The Department of Labor’s final regulation defining fiduciary status for investment advice to retirement investors will be effective this September 23. Where a fiduciary recommendation results in additional compensation for the fiduciary, that conflicted compensation is prohibited under ERISA, the Internal Revenue Code, or both. As a result, the relief provided by an exemption from the prohibited transaction rules will be needed.

Parts of the two applicable exemptions, Prohibited Transaction Exemptions (PTEs) 2020-02 and 84-24 will also be effective on September 23, 2024, 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.

Both PTEs require that, to obtain their relief, the Care Obligation—which is part of the Impartial Conduct Standards– must be satisfied. The requirements for satisfying the Care Obligation for recommendations to rollover from an ERISA retirement plan to an IRA (individual retirement account or individual retirement annuity) are virtually identical. Here’s what PTE 84-24 says in the context of independent insurance agents (called “independent producers” by the DOL):

Rollover disclosure. Before engaging in or recommending that a Retirement Investor engage in a rollover from a Plan that is covered by Title I of ERISA or making a recommendation to a Plan participant or beneficiary as to the post-rollover investment of assets currently held in a Plan that is covered by Title I of ERISA, the Independent Producer must consider and document the bases for its recommendation to engage in the rollover, and must provide that documentation to both the Retirement Investor and to the Insurer. Relevant factors to consider must include to the extent applicable, but in any event are not limited to: 

1. the alternatives to a rollover, including leaving the money in the Plan, if applicable; 
2. the fees and expenses associated with the Plan and the recommended investment; 
3. whether an employer or other party pays for some or all of the Plan’s administrative expenses; and 
4. the different levels of fiduciary protection, services, and investments available. (The emphasis is mine.)

The reference to considering the available investments has caused some observers to question whether an agent who is only licensed to sell non-securities insurance products can legally perform that task. That question was asked of the DOL in comments to the proposed exemption, and answered by the DOL in the preamble to the final PTE:

Another commenter characterized the condition as potentially requiring Independent Producers to violate the law, because as described by the commenter Federal securities laws prohibit individuals from recommending or providing detailed information or advice about securities unless they have a securities license. Thus, according to the commenter, Independent Producers who do not have a securities license (as most do not) would be forced to either break the law to comply with this condition or undertake the expense and burden of obtaining the appropriate securities licenses.

The Department of Labor responded in the preamble and disagreed with the commenter’s description of what was required for the “consideration:”

The Department disagrees with this characterization of the exemption condition. While Independent Producers are required to consider alternatives to the rollover from the Title I Plan into an annuity, they are not required to recommend or provide detailed information or advice about securities. Nothing in the exemption requires or suggests that Independent Producers are obligated to make advice recommendations as to investment products they are not qualified or legally permitted to recommend. The Department notes that nothing in the exemption or the Impartial Conduct Standards prohibits investment advice by “insurance-only” agents or requires such insurance specialists to render advice with respect to other categories of assets outside their specialty or expertise. There may be circumstances when the best advice an Independent Producer can give an investor is to bring in or work with another Investment Professional who can make a recommendation that is consistent with the Impartial Conduct Standards. A rollover recommendation should not be based solely on the Retirement Investor’s existing investment allocation without any consideration of other investment options in the Retirement Investor’s Title I Plan. The Independent Producer must carefully consider the options available to the investor, including options other than the Retirement Investor’s existing Plan investments, before recommending that the participant roll assets out of the Title I Plan. (The emphasis is mine.)

I don’t claim to have expertise on securities licensing/registration requirements or limits. However, this does raise the issue of how far can an agent go in the consideration of the securities (e.g., mutual funds) in a retirement plan generally and in a participant’s account specifically. If these rules are upheld by the courts, insurance companies and intermediaries (perhaps with additional guidance from the DOL) will need to educate independent producers on how to “consider” “the different… investments available” to the participant.

In one sense, there could be general considerations, such as liquidity, volatility, possible growth, and so on, that I would imagine could be done without a securities license. That could then be compared to the guaranteed income, and other features, of an annuity and a recommendation in the best interest of the participant could be made based on his or her needs and circumstances. The key is that the recommendation be personalized to the particular participant and the participant’s circumstances.

One part of the preamble language has been difficult for practitioners to interpret. It is the language: “There may be circumstances when the best advice an Independent Producer can give an investor is to bring in or work with another Investment Professional who can make a recommendation that is consistent with the Impartial Conduct Standards.” Some observers are concerned that the language might mean that an insurance producer should bring in a securities-licensed professional to help with the analysis. If it does mean that, it may be unrealistic. On the other hand, if it instead suggests that a best interest recommendation could, in some cases, be that part of the rollover could prudently be invested in an annuity and the remaining part could prudently be invested in a securities-based IRA (e.g., to provide some guaranteed income and some liquidity) that could be viewed as more possible.

Concluding Thoughts

As I advise clients, including insurance companies, on compliance with the new rules, and as the rules are applied to real world scenarios, there are questions without answers…or, perhaps better put, there are questions that the rules don’t directly address and therefore reasonable answers have to be developed. One example of that is the process for recommending guaranteed income products (e.g., individual retirement annuities) where the source of funds is in mutual funds and collective investment trusts in retirement plans. Hopefully, the DOL will provide helpful guidance in the future. However, that is unlikely until the current litigation against the rules is resolved.