Best Interest Standard of Care for Advisors #96: Annuity Recommendations, PTE 84-24, and Fiduciary Misunderstandings

Key Takeaways

The DOL’s expanded interpretation of fiduciary advice is described in the preamble to Prohibited Transaction Exemption (PTE) 2020-02. The expanded interpretation applies to all rollover recommendations, including recommendations to rollover into annuities.

A fiduciary rollover recommendation to rollover from an ERISA-governed retirement plan results in a conflict of interest, which is the compensation from the individual retirement account or annuity.

That conflict is a prohibited transaction under the Internal Revenue Code and ERISA. PTE 2020-02 provides relief from the prohibitions if its conditions are satisfied.

One of the conditions for an insurance company to use PTE 2020-02 is that the insurance company and the investment professionals (including insurance agents) both be fiduciaries for the recommendations. However, most insurance companies have determined that they do not have the close relationships with agents, and particularly independent agents, to satisfy the fiduciary requirements in the PTE. As a result, most insurance companies have decided that they will not use PTE 2020-02 for relief for themselves and their agents from the prohibitions of the Code and ERISA.

But, when agents make rollover recommendations covered by the DOL’s expanded fiduciary interpretation, they will engage in prohibited transactions and need relief from the resulting prohibited transactions. The alternative to 2020-02 is PTE 84-24.

However, PTE 84-24 has conditions that agents must satisfy, and there are emerging stories that many agents do not know that they can be fiduciaries and do not know about the relief provided by 84-24.


The DOL’s prohibited transaction exemption (PTE) 2020-02 (Improving Investment Advice for Workers & Retirees), allows investment advisers, broker-dealers, banks, and insurance companies (“financial institu­tions”), and their representatives (“investment professionals”), to receive conflicted compensation resulting from non-discretionary fiduciary investment advice to ERISA retirement plans, participants (including rollover recommendations), and IRA owners (including transfer recommendations)–all of whom are referred to as “retirement investors.” With regard to IRAs, the term includes both individual retirement accounts and individual retirement annuities. In addition, in the preamble to the PTE, the DOL announced an expanded interpretation of fiduciary advice, meaning that many more financial institutions and investment professionals are fiduciaries for their recommendations to retirement investors and, therefore, will need the protection provided by the exemption.

While it appears that most broker-dealers, investment advisers, and banks and trust companies will be relying on, and complying with, the conditions in PTE 2020-02, the same cannot be said of most insurance companies. As a result, when insurance agents recommend rollovers to annuities, they need to consider whether they are fiduciaries under the DOL’s expanded interpretation and, if so, how to comply with PTE 84-24 in order to avoid a prohibited transaction for their compensation, i.e., the commission and any trailing payments.

For example, the DOL’s position is that, if an agent recommends a rollover and then provides ongoing financial advice to the annuitant (that is, the owner of the individual retirement annuity) on a regular basis, the agent is probably a fiduciary (assuming that the other four parts of the 5-part test are satisfied, which would ordinarily be the case). However, that’s not always the case. If an agent recommends a fixed rate annuity and then doesn’t provide financial advice to the annuitant for a period of years, it doesn’t seem that there would be financial advice on a regular basis and, therefore, the agent wouldn’t be a fiduciary. On the other hand, if the agent recommended a fixed indexed annuity or a variable annuity, there may be a contemplation of advice being given on a regular basis. In that case, the agent would be a fiduciary.

In other words, it is a case-by-case facts-and-circumstances analysis. However, based on the limited number of cases I have heard about, it doesn’t appear that most agents know that they need to do the analysis, nor do they know about the possible fiduciary breach and prohibited transaction consequences of a failure to comply with the requirements. If I am hearing about this, I assume that the DOL is as well.

The rest of this article discusses the conditions in PTE 84-24. Before doing that, though, I want to point out that the PTE provides relief from the prohibited transaction rules. It does not relieve an agent from the fiduciary responsibility rules, which the DOL would almost certainly say require a comparative analysis of the costs, features and services related to the annuity with the investments, services and expenses in the plan, in light of the financial circumstances, investment objectives and needs of the retirement investor (the participant). In that regard, in PTE 84-24 the DOL explained:

The fact that a transaction is the subject of an exemption under section 408(a) of ERISA and section 4975(c)(2) of the Code does not relieve a fiduciary, or other party in interest or disqualified person with respect to a plan, from certain other provisions of ERISA and the Code, including any prohibited transaction provisions to which the exemption does not apply and the general fiduciary responsibility provisions of section 404 of ERISA which require, among other things, that a fiduciary discharge his or her duties respecting the plan solely in the interests of the participants and beneficiaries of the plan;… (Emphasis added)

PTE 84-24 requires that the following conditions be satisfied to obtain relief from the prohibited transaction rules related to recommending insurance products. The bolded requirements are those that have proven the most concerning.

