Tag Archives: annuities

The New Fiduciary Rule (33): The DOL’s Final PTE 84-24

Key Takeaways

  • The DOL’s fiduciary regulation will be effective on September 23 of this year. As a result, beginning on September 23, one-time recommendations to retirement investors can be fiduciary advice and, where the advice is conflicted, the investment professional and financial institution will need the protection afforded by a PTE.
  • While some of the requirements (called “conditions”) of PTEs 2020-02 and 84-24 also become effective on September 23, others will not be effective until a full year later…September 23, 2025.
  • While PTE 2020-02 can be used for banks, investment advisers, broker-dealers, and insurance companies (“financial institutions”), there is an alternative exemption, PTE 84-24, that can be used by independent insurance agents who recommend annuities and life insurance policies that only require an insurance license (“independent producers”).
  • This article covers the final PTE 84-24 and its effective dates, with a focus on compliance issues for September 23 of this year.

On April 25, 2024, the Department of Labor published its final regulation defining fiduciary status for investment advice and the related exemptions—PTE 2020-02 and 84-24. The exemptions provide relief from prohibited conflicts and compensation resulting from fiduciary recommendations to “retirement investors”–private sector retirement plans, participants (including rollovers), and IRAs (including transfers and exchanges). The fiduciary regulation and exemptions will be effective on September 23, 2024, although compliance with some of the conditions in the exemptions will be further delayed.

For context, all financial institutions—broker-dealers, investment advisory firms, banks and insurance companies–can use PTE 2020-02 for the protection it affords. However, broker-dealers, investment advisers, and banks must use PTE 2020-02 for relief for their conflicted fiduciary recommendations. In addition, relief for insurance products that are treated as securities (e.g., variable and registered annuities) can only be found under 2020-02. Finally, if an insurance product is sold by an employee or statutory employee of an insurance company, PTE 2020-02 must be used for relief.

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The New Fiduciary Rule (17): Permissible Compensation under PTE 84-24

The U.S. Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs.

Key Takeaways

  • ERISA’s fiduciary and prohibited transaction rules require consideration of costs and compensation when fiduciary recommendations are made to “retirement investors,” that is, to private sector retirement plans, participants in those plans, and IRA owners.
  • Where the Internal Revenue Code’s prohibited transaction rules would be violated, the protection of an exemption is needed. In that case, the protections of PTEs 84-24 and 2020-02 will require that costs and compensation be considered.
  • This article focuses on limitations on compensation under PTE 84-24.
  • While the general rule in ERISA and the Code is that compensation cannot be more than a reasonable amount, the PTE has additional limitations.

ERISA’s fiduciary responsibility rules require that costs, for investments, insurance products and services, be no more than a reasonable amount. In other words, a prudent process will consider the costs of products and services relative to their value to the retirement investor and relative to reasonably available alternatives. ERISA’s prohibited transaction rules, and the exemptions to the prohibitions, impose a similar limit on compensation when a fiduciary recommendation is conflicted, that is, the compensation cannot be more than a reasonable amount when compared to the value of services being offered. These rules apply to all ERISA-governed retirement plans and participant accounts in those plans (including rollover recommendations).

The Code has prohibited transaction provisions with similar limitations on compensation, that is, compensation cannot exceed a reasonable amount relative to the services provided. The Code limits apply to both tax-qualified retirement plans and IRAs (including individual retirement annuities). However, the Code does not have a standard of care for recommendations to IRA owners. Instead, the applicable standard of care is imposed by other laws and regulations (for example, the best interest standard for insurance agents in NAIC model rule 275).

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The New Fiduciary Rule (13): Advisors and Agents with Restricted Investment Menus (Part 2)

The U.S. Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs.

Key Takeaways

  • The Department of Labor’s proposed fiduciary “package” expands the scope of fiduciary status (to include, e.g., one-time recommendations) and the types of transactions that are covered by fiduciary advice.
  • That is particularly important since, where the fiduciary recommendation involves a conflict of interest (e.g., a new fee or a commission), the firms and their representatives and agents will need to satisfy the conditions of either PTE 84-24 or PTE 2020-02.
  • One question that arises under the best interest standard in the PTEs is whether advisors or insurance agents can make recommendations from limited, or restricted, menus of available products.

