Close Close

Financial Planning > Tax Planning > Tax Reform

NAIFA team to DOL: Make the fiduciary rule workable — or else!

Your article was successfully shared with the contacts you provided.

If the Department of Labor doesn’t revise its proposed fiduciary standard to satisfy the concerns of retirement advisors, then the industry is prepared to support Congressional legislation that would cut off the department’s funding.

That drastic measure was among the steps the government relations team of the National Association of Insurance and Financial Advisors said it might back if the DOL finalizes the current draft of the proposal, which NAIFA views as “ugly” and “unworkable.” The association’s strong opposition to the proposal, in addition to other legislative and regulatory threats to the industry, received a full airing during a one-hour legislative forum at NAIFA’s 2015 annual meeting in New Orleans on Oct. 5.

“If you don’t want to be a fiduciary, then you’ll have work for free under the DOL proposal,” said Magenta Ishak, a vice president of political affairs at NAIFA. “That’s the dismal future for NAIFA members who don’t wake up and take this issue seriously. Your [advocacy] activities and those of tens of thousands other agents and advisors across the country will be the deciding factor in whether or not we win this fight.”

Battles aplenty ahead

While the DOL proposal is the issue of greatest and most immediate concern, NAIFA is girding itself to push back against many legislative and regulatory threats. Diane Boyle, NAIFA’s senior vice president of government relations, said the 113th Congress, which concluded its two-year term last January, introduced more than 1,500 bills “of interest.”

The current Congress is on track to have just as many, including one that could be especially damaging to the industry: the Highway Trust Fund, which relies on a federal fuel tax to pay for road construction and smaller mass transit projects.

Why the concern? The trust is not adequately funded to meet current infrastructure needs; many of the nation’s aging highways and bridges are badly in need of repair or replacement. A revising of the tax treatment afforded the insurance industry’s products would provide a source of much-needed revenue.

Danea Kehoe, a NAIFA outside counsel at DBK Consulting, identified three areas of concern:

1. A revising of the valuation of taxable estate assets.

2. The extension of a current rule that allows overfunded defined benefit plans to use excess monies to provide post-retirement health insurance and group life insurance

3. A tax provision requiring heirs of inherited IRAs and 401(k) plans to pay tax on their inheritances within five years of an IRA owner’s death.

Turning to tax reform — also a threat to the tax treatment of life insurance products — Kehoe said an overhaul of the Internal Revenue Code remains a high priority in Congress because it would yield big benefits. Among them: a simplification and streamlining of code provisions; a lowering of income tax rates; a broadening of the tax base; and the elimination of tax incentives that, in many cases, misallocate economic resources.

Despite the promise of tax reform, Kehoe said the likelihood that Congress will bring legislation to the floor this year or next is low (though, she was quick to add, “It is coming.”)

“[Tax reform] is everyone’s top priority in concept, but translating the concept into an action agenda is so far proving insurmountably difficult for our elected lawmakers and for the interest groups that work in Congress,” said Kehoe. “A primary reason that tax reform efforts have failed to date is because of the fierce defense mounted by those who would be hurt by specific tax reform proposals.”

“And that means you,” she added. “Your efforts have built a strong firewall against proposals to tax life insurance and annuity inside build-up. Your efforts have contributed mightily to the defense against adverse tax changes to the rules governing employer-provided benefits, including health insurance and retirement savings plans.”

If not a threat at the federal level, tax law changes remain a danger in states that are looking for ways to close budget gaps. Gary Sanders, NAIFA’s counsel and vice president of government relations, said that the industry’s products remain “big, juicy targets” for state bills that have sought to impose taxes on policy premiums, product sales and tax services.

Sanders also identified as threats bills that would set up mandatory state-sponsored retirement plans for employees who don’t have a private plan. The worst of the state plans, he warned, would compete with those offered by agents and advisors in the private market. But he noted also that not all the state bills are bad.

An example of good legislation, he said, is a law passed earlier this year in Washington State that sets up a retirement clearing house to help educate employees about the need for retirement savings; and that avails employees of private market retirement solutions to fit their needs.

Examples of “bad and ugly laws,” he added, include those passed by California, Illinois and (most recently) Oregon, which mandate employer/employee participation in a state-run retirement plan that competes with private sector solutions. “None of these [state-sponsored] plans have actually enrolled anyone,” said Sanders. “And there are serious questions about their tax status and applicability under ERISA [Employee Retirement Income Security Act].”

