Tag Archives: annuities

Best Interest Standard of Care for Advisors #80: Compliance with PTE 2020-02: Insurance Distribution Issues (Part 2)

The Department of Labor’s “Fiduciary Rule,” PTE 2020-02: The FAQs

Key Takeaways

    • The DOL has issued FAQs that generally explain PTE 2020-02 and the expanded definition of fiduciary advice.
    • In FAQ 18, the DOL discusses the application of the requirements to the distribution of insurance products and the impact on insurance companies.
    • However, many insurance companies have decided against using PTE 2020-02 primarily because of the requirement that the insurance companies accept fiduciary status for the recommendations.
    • Instead, most insurance companies are relying on agents using PTE 84-24, and some are providing forms and educational materials to support that usage.
    • Meanwhile, the DOL is working on a further expanded fiduciary definition and a more demanding PTE 84-24 that will increase the oversight responsibilities for covered recommendations by insurance agents.
    • There may be a role for IMOs, FMOs and BGAs in the anticipated revised 84-24 in terms of the oversight of the recommendations by independent agents.

Background

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 (“retirement investors”). In addition, in the preamble to the PTE the DOL announced an expanded definition 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.

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Best Interest Standard of Care for Advisors #79: Compliance with PTE 2020-02: Insurance Distribution Issues (Part 1)

The Department of Labor’s “Fiduciary Rule,” PTE 2020-02: The FAQs

Key Takeaways

  • The DOL has issued FAQs that generally explain PTE 2020-02 and the expanded definition of fiduciary advice.
  • In FAQ 18, the DOL discusses the application of the requirements to the distribution of insurance products and the impact on insurance companies.
  • However, many insurance companies have decided against using PTE 2020-02 primarily because of the requirement that the insurance companies accept fiduciary status for the recommendations.
  • Instead, most insurance companies are relying on agents using PTE 84-24, and some are providing forms and educational materials to support that usage.
  • Meanwhile, the DOL is working on a further expanded fiduciary definition and a more demanding PTE 84-24 that will increase the oversight responsibilities for covered recommendations by insurance agents.

Background

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 (“retirement investors”). In addition, in the preamble to the PTE the DOL announced an expanded definition 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.

Continue reading Best Interest Standard of Care for Advisors #79: Compliance with PTE 2020-02: Insurance Distribution Issues (Part 1)

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SECURE Act and Guaranteed Income (Part 3)

The introduction to my last two posts, SECURE Act Part 1 and SECURE Act Part 2, explained:

There are two parts of the SECURE Act that I believe will have the greatest impact on my clients: plan sponsors and plan service providers. The first includes the provisions on retirement income, including the safe harbor for selecting a guaranteed income provider, the ability to distribute guaranteed income investments if a plan no longer want to offer those products, and a new requirement to give participants projection of their retirement income. The second impactful part is the authorization of Open MEPs (Multiple Employer Plans), which the law calls “PEPs” (or Pooled Employer Plans). That change will allow financial institutions to sponsor plans that can be adopted by multiple (or even many) unrelated employers, transferring much of the fiduciary responsibility onto the financial institution.

Part 1 discussed the fiduciary safe harbor for selecting an insurance company to provide the guaranteed retirement income products for defined contribution plans (e.g., 401(k) plans). Part 2 covered the common guaranteed products in 401(k) plans under the pre-SECURE Act rules.

This article talks about two practical issues: (1) the need for the guaranteed retirement income products to be on recordkeeping platforms, and (2) the role of plan advisors in helping 401(k) fiduciaries understand and select the insurance company and the product.

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SECURE Act and Guaranteed Income (Part 2)

The introduction to my last post, SECURE Act Part 1, explained:

There are two parts of the SECURE Act that I believe will have the greatest impact on my clients: plan sponsors and plan service providers. The first includes the provisions on retirement income, including the safe harbor for selecting a guaranteed income provider, the ability to distribute guaranteed income investments if a plan no longer want to offer those products, and a new requirement to give participants projection of their retirement income. The second impactful part is the authorization of Open MEPs (Multiple Employer Plans), which the law calls “PEPs” (or Pooled Employer Plans). That change will allow financial institutions to sponsor plans that can be adopted by multiple (or even many) unrelated employers, transferring much of the fiduciary responsibility onto the financial institution.

That post then discussed the fiduciary safe harbor for selecting an insurance company to provide the guaranteed retirement income products for defined contribution plans (e.g., 401(k) plans).

This article talks about the types of guaranteed retirement income products currently found in 401(k) plans. Let me start by addressing two common areas of misunderstanding.

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SECURE Act and Guaranteed Income (Part 1)

There are two parts of the SECURE Act that I believe will have the greatest impact on plan sponsors and service providers.

  • The first part includes the provisions on retirement income, including the safe harbor for selecting a guaranteed income provider, the ability to distribute guaranteed income investments if a plan no longer want to offer those products, and a new requirement to give participants projection of their retirement income.
  • The second impactful part is the authorization of Open MEPs (Multiple Employer Plans), which the law calls “PEPs” (or Pooled Employer Plans). That change will allow plans that can be adopted by multiple unrelated employers, transferring much of the fiduciary responsibility onto the sponsor of the PEP, which could be, g., a financial institution, a recordkeeper or an advisory firm.

This article discusses the fiduciary safe harbor for selecting the provider (e.g., insurance company) for a guaranteed retirement income product. The other provisions will be discussed in future articles.

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The SECURE Act and Guaranteed Retirement Income in Plans

By now you have probably seen a number of articles about the SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019) and its safe harbor for guaranteed retirement income in 401(k) plans. Some have favored the safe harbor, while others have criticized it. In either case, the authors appear to contemplate that participants will be buying individual annuities at retail prices.

In my opinion, those articles—on both sides of the fight—are at best misleading and in some cases just plain wrong. I am writing this article to give you my views.

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