401(k) Advice Rule Puts Insurers on Well-Trodden Compliance Path

The Labor Department’s newest iteration of a 401(k) investment advice standard has raised concerns from a life insurance industry gearing up for its implementation, even as the rule’s history means compliance groundwork already exists.

Annuity providers and insurance agents who handle newly-covered rollovers won’t be completely sidelined under the final rule and prohibited transaction exemptions, so long as they are willing to adjust and spend to meet stricter requirements for disclosures and compensation, several benefits lawyers told Bloomberg Law.

Life insurers and independent producers have been among the most vocal critics of the rule’s potential impact on rollover recommendations into annuity products.

But they have one advantage in that they’ve been aware of potential compliance hurdles well before the rule and amended exemptions were finalized in April. Some life insurers have even operated under a similar Obama-era fiduciary standard that went into effect briefly before it was overturned in 2018, as well as under the US Securites and Exchange Commission’s more recent Regulation Best Interest.

The fiduciary rule aligns with some of the reporting requirements under the SEC’s 2019 standard requiring broker-dealers to consider a retail investor’s “best interest,” which faced similar pushback but hasn’t undermined the business models of the firms it applies to, said John La Monica, director of compliance consulting firm ACA Group.

“I think if you look at the proposal versus the adopted rules, I think the DOL has definitely taken the issues into consideration,” he said. “I get the impression that it is definitely not their intent to decimate the insurance industry.”

Rising to the Occasion

The new fiduciary rule is facing a challenge from an insurance industry trade association in a Texas federal court, as well as a Congressional Review Act resolution on Capitol Hill, but there are no guarantees that either will succeed in killing the regulation before its initial compliance date in September.

Policy overhaul may be necessary for some annuities sales firms now covered by the Biden fiduciary rule to conduct retrospective compliance reviews to assure the independent producers selling their products adhere to the insurer’s own policies and new DOL impartial conduct standards. Those standards for impartiality include the requirement that advice providers charge only “reasonable” compensation for their recommendations.

Investment professionals whose one-time advice for retirement savers will soon fall under the new fiduciary definition will need to beef up disclosures around conflicts of interest that will land in the category of prohibited transactions involving plan assets under the new rule.

“I don’t necessarily think it’s an insurmountable thing to put into place,” said Lori Basilico, partner at Locke Lord LLP. “It just creates these roadblocks for insurance companies to do this, and it may just be their preference that it’s not worth it to do this any longer.

The DOL’s Employee Benefits Security Administration, which promulgated the rule, has argued it is necessary to prevent conflicted advice on rollovers into individual retirement accounts or annuities that it says costs retirement savers dearly.

Retirement plan participants rolling their assets into annuities will save an estimated $32.5 billion in the first 10 years after the rule becomes effective and double their savings over the next decade after that, according to Morningstar data.

But opponents like Finseca have pushed back, saying that the rule would effectively ban the commission-based sales that agents making recommendations have typically used, undermining the industry’s business model. The American Council of Life Insurers has cited a 2017 industry-sponsored Deloitte study on the effects of the 2016 Obama-era rule that found that 48% of firm respondents had or were considering eliminating annuity products from their plan offerings.

The National Association of Insurance Commissioners also criticized the new Biden final rule, saying it ignores the progress 46 states have made by adopting its Suitability in Annuity Transactions Model Regulation and restricts the ability to sell annuities.

Basilico said she has been fielding many inquiries from insurer clients since the final rule and amended exemptions came out. Insurance companies will face additional burdens to police fiduciary conduct, and if annuity sales comprise a small segment of their overall business, they may not consider a costly compliance process to be worth the effort.

But despite those challenges, with the background of the proposed rule, companies are in a position to simply fine tune their compliance to incorporate the nuances of how the rule has changed from its proposed to final form, Basilico said.

“I am not getting the questions I did when the rule was first proposed asking, ‘oh my gosh, how do we do this?” she said.

Time to Comply

The rule’s implementation rollout is staggered, with an initial effective date of Sept. 23, followed by an additional year-long phase-in period until a final 2025 deadline. During that window, insurers and agents who deem it worthwhile to incorporate additional disclosures and safeguards into their sales model can tweak their disclosures to comply, according to Aaron Szapiro, head of government affairs at Morningstar.

“This is a flexible regulation, it does not ban any particular business model,” he said. “The insurers sell a product that is potentially quite valuable for people who are in a [defined contribution] system, so I don’t really see any reason why they couldn’t make those recommendations in retirement investors’ best interest.”

Asset managers, who had sharply criticized the Obama-era rule, were prompted to innovate when that version of the rule was briefly in effect, changing the way they delivered their services and compensation models, according to Szapiro.

He attributed the asset management industry’s less emphatic response to the Biden DOL rulemaking to being better prepared after revamping its practices for compliance with the 2016 fiduciary rule and Reg BI.

The widespread adoption of practices by annuities providers aligned with the SEC standard has even been cited as a reason that a new fiduciary standard would be redundant by insurance industry stakeholders.

Reg BI’s care obligation, for example, already requires financial professionals to consider reasonably available investment alternatives when recommending an annuity to an investor.

For those facing fiduciary obligations for the first time under the new DOL rule, taking additional steps and investing in compliance on the front end could present a money-making opportunity for those still recommending annuities under the new heightened standard, according to Megan Monson, partner at Lowenstein Sandler LLP.

“For some, it may result in kind of inadvertent footfalls, because they’re not as familiar with having to build this into what they’re doing day-to-day,” she said. “But I’d also expect the fees that they’re charging for these types of services to increase simply because there’s a lot more due diligence that they have to undertake when making these recommendations.”