The U.S. Department of Labor wants to let indexed annuity distributors act as financial institutions under its new fiduciary rule.
But only if those distributors generate more than $1.5 billion in annual fixed annuity contract sales, according to a draft proposal that appeared Wednesday in the Federal Register.
The DOL fiduciary rule sets standards for how retirement plan advisors should relate to retirement savers.
A proposed "class exemption" from the rule requirements could apply to the independent market organizations in the indexed annuity business, according to the 220-page proposal.
An IMO is an insurance products distributor that operates separately from an insurance company. The proposed exemption would give an IMO that wants to sell indexed annuities to retirement savers two main options.
An IMO could let the insurer that issues an indexed annuity supervise the agents. The insurer could keep tabs on whether agents were marketing the annuity properly, and whether excessively high commissions were skewing their sales recommendations.
Or, if an IMO wanted to use the proposed class exemption, it could serve as the financial institution. An IMO financial institution could earn money from insurers for selling indexed annuities to "protected retirement investors," and it could share that ability with its agents.
The definition of "protected retirement investors" would include 401(k) plan participants, individual retirement account owners, and sponsors of retirement plans with up to $50 million in assets.
In addition to generating at least $1.5 billion per year in sales of indexed annuities and traditional fixed-rate annuity contracts, a would-be IMO financial institution would have to go through an annual auditing process, have a responsible person review pending indexed annuity sales before sending the applications to the insurers, and give agents annual class exemption compliance training.
The IMO financial institution would also have to have cash, insurance or other means to pay the claims resulting from any violations of the class exemption requirements. The value of the liability claim reserves would have to equal to at least 1 percent of the IMO's average annual fixed annuity contract sales.
Getting fiduciary status might cost an IMO an average of about $6.6 million. Operating as a financial institution might cost an average of $1.7 million per year, officials say.
'Special risks'
EBSA drafted the class exemption to flesh out the final version of the DOL fiduciary rule, which came out in April 2016. The rule is supposed to prevent conflicts of interest, such as high commission payments, from pushing retirement advisors to sell the wrong products to the wrong people. The rule itself is so strict that, if it were applied as written, it could eliminate many types of investment product sales, by blocking the sellers from earning commissions for selling the products.
Back in April, EBSA developed a Best Interest Contract Exemption to let companies pay commissions for the sale of many traditional retirement investment products. The BICE system requires a financial institution to supervise an advisor. The advisor must acknowledge fiduciary status, get reasonable compensation, give advice that's in the investor's best interest, and disclose fees and potential conflicts of interest.
EBSA officials say they are trying to create a new class exemption for indexed annuity distributors because 22 distributors asked for a chance to apply for financial institution status, and because they believe an indexed annuity is a product that looks simpler than it really is.
In 1984, the DOL created such an exemption, Prohibited Transaction Exemption 84-24, which freed all annuity contract sales from the DOL conduct standards then in effect.
When the DOL created the new fiduciary rule, it also narrowed PTE 84-24. The revised PTE 84-24 applies only to what the DOL calls fixed-rate annuities, or annuities designed so that the crediting rates do not change at all.
EBSA officials say they now want to create an exemption that would be available for all "fixed annuity contracts." The term "fixed annuity contracts" would include both fixed-rate annuities and indexed annuities. Indexed annuities guarantee payment of a minimum crediting rate, along with the potential to earn extra payments based on the performance of an investment index, such as the Standard & Poor's 500 Index.
"Fixed indexed annuities, with their blend of limited financial market exposures and minimum guaranteed values, can play an important and beneficial role in retirement preparation," officials say. "At the same time, however, these annuities, which are anticipated to be the primary type of fixed annuities sold under this exemption, often pose special risks and complexities for investors."
