DOL Fiduciary Rule Add-On Could Boost Annuity Distributors' Clout

What You Need to Know

Producers can still earn commissions.
Insurers can still pay for training trips.
Training cannot be incidental to the event.

An extension of the Labor Department’s new retirement investment advice fiduciary definition could make annuity distributors more powerful than ever.

Labor Department officials talk about the wholesalers’ future role in the final version of the Prohibited Transaction Exemption 84-24 update, which appeared today in the Federal Register, an official government regulatory publication.

The department’s new definition sets new standards for individuals and companies that help retirement savers move assets out of 401(k) plan accounts, individual retirement accounts and other arrangements that qualify for federal retirement savings tax breaks.

The PTE 84-24 update shows how the new requirements will apply to independent insurance agents and brokers who help retirement savers roll qualified account assets into any annuities, life insurance policies, or other insurance arrangements that have an investment component and are not regulated as securities by the U.S. Securities and Exchange Commission.

Labor Department officials want independent producers to avoid any conflicts of interest that could lead them to put their own financial interests ahead of the retirement savers’ interests — and they suggest that insurance marketing organizations, field marketing organizations and brokerage general agencies could be the solution.

“Insurers could choose to comply with the policies and procedures requirement by creating oversight and compliance systems through contracts with insurance intermediaries such as IMOs, FMOs or brokerage general agencies,” officials say in the preamble, or official introduction, to the final version of the PTE 84-24 update.

“Such intermediaries, for example, could eliminate compensation incentives across all the insurers that work with the intermediary, review independent producers’ documentations, and/or use of third-party industry comparisons available in the marketplace to help independent insurance agents recommend products that are prudent for their retirement investor customers,” officials add.

What it means: Life and annuity groups seem likely to challenge the new fiduciary definition and the PTE 84-24 update in court. If the PTE 84-24 update survives and is implemented as written, annuity distributors could end playing an even more important role in annuity sales.

Prohibited transaction exemptions: The Labor Department operates under the Employee Retirement Income Security Act of 1974, a law that applies a strict fiduciary standard to the people and companies involved with running large and multistate employers’ benefit plans.

A fiduciary standard requires the parties subject to the standard to put others’ interests first and to have no conflicts of interest.

The Labor Department often sets rules by developing “prohibited transaction exemptions,” or PTEs, that narrow or expand the opportunities financial services companies have to engage in activities that may conflict with a strict fiduciary standard.

Basics: The PTE 84-24 update is based on a 1984 exemption and was created by the Labor Department’s Employee Benefits Security Administration, through a process that began in October 2023.

Originally, it was set to become effective 60 days after the official Federal Register publication date.

The final version was revised to take effect Sept. 23. Parts of the exemption update will apply immediately, and parts will apply one year after Sept. 23.

The philosophy: Labor Department officials say in the preamble that retirement Investors are best protected by a uniform fiduciary standard that ensures that advisors’ recommendations will be prudent, loyal and free from misrepresentations or excessive compensation.

“Retirement Investors equally need these fiduciary protections and safeguards against dangerous conflicts of interest, whether the trusted investment professional is recommending an insurance product or a security,” officials say. “And there is no reason to believe that an insurance agent is any less susceptible to conflicts of interest than other categories of investment professionals.”

But officials also emphasize their respect for the role of insurance products and annuities in consumers’ lives.

“Certainly, the department believes that insurance products and annuities are often sound and valuable investments for Retirement Investors,” officials say.

There is nothing about annuities or the independent producer distribution channel that suggests that independent producers cannot comply with an ERISA fiduciary standard, officials add.

The core standards: Under the standards, investment professionals subject to a fiduciary standard must acknowledge their fiduciary status to the investment investor in writing, disclose material conflicts of interest, and stick to to “impartial conduct standards.”

Labor Department impartial conduct standards require investment professionals to meet a “care obligation” by evaluating investments carefully and exercising sound judgment; meet a “loyalty obligation” by always putting the retirement investors’ interests first; avoid making misstatements; and earn no more than reasonable compensation.

Retirement investment advice fiduciaries also must document and disclose the specific reasons for any rollover recommendations, according to the PTE 84-24 preamble.