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June 10, 2015 at 10:43 AM
The Department of Labor’s proposed conflict-of-interest rule would bring significant changes to how advisors for retirement plans and IRAs can be compensated on the annuity and insurance products they recommend, according to a brief from Drinker Biddle.
Under current regulations, prohibited transaction exemption 84-24 allows advisors to receive commissions on annuity contracts, regardless of whether the products are considered to be “securities” under securities law.
But that would change under the DOL’s proposal, which would limit the exemption to the sale of insurance contracts that are not securities under securities law, according to a memo from the firm’s ERISA experts, which includes Fred Reish.
Fixed annuity contracts can be exempted from prohibited transaction regulations because they are not regarded as securities.
But the law does regard variable annuities as securities. The DOL’s proposal would not allow exemptions for variable annuities when they are sold to IRA account holders, unless they are accompanied with a Best Interest Contract Exemption, which clarifies an advisor’s role as a fiduciary, the commissions they are making on the annuity recommendation, and whether or not their advice posses a conflict of interest.
Advisors to 401(k) plans would be able to continue to apply existing exemptions to all annuity products, fixed or variable, regardless of whether they are regarded as securities or not.
The proposal would also limit the types of commission advisors receive for annuity sales to both retirement plans and IRA accounts.
