The Department of Labor (DOL) is calling out the insurance industry in its latest fiduciary proposal. As a result, insurance organizations and professionals say they’re being unfairly singled out.
When the DOL issued its proposal, otherwise known as the “Retirement Security Rule: Definition of an Investment Advice Fiduciary,” critics accused the Biden Administration of unreasonably cracking down on the insurance industry, arguing that insurance agents should not be subject to federal legislation it previously had no affiliation with, and especially without a governing institute overseeing their practices.
Under the proposed three-part test (a new version that would replace the DOL’s original five-part test), insurance agents who sell or recommend guaranteed lifetime income products would be deemed fiduciaries, and be subject to the Employee Retirement Income Security Act of 1974 (ERISA). Specifically, agents who make one-time suggestions to roll over an individual retirement account (IRA) or a 401(k) into an annuity would now be considered fiduciaries, and as a result, vulnerable to potential litigation under ERISA.
It’s a change from past proposals that critics say would burden agents with more regulations. “NAIFA is particularly disappointed that the DOL is trying to saddle advisors and consumers with an additional layer of regulations when the stated goals of the proposed rule are already being achieved by the Securities and Exchange Commission’s Regulation Best Interest and state measures based on the National Association of Insurance Commissioners’ model best interest regulation for annuity transactions, both of which provide robust consumer protections and require financial professionals to work in clients’ best interests,” wrote the National Association of Insurance and Financial Advisors in a statement following the proposal’s release.
E&O insurance changes?
The proposal has led some to wonder how insurance institutes will adjust and adapt if the rule becomes law, and whether professionals would be guarded under errors and omissions (E&O) insurance, a liability coverage that protects insurance agents against claims of insufficient work or negligence. Currently, E&O insurance does not protect against fiduciary liability.
Whereas retirement plan advisors and financial professionals are accustomed to hearing and learning about their fiduciary status, Michelle Richter-Gordon, co-founder of Annuity Research and Consulting LLC, worries that won’t be the same experience for insurance agents.
Critics note that labeling investment advisors as fiduciaries isn’t the problem per say; it’s the idea that they’re subject to ERISA—a body of law that isn’t familiar to them—that’s lead to the pushback.
“Independent agents won’t even know whether their E&O insurance includes fiduciary coverage or not, and they won’t know to ask about it,” Richter-Gordon said in an interview with 401(k) Specialist. “If you were talking to plan advisors, they know it’s important, but that’s because they have been living in that space for a long time and they have institutions there to tell them that it’s important. But, who will be there to tell that to independent agents?”
It’s steered others to question whether independent marketing organizations (IMOs), institutions who provide support to insurance agents and establish partnerships between insurance carriers and insurance professionals, will take on the responsibility of negotiating E&O insurance for independent agents.
“If you were talking to plan advisors, they know it’s important, but that’s because they have been living in that space for a long time and they have institutions there to tell them that it’s important. But, who will be there to tell that to independent agents?”
Michelle Richter-Gordon, Annuity Research and Consulting LLC
The DOL had previously declined to outright call IMOs “financial institutions” in 2016, but later allowed some organizations to apply under a proposed class exemption. If granted, it would allow IMOs, along with the insurance agents they partner with, to continue selling indexed annuity products on commission.
However, along with the exemption came high standard for IMOs to apply. For example, organizations who applied had to have produced an average of $1.5 billion in annual fixed annuity premiums over each of the three prior fiscal years, among other requirements.
While no word has been issued from any IMOs yet on the latest plan, the last DOL fiduciary proposal in 2016 saw at least five organizations apply to become financial institutions.
Next steps
While trade groups call on the DOL to extend the proposal’s comment period past its original new year date, experts say the agency could be vying for an aggressive timeline.
A recent National Association for Fixed Annuities (NAFA) webinar noted that the DOL may attempt to finalize the rule as soon as possible, in an effort to avoid possible revocation from Congress under the Congressional Review Act (CRA).
Tyler Brown, associate vice president of Government Affairs at Sammons Financial Group Companies, and a panelist at NAFA’s webinar, says he anticipates seeing a finalized version of the rule as early as Spring 2024. “If they wait too long, it opens the door to use the Congressional Review Act to overturn the rulemaking,” he said.
For a congressional resolution of disapproval to pass, it requires the president’s signature or a majority vote of two-thirds of both the House of Representatives and the Senate. But, depending on how the election cycle sways in 2024, the DOL could be moving quickly to avoid possible termination, Brown added.
In the meantime, professionals should look to webinars, reading materials, and their IMO partners for further advice. “The main thing you should be doing is attending webinars, reading as much as you can about implementation of the rule and what partners are doing to become prepared for the rule,” said Brown. “Rely on some of that expertise that comes from your partners.”
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