a side effect of the DOL’s proposal were to increase use of in-plan annuities at the expense of those sold through rollovers, “that is not going to change the situation for anybody retiring within the next two years,” Toland said. “Inside and outside the plan are really different environments, and you have less choice within a plan.”

STAYING IN-PLAN

Bonnie Treichel, chief solutions officer at Endeavor Retirement, said that in-plan options could become more attractive, but “only to a point.”

“In-plan solutions and the out-of-plan solutions are different markets due to the average account balance of who these solutions are targeting and when," Treichel said in an email. "The new in-plan solutions that are innovative and low-fee coming to market today are not the same target audience as the retail consumer for out of plan annuities.”

If the proposed rule leads to more difficulty rolling money out of plans, whether for insurance products or mutual-fund-based IRAs, employers in many cases would welcome that, as many want to keep participants’ assets in-plan after they leave their jobs, she noted. “When enough of these forces collide — regulation, paternalistic plan sponsors, etc., then it makes sense for money to stay in plan.”

Today, there are a variety of in-plan annuities and guaranteed minimum withdrawal benefits available for target-date funds, but “usage isn’t high,” Reish said.

“There is very little that I have seen with independent annuities in plans, and I don’t know if that will change” in connection with the DOL’s proposals, he said.

The agency is collecting public comment for at least 60 days, after which it will make revisions to the proposed rule and PTE amendments and then send a final version to the Office of Management and Budget. While the DOL is likely open to suggestions to improve the proposal's provisions, it probably won’t budge on the overall concept of making one-time advice a fiduciary obligation, Reish said.

“The DOL is wed to the idea that a rollover recommendation should be fiduciary advice,” he said. “These discussions about the broad concepts have gone on now for closing in on 10 years … Positions on that in the industry and in the department are fully formed.”