On October 31, the Department of Labor (DOL) released its new proposed fiduciary rule (which they renamed the retirement security rule). The proposal triggered immediate and intense opposition from NAIFA and from most of the retirement savings community.

The proposed rule, if finalized without modification, would impose a fiduciary duty on advisors who are giving advice, even if it is one-time only advice:

• to employer-sponsored plans,
• on rollovers from employer plans to IRAs, and
• on non-securities type annuities (e.g., fixed annuities).

The proposed rules would also apply to other tax-favored savings plans with funds that can be invested; e.g., health savings accounts and the various kinds of education savings accounts.

The proposed new rule is accompanied by proposed changes to several existing prohibited transaction exemptions (PTEs). The two key PTE modifications would allow fiduciary retirement advisors to be paid via commission (or other forms of otherwise prohibited compensation due to conflicts of interest). The two proposed-to-be-modified PTEs are PTE 20-02 (already widely used by investment advisors and broker-dealers) and PTE 84-24, the “insurance” PTE which under the proposed modifications would be limited to independent insurance agents (i.e., those who sell products from two or more insurers).

Modifications to PTE 84-24: Eligibility for this PTE would be limited to independent advisors (those selling annuities and other non-securities products not covered by the Security & Exchange Commission’s (SEC’s) Regulation Best Interest (Reg BI)). An independent advisor is defined as one who is not an employee of an insurer and who sells for two or more insurers. Advisors who do not meet this definition and who are subject to the fiduciary rule and whose compensation would be considered a conflict of interest would have to rely on PTE 20-02.

In addition to the requirement that investment advice must be in the best interest of the retirement investor (i.e., advice must reflect the care, skill, prudence and diligence that under the circumstances a prudent person would use), the PTE (as modified and currently) could not put the interests of any party ahead of the interests of the retirement investor, could receive only reasonable direct or indirect compensation, would have to comply with federal securities laws regarding “best execution,” and could not make written or oral statements about recommendations that are materially misleading.

Further, an independent advisor relying on PTE 84-24 would have to acknowledge his/her fiduciary status and must provide a written statement of the amount of commissions paid in connection with the purchase of a recommended annuity.

Other requirements in the modified PTE 84-24 include a rule that the combined total of all fees must be reasonable, an obligation on the insurer to identify and eliminate “quotas, appraisals, bonuses, contests, special awards, differential compensation, riders, and other similar forms of compensation that “a reasonable person would conclude are likely to incentivize an independent advisor to provide recommendations that do not meet the Impartial Conduct Standards.”

The six-year record-keeping requirement would be modified to require that these records be made available to state and federal regulators; plan fiduciaries, contributing employers; and participants, beneficiaries, and IRA owners. There are also new rules that require insurers to monitor independent advisors through increased oversight responsibility.

Modification to PTE 20-02: Generally, PTE 20-02 is largely unchanged, but there is one key provision: even one-time initial advice on a rollover would trigger fiduciary duty and thus require full compliance with all the rules of PTE 20-02.

The proposed regulation is posted at: https://www.regulations.gov/document/EBSA-2023-0014-0001

The proposed changes to PTE 2020-02 are at: fiduciary--proposed-amendment-to-pte-2020-02 10 31 23.pdf

The proposed changes to PTE 84-24 are posted at: https://www.regulations.gov/document/EBSA-2023-0016-0001

NAIFA outside counsel analysis of proposed rule link

Effective Dates: The proposed new rules would have an effective date of 60 days after publication in final form in the Federal Register. This is considerably shorter than the effective dates proposed for the 2010 rule, which was 180 days after publication. It is also functionally shorter than the effective date of the 2016 rule (which was overturned by the courts)—that effective date was also 60 days after publication in the Federal Register, but it also had an applicability date of eight months after publication of the final rule.

Comments: DOL established a comment period that will remain open until January 2, 2024. In addition, the agency plans to hold a public hearing on the proposed new rules package 45 days after publication (i.e., on or around December 18). A hearing prior to close of the comment period is unusual, to say the least. Stakeholders, including NAIFA, are currently preparing comments on the rules package. NAIFA joined with other stakeholders in a letter making a formal request to DOL to extend the comment period by 60 days, move the hearing to after the close of the initial comment period and add a 30-day comment period after the hearing.

