Industry Players Weigh In on the DOL's New Fiduciary Definition

By Allison Bell

News April 25, 2024 at 02:49 PM

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What You Need To Know

The Investment Company Institute is still deliberating
David Lau says the final rule reflects common-sense best practices.
The ACLI, Finseca, FSI, NAFA and NAFA are not impressed.
Seth Friedman has thoughts about how the flow of cash could change.

Seth Friedman, who once distributed annuities himself, is wondering how the Labor Department's new final retirement investment fiduciary definition regulation will actually affect the flow of cash through the annuity distribution ecosystem.

The Investment Company Institute is still going through the 466-page regulation packet.

A group that represents investors' lawyers is happy.

Many groups in the life insurance and annuity sector are furious that the department is disrupting the mechanisms they use to provide retirement planning products and advice at a time when tens of millions of U.S. workers have no retirement savings at all.

The Labor Department set off a wave of reactions by completing work on its fourth effort to expand efforts to regulate people and companies that help retirement savers make investment decisions.

The department has used the retirement investment advice fiduciary definition to apply Employee Retirement Income Security Act fiduciary requirements on anyone who regularly provides investment recommendations for people who are using 401(k) plan accounts, individual retirement accounts or similar arrangements to build their nest eggs.

Department officials say they are able to set broad standards because ERISA gives them strong authority to regulate the assets accumulated in accounts that benefit from federal retirement savings tax incentives.

Here's a sampling of reactions to the final rules. The comments and statements have been edited for length.

Practitioners

Seth Friedman, a former annuity wholesaler and owner of AdvisorSquawk.com:

No one whom I have spoken with believes this regulation will cut [annuity industry] fees, unless this perspective is based on the advisor and their affiliated insurance agency forgoing commission as a result. If that's the case, I suspect the industry will react by increasing interest rates on multi-year guaranteed annuities and participation rates on fixed indexed annuity products.

This regulation will likely be revenue-neutral for annuity providers with one exception: Both insurance companies and broker-dealers will likely end up having to add personnel in their compliance departments to address outcomes brought by these new rules. Aside from that point of view, the rest of what occurs is up in the air.

One unknown effect of the regulation is how this issue will impact errors and omissions coverage for all related entities. Clearly, these costs are going to increase for all parties as a result of the enhanced regulatory risk.

Finally, the broker-dealer industry is very adept at squeezing the last dollar out of any opportunity. These firms are likely to seek enhanced revenue-sharing funds as a result of commission being left on the table.

Annuities are frequently referenced as being sold rather than bought by a given client. Once this regulation goes live, I suspect there will be a lot of focus on how the funds that were previously used to pay commission are allocated.

Jack Elder, senior vice president of advanced markets at CBS Brokerage:

Many Americans are financially unprepared for retirement, with the retirement gap in the trillions. Yet, the DOL's Fiduciary Rule 3.0 would disproportionately impact savers in lower-income brackets by limiting consumer choice.

The rule classifies commissions as "junk fees" in favor of a fiduciary-only model.

This one-size-fits-all approach may make it harder for advisors to provide some clients with comprehensive financial advice. Moreover, the rule unnecessarily overlaps established federal and state consumer protections.

Howard Sharfman, senior managing director at NFP Insurance Solutions:

Some companies will not want that fiduciary liability. The industry will shrink.

I believe in regulation, but this is too much.

Organizations

Eric Pan, CEO of the Investment Company Institute:

ICI is reviewing the DOL's final rule, bearing in mind the concerns we raised that it may raise costs and interfere with middle-class savers' access to the guidance, products and innovative tools they rely on to meet their retirement goals.

We have always strongly supported the principle that financial professionals should act in their clients' best interests when offering personalized recommendations, as the SEC's Regulation Best Interest for broker-dealers already requires.

We will examine the rule in detail to see how the DOL has responded to the hundreds of comment letters it received providing detailed public input on the proposal.

Supporters

Micah Hauptman, director of investor protection at the Consumer Federation of America:

Financial professionals, including most prominently insurance professionals, consistently characterize themselves as in relationships of trust and confidence with their customers who rely on their advice.

These financial professionals' business models shouldn't be structured to bilk those customers out of a secure and independent retirement, then evade accountability for those actions.

We expect industry opponents who don't want to or aren't capable of competing for customers based on the cost and quality of their services will try to defeat these landmark rules in both Congress and the courts, as they did the last time the DOL attempted to strengthen protections for retirement savers. This time, however, the industry opponents' efforts will not be successful.

David Lau, CEO of DPL Financial Partners, a web-based platform for commission-free annuities:

Investment recommendations for retirement savings need to meet a fiduciary standard — this should be self-evident and inarguable. Retirement is a critical and vulnerable financial time for most Americans, and they need to be confident that their financial advisor is giving them the best advice for their circumstances.

