Biden Fiduciary Definition Moves Could Wrap In Annuities, IRAs

Retirement advisers who market proprietary investment products and profit from advice they give to workplace investors are bracing for regulatory upheaval next year that for the first time could bind broad sectors of the insurance and financial industries to strict fiduciary obligations.

The U.S. Labor Department’s Employee Benefits Security Administration wants to ensure the advisers who recommend nest egg rollovers into individual retirement accounts or annuities—products that sometimes carry lofty hidden fees—are acting solely in participants’ interests, or at least “best interests,” under the law.

That strict fiduciary standard comes with a slate of provisions that usually prohibit commissions. They apply to any ongoing relationship with clients whose savings originated in workplace plans.

Companies that have never faced fiduciary liability have been rushing to comply with the new restrictions, but EBSA already has announced its intent to reinterpret decades-old fiduciary definitions this year and is poised to move the goalposts on what it means to be a fiduciary.

The agency set a self-imposed deadline to issue that rulemaking in December, but officials are still meeting with industry stakeholders. Any economically significant proposed regulations would have to go to the White House for review before they are released—a process that can take months.

“If DOL proceeds in a direction that requires more financial professionals to adhere to fiduciary status, many consumers would lose access to the financial professional of their choice,” said Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute.

Casting a Wider Net

More investment advisers will go under the fiduciary umbrella on Jan. 31, 2022. The administration’s new interpretation of a late Trump-era prohibited transaction exemption means advisers who meet with clients intending to keep an ongoing relationship are subject to the fiduciary standard on Day One, even if that ongoing relationship hasn’t yet started.

To comply with the law and still make a commission, broker-dealers and the financial institutions they work for must make fiduciary disclosures, comply with strict recordkeeping requirements, and adopt policies and procedures that identify, disclose, and mitigate material conflicts of interest. For financial professionals making first-time rollover recommendations, that’s a new standard of care.

The new definition could eliminate the distinction over first-time advice, casting anyone who talks about investment products with plan participants under the fiduciary net, according to Fred Reish, a partner at Faegre Drinker Biddle & Reath LLP in Los Angeles.

“A new fiduciary definition could provide that, where there is a relationship of trust between a retirement investor and an insurance agent or a representative of a broker-dealer, one-time advice could be fiduciary advice,” he said. “I expect that for all of those fiduciary recommendations there will be rigorous standards of care, disclosures, mitigation requirements, at the least. That will probably have the greatest effect on advice to IRAs and on annuity sales.”

Beyond rollover recommendations, new fiduciary definitions also could target in-plan education. Employers are turning to their third-party service providers such as recordkeepers more than ever post-Covid to help workers budget, save for college, and pay off student loan debt. When that education becomes a product pitch, though, companies could face a fiduciary standard under new rules. If so, they’ll need the exemption to do business.

“I don’t think the DOL is going to say you can’t do participant education, but it’s likely that they’re going to want to be able to make that distinction about when exemption disclosures are necessary,” said Susan Rees, of counsel at The Wagner Law Group.

The exemption may be necessary for the department to continue rolling out bundled service agreements like pooled employer plans—a key part of the 2019 legislative package Congress passed to encourage more employers to help their workers save, Rees said.

Critics say financial professionals won’t look kindly on the regulatory burden.

“We’re looking at change across the board,” said Brad Campbell, a benefits attorney and former assistant secretary of EBSA, the agency that regulates employer-sponsored plans. “A lot of us are probably comfortable with the notion that, yes, people ought to be getting really good advice as they make these big decisions. The issue, as always here, is one of compliance difficulty.”