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Retirement Planning > Saving for Retirement

NAIFA ratchets up FI focus as DOL phases in fiduciary rule

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With so much attention now focused on the U.S. Department of Labor’s plans to phase in its conflict of interest rule next year, it’s easy to lose track of one aspect that could prove critical to the insurance and finance industry: how financial institutions beholden to the new regime will interpret and implement the rule’s myriad regulations.

This is a mounting concern for the National Association of Insurance and Financial Advisors, which is holding its annual meeting in Las Vegas, Sept. 17-19. The industry’s varying responses to the rule is one among multiple advocacy issues — including continuing Congressional efforts on tax reform and legislative initiatives to impose state-sponsored retirement plans that may conflict with the private market — that NAIFA will be focusing on in the year ahead.

Related: Not ready to become a DOL-compliant FI? Go partner with one 

All eyes on the DOL

“We continue to be in a wait-and-see mode on two fronts,” says NAIFA President-elect Paul Dougherty, who takes the organization’s helm at the close of the conference. “We’re awaiting judges’ decisions on the multi-suit litigation underway. We’re also keeping on the financial institutions.”

Why the institutions? These entities — insurers, broker-dealers, RIAs and independent marketing organizations authorized to sign off on best interest contracts under the fiduciary rule — are responding to the Labor Department’s regulations in different ways.

Some of the companies are moving quickly to implement business processes to comply with the rule. Others are taking moderate steps. Still others have indicated they no longer intend to be in the retirement business.

The hodgepodge of actions, says Dougherty, is creating a “convoluted” market, making it difficult for the industry to present a unified front on implementation issues. That assumes a full phase-in of the rule in April 2017.

NAIFA and its co-complainants in a consolidated a nine-party lawsuit, filed in the U.S. District Court for Northern Texas, are adamant that the Labor Department exceeded its authority in handing down the fiduciary rule; and that, if implemented as now framed, the rule will be bad for retirement savers and the industry.

“If left changed, the DOL rule will ultimately damage the very goal the Obama Administration is trying to achieve, which is encouraging folks to save and play a more active role in preparing for retirement,” says Dougherty. “Instead, retirement savings will decline, in part because of limited access to retirement investment advice.”  

That, he adds, is because fewer advisors will be inclined to serve retirement savers below a certain income or asset threshold given the prospect of litigation. And many those who do meet the threshold may nonetheless opt out, deciding they’re unable or unwilling to pay asset under management fees in lieu of a sales commission. 

Related: DOL fiduciary rule: Disruption or opportunity?

Insurance and finance industry leaders are concerned that some of the negative fallout from the new fiduciary standard will inhibit their recruiting efforts.

Insurance and finance industry leaders are concerned that some of the negative fallout from the new fiduciary standard will inhibit their recruiting efforts. (Photo: iStock)

For advisors, the former is currently the greater concern, as the DOL regulations provide for a “private right of action” by clients alleging that a financial institution or advisor has failed to meet the best interest standard. Worse still is the prospect of class action suits by law firms to which the DOL is effectively outsourcing enforcement of the rule.

“It will be very difficult for advisors to quantify their potential future liability,” even though the financial institutions with which they’re affiliated will bear much of the legal burden under the BIC exemption, says Dougherty. “So the advisor still has a role to play in protecting themselves and their practices.”

Their task may be complicated by the companies’ varying responses to the DOL rule. One result, says NAIFA Director of Federal Relations Judi Carsrud, could be different BIC disclosure and other compliance requirements for their affiliated advisors. Among the latter: a potential rise in errors and omissions (E&O) insurance coverage to protect against DOL-related litigation.

“This is creating a difficult operating environment,” she says. “As advisors, we’re beholden to what the financial institutions decide to do.  

“There are so many moving parts to the conflict of interest rule,” Carsrud adds. “We’re focusing on what’s happening at the institutions and how we can best keep our members informed about how they should prepare.”

Turning to other advocacy issues, Dougherty said that tax reform, a perennial concern for NAIFA, could be a “significant element” of debate in the 2016 elections. The association will be “ready to respond” should Congress endeavor to simplify the Internal Revenue code and broaden the tax base by removing or watering down the current tax-favored treatment of life insurance and retirement accounts, including tax-deferred IRAs and 401(k) plans. 

Of continuing to concern to NAIFA are other tax issues, including a revising of the valuation of taxable estate assets; 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; and a tax provision requiring heirs of inherited IRAs and 401(k) plans to pay tax on inheritances with five years of an IRA owner’s death.

