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Life Health > Annuities

7 Threats Life and Annuity Commenters See Lurking in DOL Fiduciary Rule Draft

By Allison Bell

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What You Need to Know

  • Comments on the draft regulations were due Jan. 2.
  • A Prudential executive says one key provision is simply sketched out in the introduction.
  • A MassMutual executive says DOL is muscling in on IRS turf.
  • Another MassMutual point: The draft could complicate offering career agents health and retirement benefits.

The U.S. Department of Labor’s proposed fiduciary rule regulations could destabilize state life insurance markets, disrespect the Internal Revenue Service, weaken career agents’ employee benefits and hurt insurers’ ability to offer some well-established, popular life and annuity products that have not caused any noticeable problems.

Regulators, executives and agents in the life and annuity sector make those points in some of the 19,000 letters posted on the comments page for the DOL’s draft investment advice fiduciary definition and related regulation drafts.

What it means: Even if you’ve read many articles about the fiduciary rule drafts, there could be interesting details that you’ve missed.

The process: The Labor Department posted the fiduciary rule drafts in October 2023. Regulations were due Jan. 2, in spite of pleas by financial services organizations and bipartisan groups of members of Congress for extensions.

In the drafts, the department acknowledges the value of commission-based compensation arrangements for life insurance and annuities.

The department would also require agents, advisors and others helping with rollovers of assets from 401(k) plans and individual retirement arrangements into other arrangements to assume fiduciary responsibility and put the retirement savers’ interests first, rather than simply assuming the responsibility to act in savers’ best interest.

Many commenters focused on general concerns about what the added, complicated, potentially unclear responsibility would do to the overall life and annuity market.

Kent Mason, a partner with Davis & Harman, wrote on behalf of a group of clients that included insurers and asset managers, that an earlier version of the DOL fiduciary rule effort devastated retirement savers’ efforts to use annuities to prepare for retirement.

In the first half of 2017, when the earlier version of the new DOL fiduciary rule approach was moving in, total individual U.S. annuity sales fell to the lowest level since 2001, according to LIMRA statistics cited by Mason.

Other life and annuity sector commenters drew attention to specific concerns they found in the drafts.

Here’s a look at seven of the concerns.

1. The proposal could destabilize state life and annuity markets by pushing major issuers to the sidelines for a decade.

Doug Ommen, Iowa’s insurance commissioner, noted that the draft regulations would let the Labor Department penalize insurers and insurance producers that violate the retirement asset rollover advice rules by shutting them out of the rollover market for 10 years, without coordinating with state insurance regulators or even notifying them about the bans.

Those kinds of 10-year bans could interfere with states’ responsibility to keep the issuers solvent, Ommen says.

2. The proposal could let the Labor Department be unclear about whether or not it had set certain rules.

Ann Kappler, Prudential Financial’s general counsel, asserts that one key provision could affect certain types of investment transactions.

In the preamble, or official introduction to the regulation, DOL officials appear to suggest that insurance- and annuity-related transactions would not be affected.

“Preambles are not regulations,” Kappler writes. “Interpretations by the department have changed over the course of time.”

Especially given how rushed the drafting and commenting process has been, insurers could end up spending significant time, money and resources on compliance with the onerous rules that would suddenly change when the department posted a clarification or guidance letter, Kappler says.

3. The proposal could let the Labor Department act like the IRS.

John Deitelbaum, head of the MassMutual insurance and financial services section, says the draft could give the department the ability to determine whether companies would or would not have to pay certain types of federal excise taxes in connection with efforts to comply with the proposed fiduciary responsibility regulations.

Those kinds of determinations are exclusively within the enforcement authority of the IRS, Deitelbaum says.

4. The proposal includes an unrealistic implementation timeline.

The draft regulations would give insurers and other parties just 60 days to comply, but implementing the regulations would really take a minimum of 18 months, Deitelbaum predicts.

5. The proposal would make companies responsible for the actions of huge networks of people and companies.

Deitelbaum points out that, under the draft regulations, an insurer or financial institution could immediately be disqualified from using important tax provisions based either on its own actions of the actions of any affiliate.

“The proposal broadly defines ‘affiliate’ to include ‘any officer, director, partner, employee, or relative of the person’ and ‘any corporation or partnership of which the person is an officer, director, or partner,’” Deitelbaum writes. “This creates an almost boundless network of persons, most of whom will have absolutely no connection to the recommendations provided to retirement investors, whose actions can drive financial services workers and companies out of business.”

6. The proposal could hurt career agents.

Deitelbaum observes that, at this point, the current draft regulations would require insurers and producers to put the value of health insurance benefits, retirement benefits and other standard employee benefits in rollover compensation disclosures.

The Labor Department should either exclude benefits from the disclosure requirements or eliminate the need to quantify the benefits’ value, because quantifying the value would be difficult, the benefits have no direct connection with rollover recommendations and savers have no need to know what the benefits cost, Deitelbaum writes.

Regulators’ estimate that insurers would need to spend just eight hours per year on posting new advisor compensation data disclosures and other newly required disclosures on the web “grossly underestimates the time and cost,” Deitelbaum adds.

7. The proposal could freeze out innocent bystander products and services.

Gary Mettler, an independent agent, suggests that the draft regulations could apply to, and hurt administration of, fixed immediate annuities, which are simple arrangements that help savers turn assets into guaranteed streams of retirement income.

Cox worries that the current draft regulations seem to apply group universal life and group annuity products.

Kappler says the draft regulations could apply to insurance wholesalers and limit the wholesalers’ ability to tell retail agents and advisors how products are supposed to work.

Credit: Adobe Stock

Allison Bell

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