1. How does the Department of Labor fiduciary standard impact advisors who sell or provide advice with respect to fixed indexed or variable annuity products?
Under the final Department of Labor fiduciary rule, fixed indexed annuity products and variable annuity products will be subject to the best interest contract exemption. Many in the industry had expected that fixed indexed annuities would continue to be covered by prohibited transaction exemption PTE 84-24, which is an exemption that protects compliant advisors from IRS penalties that may apply if the advisor enters a prohibited transaction (simpler products, such as immediate annuities, will continue to be covered by PTE 84-24).
Generally, it is expected that the cost of compliance — and the risk of penalty for noncompliance — will be much steeper for advisors who must comply with the best interest contract exemption requirements. Therefore, many expect that the cost of selling fixed indexed or variable annuity products will increase.
Recognizing the potential compliance burdens that the new standard may generate, the final DOL rule provides for a delay in the time period when the contract required by the best interest contract exemption must be signed. The contract may be signed as a part of the transaction execution documents, rather than before the advice related to the product is provided—basically, this means that the contract can be executed at the same time the client completes the rest of the paperwork necessary to complete the purchase of the annuity. The fiduciary standard, however, will apply to all discussions, even those that occur before the contract is executed.
The final rule also contains a grandfathering provision which allows existing transactions to continue on their current commission basis.
The DOL has provided a one-year implementation period, so that advisors have until one year after publication of the final rule to comply, rather than the 8-month period that was widely expected. Implementation of the rule will take place in phases—full compliance with the requirements pertaining to the disclosures, development of policies and procedures and contract execution components of the best interest contract exemption will not be required until January 1, 2018.
The final DOL rule also eliminates two disclosure requirements that many felt would be overly burdensome, especially with respect to index-linked annuity products: the requirement that advisors provide one, five and ten year projections to clients and the annual disclosure requirement.
2. How does the Department of Labor fiduciary standard impact advisors who sell or provide advice with respect to fixed rate annuity products?
Advisors who sell fixed rate annuity products may continue to rely upon PTE 84-24, and are not required to comply with the best interest contract standard. Fixed rate annuity contracts include both immediate and deferred annuities that (1) satisfy the applicable standard state nonforfeiture laws when issued or (2) in the case of group fixed annuity contracts, guarantee return of principal net of reasonable compensation and provide a guaranteed declared minimum interest rate in accordance with the rates specified in the standard state nonforfeiture laws that apply to individual contracts.
In either event, the benefits of the contract may not vary based on investment experience of a separate account maintained by the issuing carrier, or based upon the investment experience of an index or investment model. 3. How does the Department of Labor fiduciary standard impact advisors who sell or provide advice with respect to deferred annuity products?
As is the case with fixed rate immediate annuity products, fixed rate deferred annuity products continue to be covered by prohibited transaction exemption PTE 84-24 after the implementation of the Department of Labor’s final fiduciary rule. In order to be excluded from the heightened fiduciary standard, the benefits of the contract may not vary based on investment experience of a separate account maintained by the issuing carrier, or based upon the investment experience of an index or investment model.
4. How does the Department of Labor fiduciary standard impact advisors who sell or provide advice with respect to proprietary products, including annuities?
While many in the industry expected that the rule would contain a prohibition on in-house (or proprietary) financial products, which can be more expensive than other products and present a greater risk of self-dealing, the final rule does not contain this prohibition. Instead, advisors who limit recommendations to proprietary products may continue to do so, provided that they satisfy the requirements of the best interest contract exemption