We applaud the Department of Labor's Retirement Security Rule as an important step toward ensuring that retirement investment advice is delivered in a fiduciary manner. The rule adds a critical layer of definition and transparency, which will provide retirement investors with assurance they are receiving advice in their best interest and an understanding of how the person making a retirement investment recommendation is being compensated.

We strongly believe this rule will increase the availability of fiduciary retirement advice and solutions. Oftentimes, regulation can spur market innovation.

Over the past several years, insurance carriers have been bringing commission-free products to market for fiduciary advisors to use with their clients at the same time as advisors increasingly embrace fee-based compensation models and fiduciary commitments; this rule will only accelerate that innovation and transition.

Annuities are critically important financial tools for retirement savers tasked with funding retirements that can span 30 years or more. But a non-fiduciary sales approach has tarnished their reputation and limited adoption.

The insurance industry has lagged behind the larger trend: Most of financial services has moved away from commissions to fee-based, fiduciary models, and it is only a matter of time before consumers demand that insurance does the same.

The Retirement Security Rule reflects common-sense best practices. It is time for the industry to put consumers first by aligning with modern compensation models and transparent business approaches.

This rule is a win for retirement investors who need advice they can trust. In the short term, it will protect investors from the impacts of conflicted advice. In the long term, it will reduce consumer skepticism and engender trust, which will instill consumer confidence in these important products.

Joseph Peiffer, president of the Public Investors Advocate Bar Association:

The newly finalized DOL rule, which imposes a fiduciary duty on advisors, ensures that they will have to put their clients' financial interests ahead of their own. It's not a minor issue. Conflicted advice costs Americans billions of dollars a year. This rule will finally put a stop to that.

We're going to be hearing from Wall Street and the insurance industry that the sky is falling and that their businesses are in jeopardy. That couldn't be farther from the truth. Financial advisors are not going to go extinct.

In fact, advisors already benefit from the widespread public perception that it's their job to act in their clients' best interests. Frankly, it's an insult to the intelligence of hard-working Americans when advisors claim their jobs are threatened by the prospect of providing the unconflicted advice they know their clients already expect.

PIABA strongly urges Congress to reject the inevitable industry efforts to block this rule to perpetuate its multibillion-dollar cash grab from unsuspecting families.

Opponents

Susan Neely, CEO of the American Council of Life Insurers:

The final fiduciary-only regulation released by the Department of Labor resurrects past mistakes that will harm retirement savers and their access to the professional financial guidance they want and need.

Despite substantial concerns voiced by members of Congress and echoed in the thousands of comments from consumers, the department chose to move forward with a regulation that is alarmingly similar to the department's 2016 regulation.

Before it was struck down by a federal court, that regulation resulted in more than 10 million American workers' accounts with $900 billion in savings losing access to professional financial guidance.

The department also has chosen to ignore the significant progress made to strengthen consumer protections since 2018. To date, 45 states have adopted the 'best interest of consumer enhancements' in the NAIC Suitability in Annuity Transactions Model Regulation.

More than 90% of Americans now live in a state that has adopted a best interest standard for annuity sales. These new laws and regulations also align with the SEC's Regulation Best Interest, providing robust consumer protections at the state and federal levels.

These measures represent a better way to protect consumers than the department's ill-advised regulation. They enhance the standards financial professionals must follow, and, unlike the Labor Department's fiduciary-only approach, they safeguard consumers' access to, and information about, annuities, the only financial product in the marketplace that can provide guaranteed income for life.

The regulation is out of touch with real-life issues facing retirement savers. More than 4.1 million Americans will be turning 65 each year through 2027. Most of them will not have access to traditional pensions and will need options for lifetime income like annuities provide. Now more than ever, public policy should expand and not limit people's options for retirement.

The department's actions also defy legislative efforts to tackle retirement vulnerabilities for middle-income earners. The U.S. Congress reaffirmed the importance of lifetime income when it passed legislation in 2019 and 2022 that made it easier for employers to include annuities in workplace retirement plans. Regulations that impede this progress cannot and will not stand.

ACLI will carefully scrutinize the regulatory package and consider what can be done to ensure retirees have access to the professional help and financial products they want and need for a secure retirement.

Dale Brown, CEO of the Financial Services Institute:

We are carefully reviewing and analyzing the rule. However, we remain concerned that the final rule will have a negative impact on Main Street Americans' access to financial advice as they attempt save for a dignified retirement.

Our members already adhere to an extensive regulatory regime, including the SEC's Regulation Best Interest and the DOL's existing PTE 2020-02. We are concerned that the new rule will limit retirement savers' access to professional financial advice, products and services offered by independent financial advisors and firms and create a more complicated, burdensome and costly regulatory environment.

In addition, the abnormally rapid pace of this rulemaking raises additional concerns. With the quick turnaround between the comment period deadline and the final rule release, we question whether the DOL could adequately assess and address the comments raised.

In January, FSI submitted a comment letter to DOL outlining the organization's concerns with the proposed rule. Additionally, a study conducted by FSI and Oxford Economics found that the proposed rule would result in over $2.5 billion in costs and 120 million pieces of paper annually.

