Deciphering the DOL rule at NAILBA 35

At NAILBA 35 in Dallas, which just ended, the topic of the DOL fiduciary rule was on most people's minds. Chris Morton, senior vice president of government affairs for AALU, was on hand to decipher where the insurance industry now stands with regards to the rule.

"There are a lot of challenges but also a lot of opportunities with what's coming out of Washington," Morton said. "Today we have to continue to prepare as if nothing is changing. From a business perspective, we have a lot of risk if we don't prepare."

The question on most of the attendees' minds was 'what now?' We have President-elect Trump, who is assembling his transition team and making appointments. Does this mean the DOL rule will be altered or even abandoned completely?

"The thing to remember is it's not as simple as come into office, get inaugurated, sign a piece of paper and were done," said Morton. "There's a process he has to go through to deal with regulatory changes. Something governing this is the Administrative Procedure Act. You have to go through this to make changes to something that has already been enacted."

Morton noted that there has already been talk of delaying the current applicability date of April 10, 2017. He reminded session attendees that there are leaders in Congress who have repeatedly said they have big concerns with the rule.

Though there is a lot of uncertainty around the rule now, Morton noted that there is an interest and willingness to explore options from all sides [of the political world]. "Especially since after the election," he said. "If Clinton was elected, we'd not be having these conversations right now."

Morton deciphered the DOL rule with numerous facts and calls to action.

Here are some of the key developments that precipitated the fiduciary rule:

- Obama White House/DOL: IRAs are where the ERISA money goes and the rules were too loose
- Rollovers key advice/decision point, but generally not covered by ERISA
- 2010: ERISA plans were at $6 trillion, IRAs at $4.5 trillion
- 2015: ERISA plans were at $7 trillion, IRAs at $8 trillion (almost double from 2010)
- Solution: "ERISA-fy" IRAs

ERISA may be the tail wagging the dog.

"IRA assets have almost doubled," Morton said. "The DOL was sitting there thinking, 'here's our opportunity to capture more of the marketplace and regulate it."

To his point:

- DOL jurisdiction is conduct, not license — advice to a plan/IRA is covered regardless of whether insurance, securities, banking or consulting
- Bypassed Congressional and SEC gridlock through "normal" rulemaking process
- Covers about $17 trillion in assets — will financial institutions maintain separate compliance systems or convert all?

Backers of the new fiduciary rule beleive it will "ensure that Americans who are saving for retirement will have access to financial advice in their best interest," Phyllis C. Borzi, the assistant secretary of labor for employee benefits security, wrote in a recent blog post. (Photo: iStock)

Overview of fiduciary rule package

Morton deemed it important that agents and advisors understand the following.

- The rule package consists of final regulation redefining fiduciary advice and several new or amended prohibited transaction exemptions.
- An expanded fiduciary definition used in ERISA and in tax code prohibited transaction rules also is included.
- Exemptions — new Best Interest Contract (BIC) Exemption, revised PTE 84-24, revisions to several others — all include new fiduciary standard

"We've got to preserve the commission-based model and preserve options and choice for consumers," Morton urged.

What advice is fiduciary under the rule?

There are three columns. According to Morton, you must check a box in each one to be a fiduciary under the new rule.

First column: Who am I talking to?

Advice may be fiduciary investment advice if it is provided to:

- IRAs (and other entities under IRC §4975) or
- ERISA plans, or plan participants/beneficiaries

Second column: What am I talking about?

- Recommendations as to acquiring, holding, disposing of or exchanging investments
- Recommendations of distributions or rollovers to participants and IRA owners (including whether, in what amount, in what form, or where to)
- Recommendations of fiduciary advisors
- Recommendations of type of investment account (e.g. brokerage vs. fee-based)

"This is important because it's including several factors: whether you're making a recommendation, what amount, where to, etc.," Morton said.

Third column: How did the conversation start?

- The advisor acknowledges fiduciary status;
- Written or verbal agreement, arrangement or understanding that advice is based on the particular investment needs of the recipient; or
- Advisor directs the advice to a specific recipient regarding the advisability of a particular investment or management decision.

"This is important," noted Morton. "It has to be individualized — the written or verbal agreements."

"There are ways you can conduct business that don't trigger fiduciary status," Chris Morton with the AALU said during a NAILBA 35 workshop. (Photo: iStock)

Final rule exclusions from advice definition:

- Education — you can discuss more retirement needs and income issues, less freedom to discuss investments
- Financial professional — not advice to talk to another advisor
- $50 million+ fiduciary — not advice (with disclosure) to talk to fiduciary of plan/IRA managing $50 million+
- Platform provider — not advice to provide platform, selection/monitoring assistance, if not individualized, can respond to RFP with sample line up
- General communications — reasonable person not viewed as recommendation

Morton closed by reminding those in attendance that as we move forward with a new administration and Congress, we must make sure all of us are clearly advocating for choice, access and integrity of the commission-based model.

"It's clear that for the vast majority of consumers, the more affordable choice is a commission-based choice," Morton said. "In a world where retirement planning is nowhere near where it needs to be, we've got to make sure the rules are not only clear and workable but policymakers understand there is tremendous value for what we do for the American public. That message needs to be continued very strongly."

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