Turning to developments he labeled “okay,” Sanders said that NAIFA was able convince legislators in about a half-dozen states to set up a commission to study the issue before introducing legislation in (most likely) 2016.

Also a focus for NAIFA at the state level: laws enacted in a half-dozen states that aim to protect seniors from financial fraud and exploitation. Most importantly for NAIFA members, these laws provide a “safe harbor” from liability when they or their firms report suspected fraud or exploitation of their senior clients.

“The NAIFA board recently approved a policy statement outlining our general conditions of support for this type of legislation,” said Sanders. “Also, NAIFA staffers testified before the [National Association of Insurance Commissioners], urging the NAIC to become involved on this issue. At NAIFA national, we’re working on developing our own model law to help protect your senior clients.”

Turning to federal securities regulation, Sanders said NAIFA’s main focus remains the Securities and Exchange Commission, which the Dodd-Frank Act of 2010 authorized (but did not require) the establishment of a uniform fiduciary standard for investment advisors and broker-dealers. Sanders said that NAIFA’s consistent message throughout the SEC’s deliberation on this issue has been “do no harm.” NAIFA specifically fears the imposition of a fiduciary rule that would raise advisors’ cost of doing of business and reduce midmarket investors’ access to financial products, advice and services.

Wide industry opposition

This fear could now be realized, albeit by a government arm not anticipated back in 2010: The Department of Labor. Re-proposed by the DOL last April, the 1,000-plus pages in fiduciary regulations have met with widespread industry opposition, including the American Council of Life Insurers (ACLI), the Association for Advanced Life Underwriting (AALU) and the National Association of Independent Life Brokerage Agencies (NAILBA), in addition to NAIFA.

Among other provisions, the proposal requires that advisors put their client’s best interest first by providing impartial retirement plan advice. To receive commissions on product sales, they must qualify for a best interest contract exemption or BICE. 

That means inking a contract with clients that: (1) commits them to providing advice in the client’s best interest (i.e., acting as a fiduciary); and (2) warrants that the firm has adopted practices and procedures designed to mitigate potential conflicts of interest when providing advice.

“The DOL rule is ugly; it doesn’t work,” said Judi Carsrud, NAIFA’s director of federal relations.

She added the proposal makes recommending an annuity to retirement savers “almost impossible” and greatly increases the risk of unfounded lawsuits. The reason: The proposal’s extensive regulations will make staying in compliance very difficult for advisors. Carsrud directed her severest criticism at the ban on commissions for advisors who continue to operate under a lesser, product suitability standard.

“If you don’t want to be a fiduciary advisor, then you can work for free,” said Carsrud. “Clearly, this is not a solution.”

To prevent the proposal’s implementation, she added, NAIFA has held “hundreds of meetings” with lawmakers, several private meetings with the DOL, the White House and with FINRA officials. The association has also participated in coalition media campaigns and had outgoing president Juli McNeely testify at a Financial Services Committee hearing on the rule.

These and other initiatives, said Carsrud, are making headway. She noted that lawmakers — including about half of House Democrats — have written or met with DOL officials expressing their concerns and demanding that the rule “be made workable.”

Should these efforts fail then, said Carsrud, NAIFA and sisters associations are prepared to ratchet up the pressure. Among the Congressional measures they might support:

1. halt funding of the DOL;

2. write legislation that codifies a best interest standard; and

3. require the DOL to stand down until the SEC proposes its own uniform fiduciary standard.

She acknowledged that the DOL’s aggressive timeline — the department is aiming to finalize the rule before the end of President’s Obama’s second term — makes securing desired revisions to the proposal less likely.

“We lack confidence in the DOL to get the rule right without more input from stakeholders after they complete their revisions,” said Carsrud. “So we want the DOL to re-propose the rule rather than go final with a revised rule. NAIFA cares more about getting the rule right than in getting it done in the next few months.”

See also: 

MetLife says Obama plan threatens ability to advise middle class

Stifel CEO: Obama fiduciary standard is almost unworkable

Wagner wages war over DOL rule

AARP storms Capitol Hill over fiduciary standard


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.