To the surprise of many, the Department of Labor allowed the previous administration’s final fiduciary advice regulation, officially titled Prohibited Transaction Exemption 2020-02, to go into effect on Feb. 16. The focus of PTE 2020-02 is on broker-dealers and registered investment advisors, but how does this turn of events impact insurance producers?
Does PTE 2020-02 Matter For Insurance Sales?
This new PTE, in itself, probably has little impact on annuity and certain life insurance sales. This is simply an additional way for persons who are categorized as “fiduciaries” under Section 4975 of the Tax Code to qualify to be paid a commission for selling products or services to qualified plan participants and individual retirement account owners. No one is required to use this particular new PTE instead of preexisting ones.
For decades, PTE 84-24 has covered insurance agents and brokers and their affiliates to allow the sale of life insurance and annuities to qualified plans. This option remains available, and the DOL has recently clarified that PTE 84-24 also covers sales to IRA owners and commissions paid to insurance intermediaries as well. For PTE 84-24 to “permit” the sale of an annuity or insurance policy with qualified funds, the participant or owner must sign a disclosure document authorizing the transaction. The PTE 84-24 disclosure must contain:
- The nature of any affiliation or relationship with the insurance company whose contract is being recommended, and any limitations on the products that can be recommended.
- The sales commission, expressed as a percentage of gross annual premium payments.
- A description of any charges, fees, discounts, penalties or adjustments under the contract.
The Preamble Is The Real Story
The preamble to PTE 2002-02 is where we find the important news. It provides commentary regarding how the DOL’s career staff think the regulatory definition of fiduciary investment advice — which dates back to 1975 — should be interpreted in the present retirement savings marketplace.
When the Fifth Circuit Court of Appeals vacated the Obama administration’s regulation redefining the term “fiduciary” in 2018, the DOL was required to revert to this five-part test for fiduciary investment advice: “(1) … make recommendations as to the advisability of investing in, purchasing or selling securities or other property (2) on a regular basis (3) pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary or IRA owner, that (4) the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and that (5) the advice will be individualized based on the particular needs of the plan or IRA.”
Back in 2005, the DOL issued Advisory Opinion 2005-23A (the “Deseret Letter”), which said that a recommendation to rollover is not advice to sell, withdraw, or transfer assets invested in a qualified plan. This meant that rollover recommendations were categorically excluded from the definition of fiduciary investment advice. Last summer, the DOL formally withdrew this advisory opinion, saying its earlier analysis was incorrect. Instead, financial professionals should look at rollover recommendations in the context of their entire relationship with the person receiving the advice when determining whether fiduciary duties apply to their recommendations.
The preamble provided useful clarification that “if a financial institution or investment professional does not want to assume a fiduciary relationship or create misimpressions about the nature of its undertaking, it can clearly disclose that fact to its customers up front, clearly disclaim any fiduciary relationship, and avoid holding itself out to its retirement investor customer as acting in a position of trust and confidence.” While it has not provided bright-line rules, the DOL has made it clear that disclaiming fiduciary status is permissible, as long as other communications and actions are consistent with that disclaimer.
To-Do List For Insurance Producers
When the Obama administration’s fiduciary regulations were being delayed and litigated, the DOL issued a temporary policy of not enforcing prohibited transaction rules against persons who were following the basic “impartial conduct standards” laid out in the (now-defunct) Best Interest Contract Exemption. These standards are simply good professional practices: acting prudently and in the best interest of the client, compensation being reasonable, and not making misrepresentations. The preamble announced that this temporary non-enforcement policy will come to an end on Dec. 20, 2021. This gives financial professionals most of this year to determine more specific plans for compliance going forward.
Financial professionals should consult with their compliance officers and/or legal advisors for specifics, but these are some key items to be addressing:
- Sales of qualified variable and indexed annuities. When selling annuities in which the owners can make changes in their account allocations or other features, it is reasonable to expect that the clients will continue to look to their agents for additional advice after the initial sale. The safe assumption is that recommendations to rollover to these types of annuities are fiduciary advice, in which case complying with the requirements of an applicable PTE will be necessary. Issuing insurance companies are best positioned to produce standardized PTE 84-24 disclosures for their products. Check with the companies whose products you distribute to make sure they are planning to include these forms with their application packets soon, if they don’t already.
- Sales of qualified “simple” fixed annuities: Fixed, non-indexed annuities may be recommended on a onetime basis, in which case they would fail the “regular basis” part of the five-part test and not be fiduciary investment advice. However, if they are sold in the context of a broader relationship of providing advice on retirement investments, these sales may be subject to the fiduciary rules. Professionals selling these products should consider whether it is more appropriate to prominently disclaim fiduciary status, or to use PTE 84-24 disclosures “prophylactically.” (Unlike PTE 2020-02, PTE 84-24 does not require anyone to represent themselves as a fiduciary.)
- Sales of life insurance to qualified plans: IRAs cannot own life insurance, but some employer-sponsored plans can. Carriers issuing policies in this niche space may have already been providing PTE 84-24 disclosures in their application packets; make sure they are doing so going forward.
Whether called a “fiduciary” or “best interest” or “enhanced suitability” standard, various federal and state regulators are increasingly converging on certain best practices when it comes to making recommendations for financial products and services. This can enhance opportunities to demonstrate your valuable expertise to clients. However, it can be challenging to make sure specific documentation and disclosure requirements are followed when different rules apply to different transactions. Always consult with your compliance officer to get clarity about which requirements apply to your particular practice and situation.
H.L. Vogl, JD, CFP, serves as director, advanced sales, at Crump Life Insurance Services and serves on the company’s regulatory council. He may be contacted at [email protected].
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