Preparing Independent Agents for Compliance with DOL’s Retirement Security Rule
The Department of Labor (DOL)’s new Retirement Security Rule (“Rule”) - along with the associated Prohibited Transaction Exemptions (“PTE”s) 2020-02 (for professionals working under the auspices of a financial institution), and 84-24 (for independent agents) that allow a financial professional (“FP”) to receive compensation in respect of a recommendation made to a Retirement Investor - will, absent successful legal challenge, become effective September 23, 2024.
Historically under ERISA, a regular basis of communication was one prong within a five-part test, all prongs of which needed to be met, to determine that conduct was being performed by a fiduciary. This Rule is the first time the regulator has determined that even one-time sales transactions automatically establish fiduciary relationships. The Rule will be applicable whenever a new, personalized recommendation is made to a Retirement Investor on or after the effective date.
While this Rule will affect agents, insurance manufacturers, financial institution distributors, and several other constituencies (and we will write more in the coming months on this subject), this blog post focuses on how a revised PTE84-24 will impact independent agents. Independent agents, in the context of the Rule, refers to individuals appointed with two or more carriers, irrespective of whether they hold securities licenses. With respect to the activity of independent agents, the Rule applies whenever the agent recommends that a Retirement Investor purchase fixed, non-security insurance products that include an investment component, and it applies even when the investment component is fully guaranteed. Independent agents are the only form of FP that will operate without a co-fiduciary in this brave new ERISA world with which most agents have historically had little experience.
Upshot of Independent Agent Impact
The Rule makes an FP an investment advice fiduciary whenever the FP makes an individualized investment recommendation to a Retirement Investor (funds either coming from an ERISA plan or an IRA) for a fee or other compensation, and that FP either acknowledges routinely being in the business of providing financial recommendations, or acknowledges that they are acting in a fiduciary capacity when making a recommendation to a Retirement Investor. Because independent agents will not be sharing this ERISA fiduciary responsibility with an overseeing institution, they represent the community most in need of education and support from their Marketing Organization partners, their industry associations, and their other community members, such as Axonic Insurance Services.
Why I Disagree with DOL’s Position on the Role Independent Agents Hold with Retirement Savers
While I applaud governmental interest in applying fiduciary standards to a greater proportion of retirement advice delivered, the logic behind governing all forms of financial professional conduct through the lens of “investment advice” is erroneous, for reasons that I have detailed over a several-year-period in articles including those in the links below:
Regulators Must Distinguish Financial Advisement from Investment Advisement
The Time to Define Insurance Advising is Now
RIA Sell Verbs. Agents and Brokers Sell Nouns
Many people think clients pay for “financial plans,” but that is not true. Clients pay either for advice, or they pay for products.
In fact, no form of FP sells a (paper or electronic/PDF) financial plan. Financial planners charge a fee for “having planned.” Insurance agents might offer clients the same PDF output as financial planners would provide, as part of an effort to connect the consumer with the product the agent believes matches the client’s need. The agent is then compensated via a commission, under Best Interest standards in most states.
The Difference Between Asset Management and Wealth Management
A fiduciary investment advisor managing accurately to the mandate they were given by a client could inadvertently lead to a client running out of money in retirement, and still qualify to call themselves a fiduciary investment advisor.
Wealth maximization is, definitionally, maximizing (assets – liabilities). Accordingly, wealth management, a view that is definitionally more expansive than asset management, should not be regulated under the Investment Advisers’ Act. Most germane to my discomfort with the regulatory frame that has led to this Rule is the notion that all FPs sell investment advice. In reality, insurance agents sell liability minimization products to consumers with such needs, meaning that agents sell neither “investments” (which are asset maximization products) nor “advice.”
A financial professional that is not an RIA is precluded by the SEC/FINRA from self-identifying as “investment advisor”, yet, by requirement of DOL under the Rule, beginning in September 2024, must represent that they routinely sell investment advice. That is a massive logical contradiction. Many financial professionals will, under the Rule, be forced to say they routinely do (sell investment advice) something inconsistent with what they may say they are (an investment advisor). And yet, here we are.
DOL Retirement Security Rule: Independent Agent Impact
Absent success of pending litigation to stay the Rule by insurance lobbying groups, the Final Rule and the amendments to its associated PTEs are to be effective September 23, 2024, applying to “investment advice” associated with ERISA-derived accounts on or after that date. Both PTEs alluded to above include a one-year transition period after their 2024 effective dates; meaning that, during the transition period following the effective date, exemptive relief will be available for both PTEs 2020-02 and 84-24, as long as compliance with the impartial conduct standards and a written acknowledgment of fiduciary status occurs. In order to receive compensation under PTE84-24, once the Rule goes into effect this September, an independent agent is required to:
Comply with “impartial conduct standards” under which they must satisfy a duty of care and loyalty, and
Provide a written acknowledgement of their fiduciary status.
In addition to the 2024 requirements, by September 2025, PTE 84-24 requires independent agents to also:
Provide a written description of their services, and disclose any material conflicts of interest
Provide a notice describing the Retirement Investor’s right to request additional information regarding cash compensation
Prior to the sale, document the basis for the recommendation and provide copies of that documentation to both the Retirement Investor and the Insurer.
September 2024 Retirement Security Rule Requirements for Independent Agents
Fiduciary Status Acknowledgement:
Required written acknowledgement that the independent agent is a fiduciary.
