The Department of Labor has issued the:

• final regulation defining fiduciary status for investment advice to retirement investors and
• related exemptions for prohibited conflicts—PTEs 2020-02 and 84-24.

The exemptions provide relief from prohibited compensation resulting from fiduciary recommendations to “retirement investors”—private sector retirement plans, participants in those plans (including rollover recommendations), and IRAs—individual retirement accounts and individual retirement annuities (including recommendations of transfers and exchanges).

The fiduciary regulation will be effective on September 23, 2024. Parts of the PTEs will be effective on that date, but other parts will not be effective until a year later—September 23, 2025.

The split effective dates for the PTEs are as follows. The Impartial Conduct Standards and the Fiduciary Acknowledgment disclosure are effective September 23, 2024—this year. The remaining conditions in the PTEs are effective on September 23, 2025. That includes all of the remaining disclosures, the policies and procedures, and the annual retrospective review.

A fiduciary recommendation to exchange “qualified annuities” is subject to the new rules. The authority for that conclusion can be found in the regulation’s descriptions of covered recommendations. (“Qualified annuities” is an industry term; the DOL refers to them as IRAs—”individual retirement annuities”, which is also how the Internal Revenue Code labels them.) The following recommendations are included in the description of covered transactions:

• The advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property.
• Rolling over, transferring, or distributing assets from a plan or IRA, including recommendations as to whether to engage in the transaction, the amount, the form, and the destination of such a rollover, transfer, or distribution.

So it’s clear that recommending qualified annuity exchanges is subject to the fiduciary rules (beginning September 23, 2024) and I don’t think it requires explanation that the insurance agent’s commission is a conflict of interest that is a prohibited transaction.

That means that a PTE—prohibited transaction exemption—is needed. However, PTEs, including 84-24 and 2020-02, have conditions that must be satisfied in order to obtain the relief that they provide.  Both of those PTEs can provide relief for recommendations of annuity exchanges. The circumstances in which one or the other will apply are beyond the scope of this article—and have been discussed in other posts, but for purposes of today’s article, it doesn’t matter.  That’s because both require satisfaction of the Care Obligation.

That means that, since the fiduciary regulation and the Impartial Conduct Standards in the PTEs (where the Care Obligation is found) must be satisfied beginning this September 23. That begs the question of, what does the Care Obligation require for annuity exchanges?

Fortunately, there is some guidance in the NAIC Model Regulation—which has been adopted by almost all of the States (with some modifications)—that provides helpful, but not complete, information about the process for evaluating annuity exchanges.

For example, the NAIC Model Regulation says, in part:

The requirements under Subparagraph (a) of this paragraph require a producer to consider the types of products the producer is authorized and licensed to recommend or sell that address the consumer’s financial situation, insurance needs and financial objectives. This does not require analysis or consideration of any products outside the authority and license of the producer or other possible alternative products or strategies available in the market at the time of the recommendation.

Comment: The Care Obligation would also require that.  However, it is not clear if the Care Obligation would also require that, if the annuities available to the producer were inferior to others in the marketplace, the producer would need to decline the sales opportunity. (The NAIC Model Regulation uses the term “producer,” as does PTE 84-24. This article is using “producer” and “agent” interchangeably.)

At another point, the NAIC Model Regulation says:

The consumer profile information, characteristics of the insurer, and product costs, rates, benefits and features are those factors generally relevant in making a determination whether an annuity effectively addresses the consumer’s financial situation, insurance needs and financial objectives, but the level of importance of each factor under the care obligation of this paragraph may vary depending on the facts and circumstances of a particular case. However, each factor may not be considered in isolation.

Comment: This is similar to what the Care Obligation would require. However, satisfaction of the DOL’s Care Obligation would be measured by the standard of a hypothetical knowledgeable person, while the NAIC’s standard is that of someone with similar licensure.  It’s not clear if the DOL standard is higher than the NAIC’s, but it is possible since the DOL’s standard could be interpreted to include a broader range of knowledge of products and services that might be in the best interest of the retirement investor.

Later in the NAIC Model Regulation, it says:

In the case of an exchange or replacement of an annuity, the producer shall consider the whole transaction, which includes taking into consideration whether:  

(i) The consumer will incur a surrender charge, be subject to the commencement of a new surrender period, lose existing benefits, such as death, living or other contractual benefits, or be subject to increased fees, investment advisory fees or charges for riders and similar product enhancements;  

(ii) The replacing product would substantially benefit the consumer in comparison to the replaced product over the life of the product; and  

(iii) The consumer has had another annuity exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months.

Comment: The Care Obligation would almost certainly be interpreted to be consistent with this.  Interestingly, the NAIC Model Regulation requires some comparison with the existing qualified annuity before recommending a replacement.  However, it does not require a similar analysis before recommending a rollover from a retirement plan to a qualified annuity (as do the SEC and the DOL rules).

There is a related disclosure requirement in the NAIC Model Rule that has some relevancy to our discussion:

Prior to or at the time of the recommendation or sale of an annuity, the producer shall have a reasonable basis to believe the consumer has been informed of various features of the annuity, such as the potential surrender period and surrender charge, potential tax penalty if the consumer sells, exchanges, surrenders or annuitizes the annuity, mortality and expense fees, investment advisory fees, any annual fees, potential charges for and features of riders or other options of the annuity, limitations on interest returns, potential changes in non-guaranteed elements of the annuity, insurance and investment components and market risk. 

Comment: To the extent that any of these factors weren’t required to be considered by the NAIC rules discussed earlier in this article, I believe that the DOL’s Care Obligation would require that a producer consider them in making a fiduciary recommendation—as opposed to just disclosing them.

Concluding Thoughts

The requirements in the NAIC Model Regulation are consistent with satisfaction of the Care Obligation in PTEs 84-24 and 2020-02.  However, in a given case they may not be enough.  As a result, thought should be given to augmenting the NAIC compliance process with additional considerations for the PTE’s best interest process.

Viewing the PTEs from the perspective of producers, the Impartial Conduct Standards and the Fiduciary Acknowledgement are effective for them on September 23 of this year.

With regard to the requirements for documentation, supervision, disclosures, and policies and procedures, the firms (e.g., insurance companies and broker-dealers) will not need to have those in place until September 23 of 2025.

However, that is not the full story for all of the firms.  Where the qualified annuity exchanges must use PTE 2020-02 for relief, the firms are “co-fiduciaries” with the agents this September 23.  That means that the firms must satisfy the Care Obligation and deliver the Fiduciary Acknowledgement.  And to satisfy the Care Obligation, the firms will likely need a process that is more demanding than the NAIC Model Regulation’s.