“It’s like déjà vu all over again.”
Yogi Berra said a lot of things decades ago that seem apt today concerning the Department of Labor fiduciary rule. He also said “you can observe a lot by watching.”
It is amazing to observe the U.S. insurance industry sitting back doing virtually nothing as the DOL moves ahead with an investment advice proposal that threatens to disrupt our world.
It is well known the DOL has released a proposal that is unworkable for major segments of the insurance industry — especially the independent distribution channel. The department’s proposal would turn most insurance agents into fiduciaries, extend ERISA to 401(k) rollovers, and create a class prohibited transaction exemption that is designed for the securities industry but unworkable for independent agents. It is essentially the Obama Fiduciary Rule all over again.
The politics are complicated. The current Labor secretary, Eugene Scalia, who was instrumental in stopping the Obama rule, now is allowing his agency to proceed with an equally flawed proposal. The current administration that rails against excess regulation lets oxygen flow to a rule that is the epitome of bureaucratic creep.
Self-described consumer groups suddenly want delay because they think the proposal does not go far enough — though one activist admits she needs to rethink this position given industry opposition. Some industry groups support the proposal likely because they want to protect 401(k) plans from rollovers or get a leg up on the insurance industry — ironically, those are real conflicts of interest.
However, what remains most surprising is the insurance industry has not risen up more forcefully against this ill-conceived proposal. Industry-submitted letters with extensive concerns about the latest DOL proposal and those concerns were amplified at the recent DOL hearing. Yet the industry does little to create political pressure on the DOL.
There has been little lobbying of Congress and no grassroots other than efforts orchestrated by our organization, the Federation of Americans for Consumer Choice. It is hard to understand why industry as a whole, having won the battle at the Fifth Circuit, is content to sit back and risk losing the war by allowing DOL to turn agents into fiduciaries and create a regulatory quagmire never authorized by Congress.
Problem With PTE 84-24
It is whispered by some the prohibited transaction exemption known as PTE 84-24 will save the day. If that is why industry remains quiet, it is false hope. In testimony at the DOL hearing, we called out the reasons PTE 84-24 is no panacea.
It would require implied admission that agents are fiduciaries. It covers only commission and would not allow other common forms of compensation. Compliance for up-line IMOs (independent marketing organizations) would be complicated at best.
Technically it would not work for rollovers based on DOL’s edict that assets in a rollover transaction are employer plan assets. And worst of all, DOL could reinterpret PTE 84-24 at any time, leaving insurance agents high and dry.
During the DOL hearing, out of all these concerns, agency staff asked only about whether PTE 84-24 requires agents to state explicitly they are fiduciaries. The simple answer is there is no explicit requirement but nonetheless it is obvious an agent would only make the disclosures required of PTE 84-24 if the agent considered himself or herself a fiduciary. It is a difference without distinction.
While another speaker at the hearing gave the lawyerly answer there is no explicit requirement, that should provide zero comfort to insurance agents who will be forced to give PTE 84-24 notices to IRA owners, essentially admitting to fiduciary status and all the risks and restrictions that come with it.
The insurance Industry must not stick its head in the sand and merely hope for the best. The DOL proposal is deeply flawed and industry must sound the alarm by asking Congress and the Trump administration to stop the current proposal before it’s too late. Time is of the essence, which of course brings us to one more favorite Yogi Berra saying, “it ain’t over till it’s over.”
Kim O’Brien, MBA, is CEO of the Federation of Americans for Consumer Choice, which was founded by independent marketing organizations to protect America’s choice of insurance professionals and fixed annuities, life insurance and long term care. Kim lives in Arizona with her college sweetheart of 47 years and their two Irish Setters, Dooley and Finian.