Marc Cadin, CEO of Finseca:

I continue to believe the DOL is conducting an ideological campaign to ban commissions, as evidenced by their inflammatory and offensive framing of this rule when they initially proposed it, the un-American and absolute disgrace of the lightning pace at which they have pushed this rule through, and the lack of questions or even spirited debate on the substantive issues within this rule.

When I testified before the DOL in December, I received zero questions and zero comments. They didn't challenge or entertain a debate on any of my assertions. The same was true in our most recent — and final — meeting with them; we received zero questions and zero comments from either OMB or DOL.

We were clear that OMB should not let this fiduciary-only approach move forward because it would cause real harm to real Americans. It will make it harder for Americans to access financial advice, it will make it harder to bring new professionals into the business, dramatically raise costs for the profession, and make millions of people less financially secure.

As I told Congress in January, this rule not only flaunts the bipartisan will of Congress over the last four decades, but also it takes our country in exactly the wrong direction. Millions of Americans already have a retirement savings gap in the trillions.

In the next decade, Social Security will go insolvent. Our national debt is nearly $35 trillion. The only possible answer is more private-sector solutions.

Research from Ernst and Young has clearly shown that a holistic financial plan that includes life insurance, especially permanent policies, investments, and deferred income annuities, outperforms investment-only or investment-plus-other-products approaches in every combination.

More Americans need access to financial security professionals to create those holistic plans so they can absorb the challenges that life throws their way.

At a time when we need to encourage more Americans to pursue holistic financial plans, we must expand access and choice to advice — not limit it.

Wayne Chopus, president of the Insured Retirement Institute:

Based on our preliminary review, in issuing this unnecessary and redundant rule, DOL disregarded data showing how millions of lower- and middle-income consumers will be deprived of access to affordable retirement planning assistance.

This rule is the product of a severely flawed rulemaking process and defies applicable judicial precedent and the limitations on DOL's rulemaking authority as established by Congress.

This new rule reflects DOL's belief that these robust federal and state regulations do not effectively protect consumers, but DOL has offered no current, real-world evidence that the current regulatory framework is not working. Under this rule, consumers will pay the price in lost opportunities to plan for a secure and dignified retirement.

Chuck DiVencenzo, CEO of the National Association for Fixed Annuities:

It has been obvious from the outset that the DOL was intent on continuing its quest to push the regulatory boundary of IRAs past the original congressional intent of the Employee Retirement Income Security Act of 1974 under false pretenses supported by back-of-the-napkin calculations.

The process has been marred by a paucity of meaningful engagement between the DOL and industry stakeholders.

Instead, the department has dangerously rushed to put into effect a rule that disregards the value of independent distribution, the desire for Main Street savers to work with the professional service providers of their choosing and the need for products that can provide predictable lifetime income.

Ultimately, we anticipate more confusion, higher costs and less financial security for low- and middle-income savers who need it most.

Recently, fixed annuity sales have experienced several quarters of record sales numbers, in part due to consumer concerns about ongoing market volatility and longevity risk.

Annuities are the only financial product that allows retirement savers to protect a portion of their nest egg from market declines while providing the opportunity to earn interest and generate a predictable stream of income payments that last a lifetime.

Meanwhile, according to the Investment Company Institute, approximately $6.9 trillion in assets are held in more than 710,000 401(k) plans, on behalf of about 70 million active participants and millions of former employees and retirees.

The new rule is expected to significantly hinder the ability of independent annuity professionals to use annuity products to help Americans move some of their hard-earned retirement savings out of such defined contribution plans into a vehicle that can help augment their retirement security.

This administration has repeatedly cited its desire to institute commonsense policies that help protect consumers from financial harm.

Yet here we are with new regulations that contradict robust, uniform consumer protections that have been implemented by the states to ensure that financial professionals are providing recommendations in their clients' best interests.

Currently, according to LIMRA data, more than 40% of annuity sales are conducted by those professionals in the independent channels, which will unquestionably be most negatively impacted by the burdensome compliance requirements of this rule.

Instead of celebrating the hard work these professionals do to combat retirement savings challenges, the DOL is effectively threatening their livelihoods and the future of millions of Americans they diligently serve.

The National Association of Insurance Commissioners:

We continue to have significant concerns about the potential impact of the Department of Labor's final fiduciary rule on access and choice for American retirees to certain life insurance and annuity products.

These products have been recognized by multiple administrations of both political parties as an important option for retirees to manage their risk of outliving their savings.

The final rule, which was rushed through the administrative process at DOL and the Office of Management and Budget with virtually no coordination with state insurance regulators, also discounts the work of 45 states and counting to enhance consumer protections for these products by adopting the NAIC's Suitability in Annuity Transactions Model Regulation, which extends a level playing field to products sold within and outside a retirement plan.

(Credit: Chris Nicholls/ALM)

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