  • The transaction is effected by the insurance agent or broker… in the ordinary course of its business as such a person.
  • The transaction is on terms at least as favorable to the plan as an arm’s-length transaction with an unrelated party would be.
  • The combined total of all fees, commissions and other consideration received by the insurance agent or broker…: In connection with the purchase of insurance or annuity contracts or securities issued by an investment company is not in excess of ‘‘reasonable compensation’’ within the contemplation of section 408(b)(2) and 408(c)(2) of the Act and sections 4975(d)(2)and 4975(d)(10) of the Code.
  • The insurance agent or broker…is not (1) a trustee of the plan (other than a nondiscretionary trustee who does not render investment advice with respect to any assets of the plan), (2) a plan administrator (within the meaning of section 3(16)(A) of the Act and section 414(g) of the Code), (3) a fiduciary who is expressly authorized in writing to manage, acquire or dispose of the assets of the plan on a discretionary basis, or (4) …an employer any of whose employees are covered by the plan.
  • With respect to a transaction involving the purchase with plan assets of an insurance or annuity contract or the receipt of a sales commission thereon, the insurance agent or broker… provides to an independent fiduciary with respect to the plan prior to the execution of the transaction the following information in writing and in a form calculated to be understood by a plan fiduciary who has no special expertise in insurance or investment matters:
    • If the agent, broker, or consultant is an affiliate of the insurance company whose contract is being recommended, or if the ability of such agent, broker or consultant to recommend insurance or annuity contracts is limited by any agreement with such insurance company, the nature of such affiliation, limitation, or relationship;
    • The sales commission, expressed as a percentage of gross annual premium payments for the first year and for each of the succeeding renewal years, that will be paid by the insurance company to the agent, broker or consultant in connection with the purchase of the recommended contract; and
    • [A] description of any charges, fees, discounts, penalties or adjustments which may be imposed under the recommended contract in connection with the purchase, holding, exchange, termination or sale of such contract.
  • Following the receipt of the information required to be disclosed [above] and prior to the execution of the transaction, the independent fiduciary acknowledges in writing receipt of such information and approves the transaction on behalf of the plan. Such fiduciary may be an employer of employees covered by the plan, but may not be an insurance agent or broker, pension consultant or insurance company involved in the transaction. Such fiduciary may not receive, directly or indirectly (e.g., through an affiliate), any compensation or other consideration for his or her own personal account from any party dealing with the plan in connection with the transaction.

Records of compliance must be retained for 6 years from the date of the transaction.


  • The issue of “reasonable compensation” has generated concern because of the lack of publicly available data (e.g., benchmarking data) about the ordinary and customary commissions and trails for annuity products. Since the burden of proof of compliance with a PTE’s conditions is on the person claiming the “exemption” (that is, the agent), agents should have information about customary and ordinary commissions in a range of scenarios, that is, for different types of annuities of different amounts.
  • The concern about disclosing the amount (that is, percentage) of commissions and trails is the obvious. That is, if the retirement investor calculates the dollar amount represented by the percentage it may seem like a large amount relative to the services rendered. That could be largely due to the industry practice of front loading compensation for the sales and servicing of insurance products.

While those concerns are real, the consequences of failing to comply with the fiduciary standards and the PTE conditions are significant. If the fiduciary duties of care and loyalty are breached and the conditions of the PTE not satisfied, it can result in damages for breach and a loss of the agent’s compensation for failure to comply with the PTE’s conditions.

Concluding Thoughts

I am concerned that there may be widespread noncompliance in the recommendations of rollovers to annuities by insurance agents and brokers. That is not due to any purposeful intent. Instead, my observation is that many insurance agents, and particularly independent insurance agents, are not aware of the DOL’s expanded fiduciary interpretation and do not know about the existence of PTE 84-24 and the need to satisfy its conditions. There is a need for someone, perhaps the insurance industry trade associations, to take leadership in educating those agents about the fiduciary and prohibited transaction issues.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.