Reactions: Reaction to the Department of Labor (DOL) proposed new rules on fiduciary duty for advice on retirement investments is intense. The initial reaction ranges from outright (and outraged) opposition, to pointing out areas of needed clarification, to strong support (from the White House and some consumer groups). Expect vigorous lobbying and many official comments and a fairly lengthy time frame before the outcome of this battle can be predicted.

 “Junk Fees:” First, there is near unanimous outrage in the retirement savings community over the White House’s characterization of retirement advice compensation as “junk fees.” Even some of the proposal’s supporters are privately opining that the characterization of advisor compensation as “junk fees” is not going to be helpful in an effort to finalize the rules.

Extended Comment Period: Numerous individual companies and coalitions of companies and trade associations have submitted formal requests for a longer comment period (to at least 90 days). There are also requests to move the hearing to after the close of comments, with an additional 30 days to respond to comments delivered at the hearing. NAIFA signed a joint trades letter making these requests.

 Lawmaker Reaction: Generally, Congressional Republican lawmakers share the industry’s outrage over the proposed regulations. For example, House Education & the Workforce Committee Chair Rep. Virginia Foxx (R-NC) has written a scathing letter to DOL lambasting the proposed rules changes. She called this new package of proposals “new lipstick on the same old pig.”

Democrats, however, are mostly in the “still studying/seeking input from constituents” mode. That is not to say that a fair number of Congressional Democrats will ultimately decline to support the proposals, although certainly some will. But it is likely that a considerable number will want to help once they have a fuller understanding of the proposed package’s impact, especially on middle-class retirement savers. NAIFA’s grassroots and in-DC lobbying will help with that.

And, the National Association of Insurance Commissioners (NAIC) issued a statement saying that the NAIC fundamentally disagrees with the DOL and its proposed rules changes. In particular, the NAIC said that it “fundamentally disagrees with the White House’s characterization of state consumer protections for annuity products.” The White House argues that NAIC’s Suitability in Annuity Transactions Model Regulation $275 is inadequate and less robust than the SEC’s Reg BI or an ERISA fiduciary standard.

Modifications: Already numerous areas of needed clarification have been identified, and more are likely to come to light as experts become more familiar with this behemoth package of rules changes. Among the questions that need answers is just what constitutes the “relationship of trust and confidence” which is the underpinning of DOL’s imposition of a much broader fiduciary rule. The proposed regs and PTE changes eliminate the need for a “mutual agreement required for a relationship of trust and confidence,” and that raises the question of what does establish such a relationship. There are also jurisdiction questions especially with respect to DOL’s authority to regulate IRAs (and investments in them). Also needing clarification is whether IRAs/IRA owners without any employer-provided retirement plan assets are also subject to this rule.

Other areas where clarity is lacking include precise definitions within the Impartial Conduct Standards—e.g., just exactly what is “differential compensation?” What is required for insurer supervision over independent advisors? What other investments (besides those cited as examples in the proposed rules) constitute “non-securities annuities or other insurance products not regulated by the SEC”? Do these rules impact the rules relating to pension risk transfers?

The rules are also unclear as to the frequency and scope of disclosures required under the Impartial Conduct Standards. How do these rules interact with the QPAM rules? What assets (e.g., crypto?) are impacted by the statement that these new rules are needed to address investments not within the jurisdiction of securities laws?

Litigation: It is widely expected (by both opponents and supporters of the proposed new rules) that there will be a court challenge to them once they are finalized (assuming lack of modification that resolves the many concerns that surround the proposal). Those lawsuits, however, are months into the future given the time it will take to analyze, comment on, potentially modify, and finalize the proposed rules. And all of that will precede any litigation that might arise between retirement investors who could allege violation of the rules by their retirement investment advisors.

Prospects: This is just the beginning of the newest battle over fiduciary responsibility in the retirement savings space. NAIFA is fighting the proposal at both the grassroots and in-DC levels, analyzing the proposal, and working with industry allies to develop the best strategy for fighting it. If you haven’t already responded to the November 9 Action Alert, please “Take Action” and tell our lawmakers we need them to fight the DOL and protect Main Street Americans.

NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; or Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.