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DOL’s proposal significantly affects annuities

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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.

Revenue sharing payments, administrative fees, marketing payments and payments from third parties other than the insurance company issuing the annuities would all be prohibited.

The rule also expands the definition of ERISA’s fiduciary standard to advisors that recommend annuities to participants in plans, and also to the sale of group annuity contracts sponsors use to structure pension de-risking schemes.

And advisors would be beholden to a fiduciary standard of care on all plan distributions and IRA rollovers, including those that annuity recommendations.

“The proposal will have a significant impact on Insurance Advisors,” wrote the attorneys. 

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“Under the proposed fiduciary definition, most Insurance Advisors would be considered fiduciaries, subject to the Best Interest standard and prohibited transaction rules,” they added.