The stay of the effective dates of the amended fiduciary regulation and amended exemptions means that the “old” DOL fiduciary regulation (the 5-part test) and the existing exemptions continue in effect indefinitely. As a result, it is unlikely that an insurance producer will be a fiduciary under ERISA or the Internal Revenue Code  when making a recommendation to a participant to take his or her money out of a retirement  plan and roll over into a “qualified” annuity (or, more technically, an Individual Retirement Annuity).

Since the probability is that an insurance producer will not be an ERISA or Code  fiduciary, the applicable standard of conduct for a rollover recommendation will either be NAIC Model Rule #275 (“Suitability in Annuity Transactions Model Regulation”, as adopted by almost all of the states MDL-275.pdf (naic.org)) for insurance-only annuities or, for annuities that are securities (e.g., variable annuities or registered index-linked annuities, or RILAs), the SEC’s Regulation Best Interest for broker-dealers or its  “Commission Interpretation Regarding Standard of Conduct for Investment Advisers”.

As pointed out in my last article, the NAIC model rule does not require, for a rollover recommendation, a comparative analysis of the participant’s interests in the retirement plan nor does it require a consideration of whether it is better for the participant to leave his or her money in the plan. However, for securities regulated recommendations (for example, for rollover recommendations into annuities that are securities), the advisor/agent must perform a comparative analysis and must consider leaving the money in the plan. Let’s look at what the SEC staff said about those issues in its “Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors.”

When considering a rollover recommendation, do I have to consider the option of leaving the retail investor’s investments in the employer’s plan?

As discussed above, you must have a reasonable basis to believe that an account recommendation is in the retail investor’s best interest and does not place your or your firm’s interests ahead of the retail investor’s interest. In the staff’s view, it would be difficult to form a reasonable basis to believe that a rollover recommendation is in the retail investor’s best interest and does not place your or your firm’s interests ahead of the retail investor’s interest, if you do not consider the alternative of leaving the retail investor’s investments in their employer’s plan, where that is an option. To evaluate any recommendation to transfer assets out of an employer’s plan, or between individual retirement accounts, you would need to obtain information about the existing plan, including the costs associated with the options available in the investor’s current plan. [The emphasis is mine.]

In other words, for annuities that are securities, broker-dealers and investment advisers must obtain information about the investments, services  and costs in the plan (see quote below regarding those and other factors), must compare that information to the potential rollover IRA, and must make a recommendation that is in the best interest of the participant (including considering whether it would be best to leave the money in that plan).

For insurance-only annuities, the NAIC model rule is silent on those issues; it doesn’t have any specific provisions about rollover recommendations. Instead, the Care Obligation in the NAIC model rule focuses on the recommendation of the annuity (without consideration of the plan). For example, the model rule requires, in part,  that the producer have “a reasonable basis to believe the recommended option effectively addresses the consumer’s financial situation, insurance needs and financial objectives over the life of the product, as evaluated in light of the consumer profile information”  and “a reasonable basis to believe the consumer would benefit from certain features of the annuity, such as annuitization, death or living benefit or other insurance-related features.”

Returning to the SEC staff bulletin, it views, as does the DOL, a rollover recommendation as including two distinct recommendations: a recommendation to take the money out of the plan and a recommendation to invest in an IRA. In that regard, it asks and answers:

Are there additional factors that I should consider when making a rollover recommendation in order to have a reasonable basis to believe the recommendation is in the retail investor’s best interest?

Yes. When making a rollover recommendation to a retail investor, you must have a reasonable basis to believe both that the rollover itself and that the account being recommended are in the retail investor’s best interest. In addition to the factors discussed above, the staff believes that there are specific factors potentially relevant to rollovers that you should generally consider when making a rollover recommendation to a retail investor. These factors include, without limitation, costs; level of services available; features of the existing account, including costs; available investment options; ability to take penalty-free withdrawals; application of required minimum distributions; protection from creditors and legal judgments; and holdings of employer stock. [Again, the emphasis is mine.]

As the quoted language points out, under SEC guidance (see Reg BI and the IA Interpretation) and the SEC staff’s bulletin, there are two recommendations. The first is to sell the investments in the plan and withdraw the cash, and the second in to put that money in an IRA or qualified “securities” annuity. Under the SEC and SEC staff guidance, both of those must be in the best interest of the participant.

Concluding Thoughts

My purpose in writing this article is not to criticize or praise the NAIC or SEC rules, but instead to point out that there are two separate and different sets of rules for recommending rollovers into annuities….one for insurance-only annuities and one for securities annuities.

The former does not appear to require consideration of the participant’s interest in that plan and whether it is in the participant’s best interest to leave the money in the plan. Instead, it focuses on the recommendation of the annuity. The latter requires consideration of possibly leaving the money in the plan and then determining if the services, investments and costs in the rollover IRA are better for the participant.

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.