Below is a current analysis of DOL Fiduciary 3.0 provided by our partners at Finseca. Gen3 will be adding a page to the agent portal to provide ongoing updates to our valued producers.

DOL Fiduciary 3.0 – Topline Takeaways for the Profession and Financial Security for All

On October 31, President Biden and the Acting Labor Secretary Su launched the latest attempt by the Department of Labor to impose a broad new regulatory regime on retirement-related financial assistance with harsh words for annuities and insurance sales commissions. Calling commissions “junk fees” and ignoring the recent adoption by 40 states of the NAIC best-interest standard for annuity sales, the Biden Administration alleged that retirement savers are not sufficiently protected from conflicted investment recommendations and that the Department of Labor step in to regulate sales of annuities and financial advice to retirement plans and IRAs.

If this sounds familiar, it’s because this is not the first time DOL has tried this. The new proposal is very similar to the Obama Administration’s 2016 fiduciary rule that a Federal appeals court vacated for exceeding the Labor Department’s authority. Finseca and our allies are working hard to oppose the proposed rule, which we believe will limit access to needed financial security products and assistance for Americans already facing a massive gap. You can read Marc Cadin’s statement from 10/31 here.

Here’s what financial security professionals need to know:

What Does the New Proposal Do?

The goal of the proposal is to give the Department new authority to regulate investment recommendations to retirement plans, plan participants, and IRA owners, especially IRA rollovers and transfers, such as when a producer recommends purchasing an annuity using the proceeds of a plan or an IRA. DOL currently has limited authority to impose conditions on rollovers. The proposed rule would dramatically expand the agency’s reach to include insurance sales. The proposed DOL standards would apply in addition to any other Federal and State requirements for producers—as a result, a producer would have to comply with the state’s annuity sales regulations and the DOL’s new fiduciary regulation at the same time.

How Would the New Standard Apply to Producers?

Specifically, the new fiduciary definition (replacing the five-part test) would apply to a financial security professional making a covered investment recommendation—which includes an annuity sales recommendation—to an ERISA plan, a plan participant, or an IRA owner:

  • If the professional makes recommendations on a regular basis as part of his or her business,
  • If the professional makes the recommendation “under the circumstances indicating” that the recommendation is individualized and may be relied upon by the retirement investor as a basis for decisions “that are in [the investor’s] best interest” and
  • If the professional receives, directly or indirectly, a commission, fee, or any other form of compensation from any source in connection with the recommendation.

This very broad definition would likely include most if not all, producers and draws no distinction between sales activity and investment advice activity. That the failure to recognize this difference was one of the key reasons the Federal appeals court vacated the 2016 rule does not appear to concern the DOL in this latest proposal.

A covered investment recommendation includes advice regarding the following:

  • The advisability of acquiring, holding, disposing of, or exchanging securities or other investment property.  Investment property includes annuities but not health insurance policies, disability insurance policies, term life insurance policies, or other property not containing an investment component,
  • How to invest after assets are rolled over, transferred, or distributed from the plan or IRA,
  • Which type of account a retirement saver should open (brokerage, advisory, etc.)
  • Investment policies or strategies and portfolio composition,
  • The selection of other persons to provide investment advice or investment management services, and
  • Voting of proxies appurtenant to securities.

Bottom Line: It will apply to a lot more consumers, professionals, and transactions. 

What Does this Mean for Commissions?

The rule would have a dramatic impact on commissions as a choice available to consumers who want to access financial advice. Recommendations that involve plans, IRAs, and rollovers/transfers would now be fiduciary advice under ERISA and the Tax Code. As a result, commissions and other compensation would become conflicted “prohibited transactions.” As a result, producers would have to comply with an “exemption” to receive their commissions or other compensation. An “exemption” is a set of additional special rules and conditions that the producer must meet to be able to give advice and be compensated for it.  

Where the Rubber Meets the Road – Exemption Requirements for Producers in PTE 84-24 and PTE 2020-02

The proposed rules package makes modifications to seven exemptions. Two of those will have a dramatic and meaningful impact on your business and ability to serve clients (84-24 and 2020-02). Both pose significant compliance challenges and may not be available to all producers.  

The first is PTE 84-24, which could be used only by certain independent producers (subject to several conditions) and only for recommending certain types of fixed annuities and insurance contracts. It has been extensively revised, significantly increasing the compliance complexity and drastically narrowing which professionals can rely on it.  

The second is PTE 2020-02, which can be used for a wide array of financial products and services but which may not be available for some independent producers. The attached chart provides a more detailed comparison of the two exemptions, but the following summarizes the major requirements:

New Conditions Required by Both PTE 84-24 and PTE 2020-02:

Among the extensive disclosure and reporting obligations related to both exemptions:

  • Producers must agree to be fiduciaries in writing;
  • Producers must make specific disclosures, including:
    • written statement of the producer’s material conflicts of interest;
    • written analysis and disclosure of why a rollover recommendation is in the participant’s best interest;
    • written statement of the best interest standard; and
    • written description of the services the producer will provide and the products the producer is licensed and authorized to sell;
  • Producers must disclose the amount of compensation they will receive (commissions must be described in dollars and as a percentage); and 
  • Producers must abide by a new and different standard of care called the Impartial Conduct Standards, which include DOL’s version of best interest.

Key Differences in the Conditions of PTE 84-24 and 2020-02:

  • Type of Producer—Career and independent producers who are employees of carriers (including statutory W2s) can only use PTE 2020-02—they cannot use PTE 84-24.  Only independent agents recommending two or more unaffiliated carriers and licensed under state law can use PTE 84-24—no other producers are eligible.
  • Type of Annuity/Policy—PTE 84-24 is only available for annuities that are not securities regulated by the SEC (such as fixed and fixed index annuities).  Variable annuities and other securities can only be recommended using PTE 2020-02.
  • Type of Compensation—PTE 84-24 only permits an “Insurance Sales Commission” (the commission paid by the carrier or its affiliate to the producer, including renewal and trailing fees, but no other compensation, such as incentives, revenue sharing, administrative fees, or marketing payments).  PTE 2020-02 permits a wider range of reasonable compensation, including some forms of compensation not available under PTE 84-24, subject to mitigation of conflicts.

It is also crucial to note that PTE 2020-02 requires both the producer and the insurance company to be co-fiduciaries for the advice, and the insurance company must adopt policies and procedures that govern the conduct of the producer in developing the recommendation. For many independent producers, this condition cannot be met because the producer’s conduct cannot be controlled by the carrier(s), eliminating the ability to use PTE 2020-02.  As a result, a producer who cannot use PTE 2020-02 may be limited to receiving only the Insurance Sales Commission permitted under PTE84-24.

The new conditions mark a dramatic change in the regulation of many producers.  Put simply, the same annuity, recommended to the same person, would be regulated entirely differently, with different standards and different compliance requirements, if the source of the funds to buy the annuity is a plan or IRA. These changes are going to increase the costs, risks, and compliance burdens of providing recommendations, which will reduce access to financial security products for low-balance retirement savers who more frequently rely on commission-based assistance.  As we saw in response to the 2016 rule during the brief period it was implemented, the retirement savers DOL hopes to protect were the very retirement savers who lost access to much-needed recommendations and assistance. 

What Happens Next?

The new rules package is open for public comments for 60 days until January 2, 2024. There will also be public hearings debating these issues. Finseca, along with our sister trade associations, will be asking for an extension (this is the shortest comment period ever offered on such a rule).  

We will be offering detailed comments on the many problems with the proposed regulatory package, and we will be working with Congressional leaders of both parties who understand the vital role holistic retirement planning plays in protecting working Americans. Here is the timeline.