Related: IMOs take on enhanced sales role under the new DOL rule

"It will be very difficult for advisors to quantify their potential future liability, even though the best interest contract [BIC] exemption shifted much of the legal burden [for failing to comply with the rule] to the companies — the financial institutions," says Dougherty. "So the advisor still has a role to play in protecting themselves and their practices."

“We’re very fortunate that NAIFA has tremendous relationships with members of Congress in every Congressional district,” says NAIFA President Paul Dougherty. “That’s the strength of NAIFA’s advocacy.

Being heard

Dougherty expressed confidence that NAIFA, acting in concert with sister associations, can thwart legislative efforts that might threaten the industry’s products. Underpinning that confidence are the extensive relationships NAIFA has established over the years with key legislators, both in Congress and in the states, who oversee appropriations. 

“NAIFA’s (political action committee) is the largest in the insurance industry,” Dougherty says. “We feel good about our ability to have our voice heard, both in Congress and in the states.”

See also: 10 critical tax issues for 2016

Some 17 states legislatures now also are weighing legislation that would set up mandatory, state-sponsored retirement plans for employees. The worst of the plans, NAIFA warns, would compete with those offered by agents and advisors in the private market.

To boot, some of these plans may not meet the rigorous fiduciary standard of care and reporting requirements imposed on private plans. The Labor Department has indicated that ERISA — the Employee Retirement Income Security Act of 1974 — won’t apply to these state-run plans.  

“These plans run counter to the objective of building retirement savings because employers enrolled in the state-run plans would not be bound by the same obligations to employees as are employer-sponsored private plans subject to ERISA law,” says Carsrud. “The states should be focusing more on promoting financial literacy and education. 

Enhancing advisors’ skills

For its part, NAIFA is ramping up efforts to assist those educating consumers outside the public sector: its nearly 40,000 members. The various sessions at this year’s annual meeting, says Dougherty, reflect NAIFA’s broadening focus on enhancing the skills and expertise that insurance and financial advisors need to succeed in their practices. Not least among them: producers under age 40.

To replenish and grow its membership ranks (which has declined in recent years), NAIFA is increasingly tailoring its professional development content to the needs of new advisors. Hence the investments NAIFA is making in virtual instruction — webcasts, podcasts and online video tutorials — that allow on-the-go access to tools, techniques and best practices. 

Young industry recruits, says Dougherty, can also look forward to gatherings hosted by NAIFA’s Young Advisors Task Force, which comprises agents and advisors under age 40. “Working with the Task Force, NAIFA has just in the last few years brought town the average age of members from 58 to 52,” says Dougherty.

Related: 4 threats to the insurance industry: tax reform (and 3 others)

NAIFA is ramping up efforts to assist those educating consumers outside the public sector: its nearly 40,000 members.

NAIFA is ramping up efforts to assist those educating consumers outside the public sector: its nearly 40,000 members. (Photo: iStock)

NAIFA’s 20/20 plan

Replacing retiring agents and advisors with raw recruits, many of them fresh of college, is a major focus of the NAIFA 20/20 plan, an initiative months in the making. The initiative lays out five-year goals to “empower” NAIFA and its members, enhance NAIFA’s business model and diversify the organization’s revenue-base. The end-goal: To ensure the association’s “long-term strength, success and sustainability.” 

The project calls in part for new content, both in-classroom and digital, to help advisors retools in a Labor Department-regulated world. Prominent at this year’s annual meeting is a half-day “Skill Builders” workshop on Saturday, “Serving your clients with fiduciary compliance,” to help advisors understand the rule’s requirements and restrictions. The four-hours instruction also aims to help advisors develop strategies to implement the fiduciary standard within their practices.

Separately, NAIFA has kick-started a pilot program to expose prospective members with less than three years in the business, a critical time for new agents and advisors trying to establish their practices, to all the association has to offer. The initiative now boasts some 10,000 participants. 

“About 85 percent of advisors leave the business after the first three years,” says Dougherty. “We’re trying to encourage them not just to be part of NAIFA, but also be a part of the industry. 

“We need younger advisors to replace those who are retiring, but also to deliver mentoring and inspiration to others in their peer group,” he adds. “We’re very encouraged by the success of the pilot program.”

Related: AALU: Shifting from defense to offense on Capitol Hill


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