Impartial Conduct Standards:
According to the National Association of Fixed Annuities: https://nafa.com/wp-content/uploads/NAFA_DOLRule_Summary_rev110923.pdf, compliance with Impartial Conduct Standards (ICS) “includes a best interest standard, when providing fiduciary investment advice to Retirement Investors. Generally, compliance with ICS requires that:
The investment advice is in the best interest of the Retirement Investor, reflecting the care, skill, prudence, and diligence a prudent person acting in a like capacity and which does not place the financial or other interests of the Independent Producer or Insurer ahead of the Retirement Investor’s interests;
The Independent Producer receives no compensation in connection with the transaction other than the sales commission, and the sales commission does not exceed reasonable compensation; and
The statements made to the Retirement Investor about the recommended transaction and other relevant matters are not materially misleading.”
Consider These Potential Next Steps in Advance of September
How will agents comply with Impartial Conduct Standards (ICS)?
Meeting this standard requires gathering the information that an expert would consider germane to the recommendation, and then, in a repeatable process, identifying which solutions are in the best interest of the Retirement Investor. What information is necessary for an agent to collect so as to meet the ICS will vary depending on the recommendation type. Would rollover recommendations, for example, necessitate collecting information about plan expenses/offerings and comparing those to the costs and benefits of the recommended solution? How will agents document that the compensation they receive is reasonable? How will agents compare distribution expenses to fees associated ongoing financial advice? How will agents document that comparison?
It is likely that manufacturers and marketing organizations with which agents work may develop guidelines, suggested procedures, and other resources to support a new fiduciary’s processes and decision-making. It is wise for agents to begin considering now how they may meet this standard.
How will agents’ acknowledgement of fiduciary status work?
Carriers and distribution groups are currently discussing a variety of different approaches for how to guide agents towards meeting this responsibility. What guidance are the particular carriers and marketing group(s) with which the agent works giving? Some are considering directly using the model language DOL provided within the Rule. Industry trade groups are collaborating towards a potential common form. Some distributors may require a different approach. Agents should be in active communication with their business partners about what that partner’s approach is likely to be.
Agents should avail themselves of educational information available through industry trade groups.
Agents should consider joining industry trade groups. As one example, NAIFA has collaborated with several industry trade groups in pushing back against this Rule, and has provided educational materials for agents on its website here: https://advocacy.naifa.org/naifa-responds-to-the-dol, and NAFA has provided its summary of impact to independent agents here: https://nafa.com/wp content/uploads/NAFA_DOLRule_ProducerTop10_061724.pdf
Agents should inquire about the support services their Marketing Organization intends to provide.
It is likely that different organizations will take different approaches to how they support agents that need to meet these obligations. The most important thing for agents to keep in mind as they prepare for this deadline is that the legal responsibility for meeting these requirements falls with the independent agent.
The insurance company with which the agent writes a policy has oversight responsibility on the transaction, but it does not serve as co-fiduciary with an independent agent, and neither does a Marketing Organization.
Agents should consider their current and intended affiliations in light not only of the factors currently influencing those decisions, but also in light of the support that organization will provide to the agent in meeting this legal obligation. For example, in the preamble to PTE84-24, the DOL points out that: “…Insurers could choose to comply with the policies and procedures requirement by creating oversight and compliance systems through contracts with insurance intermediaries such as IMOs, FMOs, or brokerage general agencies (BGAs). Such intermediaries, for example, could eliminate compensation incentives across all the Insurers that work with the intermediary, review Independent Producers’ documentations, and/or use third-party industry comparisons available in the marketplace to help independent insurance agents recommend products that are prudent for their Retirement Investor customers.”
Will the agent’s Marketing Organization facilitate an approach like the above? If not, what is its intended approach?
Know your E&O: In the plan advisory community, not all Errors & Omissions (E&O) policy providers expressly cover fiduciary risk. It is unclear at this time to what degree different carriers might or might not cover claims related to fiduciary conduct. It is also unclear the degree to which E&O rates may rise due to the Rule. It would be wise for agents to investigate questions of fiduciary coverage with their E&O carrier
Agents should consider asset location planning strategies for themselves: In my 25 years of insurance industry experience, I have seen many insurance product sales concepts geared towards professional service providers, e.g., doctors who face personal liability based on their professional conduct. Independent agents are about to enter this category. Agents should consider if asset location strategies that agents might pitch to service provider clients might now make sense for their own planning.
As it stands, industry has more questions than answers about how practically to comply with the Rule. It is important for agents to work with their carrier and Marketing Organization partners to start preparing now for how they may be able to help them comply with these standards.
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About Michelle Gordon:
Michelle is a highly experienced insurance industry executive and intellectual property developer with over twenty years of experience in the insurance and advisory industries. Currently the Chief Operations Officer and Head of Retirement and Advisory at Axonic Insurance Services, she most recently simultaneously operated her own strategic consultancy MRG Advisers, primarily serving insurers and financial institutions on program development at the intersection between ERISA and annuities, while leading the nonprofit Institutional Retirement Income Council which advocates for Defined Contribution income, and co-founding Registered Investment Adviser Annuity Research & Consulting. Michelle previously served as Managing Director, Retirement Enhancement Solutions at Milliman Inc., developing non-guaranteed longevity risk-pooled products. Michelle began her life and annuity career at New York Life Insurance Company, where she held various executive positions including overseeing product development for accumulation-oriented life insurance products, served as regulatory principal and strategic overseer for its distributing Broker Dealer and Registered Investment Adviser, and as intellectual property developer named on a patented method for the inclusion of insured solutions within holistic lifetime wealth optimization.
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