This article continues a discussion of the consequences of limited menus on the availability of the exemptions and the relief they provide for compensation resulting from the recommended transactions.

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The New Fiduciary Rule (3): Fixed Indexed Annuities

The US Department of Labor has released its package of proposed changes to the regulation defining nondiscretionary fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs.

Key Takeaways

    • Statements from the White House indicate that the DOL and the White House are concerned that fixed indexed annuities may be inappropriately sold to participants and IRA owners (“retirement investors”) in connection with recommendations to roll over benefits from plans and to transfer money from IRAs. Some of the political rhetoric accompanying the release of the proposals was unusually harsh.
    • The reaction from the insurance industry and state insurance commissioners has been immediate and strong.
    • If the proposals become final as written, the greatest impact of the changes will likely be on insurance agents, particularly independent producers.
    • The greatest impact on products will likely be on fixed indexed annuities.
    • This and several following articles will cover the impact on independent insurance agents, insurance companies, and annuities.

This article discusses the DOL’s thoughts on prudent processes for evaluating fixed indexed annuities, which dates back to the Obama-era Best Interest Contract Exemption (which was vacated in 2018 by the 5th Circuit of Appeals).

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The New Fiduciary Rule (2): The Impact

The US Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment advice to plans, participants (including rollovers), and IRAs.

Key Takeaways

  • The Department of Labor’s proposed fiduciary “package” will have different impacts on different types of service providers to retirement plans, participants, and IRA owners (collectively, “retirement investors”) . . . .investment advisers, broker-dealers, banks and trust companies, and insurance agents (and companies) (“financial professionals”).
  • The greatest impact of the changes, if finalized as is, will be on insurance agents, particularly independent producers. Insurance companies issuing the life insurance policies and annuity contracts will also see increased compliance burdens.
  • For all of the types of financial professionals, the most impactful change will likely be that one-time investment recommendations to private sector retirement plans and their participants, and to IRA owners, will be fiduciary advice. That includes rollover recommendations.

This post discusses the likely impact of the new proposals. Future posts will go into more detail about the proposals and compliance issues:

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The DOL’s Regulatory Agenda and a New Fiduciary Rule

UPDATE: On August 8, I posted this blog article in contemplation of the DOL sending a new fiduciary proposal package to the Office of Management & Budget (OMB) in the White House. One month later, to the day, the receipt of the DOL’s proposed fiduciary rule and prohibited transactions was posted on the OMB’s website. In reviewing my blog article, I think it was spot on in predicting key elements of the fiduciary rule and the exemptions. However, that is still based on my crystal ball, since the changes new proposals won’t be known until they are vetted by the OMB and published in the Federal Register—probably 45 to 60 days from now. As this article suggests, the fiduciary proposal will likely say that rollover recommendations are fiduciary advice and that rollover recommendations to annuities will be subject to more stringent standards.

Key Takeaways

  • The anticipated DOL proposed fiduciary regulation could be sent to the Office of Management & Budget (OMB) in a matter of weeks.
  • The proposal will likely say that a rollover recommendation to a participant in an ERISA governed retirement plan is a fiduciary act.
  • The DOL will also likely propose amendments to prohibited transaction exemptions (PTEs), including to PTE 84-24, the exemption used for fiduciary rollover recommendations into individual annuity contracts.

The DOL has not appealed the decision in the Florida Federal District Court that vacated its fiduciary “re-interpretation.” That re-interpretation, in effect, said that ongoing investment advice to a rollover IRA could be connected to the rollover recommendation to a participant such that the “regular basis” prong of the 5-part fiduciary test would be satisfied. For context, the DOL had previously said that, if a person was not already a fiduciary to a plan, a recommendation to a participant to rollover his or her benefits was a standalone recommendation and therefore did not satisfy the regular basis prong of the 5-part test.

The re-interpretation tried to connect the recommendation to the plan (that is, for the participant to rollover to an IRA) to subsequent investment advice to the rollover IRA and, in that way, to conclude that the rollover recommendation was part of a regular basis advice arrangement. However, the Court held that the “regular basis” test is applied separately to the plan and the IRA and advice to the two could not be connected.

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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.

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 (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.

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

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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.

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

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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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