Insurers and financial brokers who advise workplace retirement clients are feeling pressure from the Biden administration to apply a strict fiduciary standard of care on all their transactions, even when some of those sales wouldn’t qualify under the law.
The U.S. Labor Department has begun enforcing a Trump-era regulation that is forcing financial professionals to adjust their business plans to qualify for exemptions that let them earn commissions on the advice they give. Fiduciaries are otherwise prohibited from profiting off their advice.
One-time advice to transfer assets from a workplace plan into an annuity or individual retirement account may qualify as fiduciary advice under the DOL’s latest interpretation of that rule. That’s putting a stranglehold on an insurance industry that’s spent years trying to avoid a standard that critics say can be costly for the professionals who offer advice and the investors who receive it and may not want it.
“It looks like the world is coming to a one-size solution, which is that we’re almost always going to assume it’s fiduciary advice and we’re going to assume we need one exemption or the other to avoid violating the law,” said Fred Reish, an employee benefits partner at Faegre Drinker Biddle & Reath LLP in Los Angeles.
The policy of the department’s Employee Benefits Security Administration last year, which had been that it wouldn’t enforce the regulation, expired last month meaning the exemption and the department’s interpretation of it are now effective.
The insurance companies Reish advises are applying the latest fiduciary exemption to almost all of their rollover recommendations because it would be too costly to discern the varying relationships independent agents have with their own clients. Companies are absorbing additional legal liabilities and installing comprehensive disclosure programs that are expensive to maintain and insure.
“Everything is in play now,” he said. “The prohibited transactions exemptions are needed; the fiduciary definition applies. We’re past the effective date, past the non-enforcement policy into the ultimate compliance period.”
The DOL guidance from April said one-off advice may meet the “regular basis” component of a legal test defining fiduciary status if it’s part of an ongoing advisory relationship.
Fixed-rate annuities that guarantee a set interest rate on the money invested probably don’t meet that definition because a client wouldn’t need advice to adjust their investments based on market fluctuations; their rate of return is already set. That differs from variable annuities which change often and require careful client-adviser monitoring or fixed-indexed annuities which may or may not change according to an index the investor sets.
That hasn’t changed the way his clients are treating all three types of annuities, Reish said.
“The insurance companies and broker-dealer companies have said to me, ‘Fred, we can’t deal with it at that level. We have to have a program that treats them all the same,’” he said. “All of my clients are just assuming that they’re all fiduciary recommendations—that they all are going to be having ongoing financial advice.”
Stakeholders disagree on the consequence of a one-size-fits-all approach to rollover recommendations.
The biggest difference between fiduciary advice and other standards such as the best-interest provision used by the Securities and Exchange Commission is cost, said Jim Szostek, vice president and deputy for retirement security at the American Council of Life Insurers.
Regulatory scrutiny the department places on insurers and their agents under the fiduciary exemption means companies are spending time and money ensuring they’re properly applying the standards set out under the rule. Those costs are passed down to the consumer, even if a fiduciary adviser can charge a commission rather than a flat fee.
“The two standards protect consumers, but they vary by the size of assets,” he said. “If you’ve got $250,000 set aside for retirement, you probably can engage a fiduciary for advice. If you’ve got $50,000, you may not be able to afford it.”
But companies have been offering fiduciary advice to clients with different economic backgrounds for decades, said Mitch Shames, founding and managing director of Harrison Fiduciary Group LLC in New York. He said he struggles to see why insurance agents or broker-dealers would keep advice to a single instance other than to avoid more federal regulation.
“It’s not surprising that insurance companies are pushing back and they’re pushing back hard. It’s a huge industry and they’ve largely been free of fiduciary rules for a long time,” Shames said. “But the fiduciary rules are a robust set of principles that are designed to protect retirement assets.”