DOL Proposed Fiduciary Rule and Life Insurance

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Ernie Guerriero, CLU®,ChFC®,CEBS,CPCU®,CPC®,CMS,AIF®,RICP®,CPFA

Previously we posted about the announcement of the DOL’s Proposed Fiduciary Rule titled, “Improving Investment Advice for Workers & Retirees”.  I have been receiving calls on what this will actually mean for those producers that use life insurance in a Qualified Plan.

Under the 1974 Rule, then with the Proposed, then vacated, and now the new Proposed Rule, the DOL allowed for and under the Proposed Rule, allows for Plan Fiduciaries to include life insurance:

  • On June 29, 2020, the Department of Labor (“DOL”) announced its new approach to the standards for and investment professionals who provide investment advice on a nondiscretionary basis to 401(k) plans, pension plans, or other plans covered by ERISA or to IRAs. [Improving Investment Advice for Workers & Retirees]
  • The DOL also proposed a new prohibited transaction exemption (“PTE”) that, if finalized as proposed, will provide rules for financial institutions and investment professionals seeking to (a) receive compensation from a recommended transaction involving a Retirement Plan, including commissions or additional advisory fees received as the result of advice to an individual to roll funds from a Retirement Plan covered by ERISA to an IRA, and/or (b) conduct principal trades with Retirement Plans to which they provide investment advice.
  • Insurance companies can supervise independent insurance agents and they can also create oversight and compliance systems through contracts with intermediaries such as independent marketing organizations (IMOs), field marketing organizations (FMOs) or brokerage general agencies (BGAs). Eligible parties can also continue to use relief under the existing exemption for insurance transactions, Prohibited Transaction Exemption (PTE) 84-24, as an alternative.

There are two methods that allow the use of life insurance: (1) create oversight and compliance systems, or (2) rely on PTE 84-24.

What has changed is the liberal interpretation of the 5-Part Test.  The 5-Part Test is used to determine Fiduciary status.  The 5-Part Test provides that if a person (who is not otherwise a Retirement Plan fiduciary by reason of discretionary management or control) provides investment advice for a fee with respect to Retirement Plan, that person is considered a fiduciary (an “Investment Advice Fiduciary”) only if that advice is:

  1. relating to the value of securities or other property or is a recommendations concerning the advisability of investments (whether in securities, real property, insurance products—including annuities, or other property);
  2. provided on a regular basis;
  3. pursuant to a mutual understanding or agreement; 
  4. tailored to the needs of the Retirement Plan.

The DOL has further clarified the 5-Part Test in some important ways:

  • Advice at the Start of a Relationship. The DOL explained that the “on a regular basis” element of the 5-Part Test can be established when there is a reasonable expectation by the parties that advice will be provided on an ongoing basis. Accordingly, investment advice may be deemed fiduciary in nature even if there was relationship before the advice at issue was provided.
  • Disclaimers of Reliance. A disclaimer that a Retirement Plan cannot rely on the advice given as a primary basis of investment decision-making is not dispositive. The DOL requires a mutual understanding or agreement that advice will not be a primary basis of investment decision-making by the Retirement Plan. As such, disclaimers may still be considered as part of the analysis, but the determination of fiduciary status depends on the reasonable understanding of the parties based on all of the facts and circumstances.
  • Regulation Best Interest (“Reg BI”). Per the DOL, any investment advice subject to the SEC’s Reg BI standard (which applies to broker-dealers and their registered representatives) or another similar best interest standard (e.g., state best interest or fiduciary rules, such as those of Nevada, New Jersey, and Massachusetts, or Iowa’s proposed best interest standard for insurance sales) would reasonably be understood by the parties as intended to serve as a primary basis of decision-making.

Therefore in order to rely on the proposed PTE for Investment Advice Fiduciaries, the financial institution and/or investment professional must satisfy and comply with the following requirements:

  • Impartial Conduct Standards. The Impartial Conduct Standards require that the investment advice that leads to the transaction for which the exemption is sought is in the “best interest” of the investor. (“Best interest” is based on the ERISA fiduciary duties of prudence and loyalty and will be interpreted and applied consistent with Reg BI.) The financial institution and/or investment professional must receive no more than reasonable compensation for their services, must seek to obtain “best execution” (as required by securities laws), and must not make any materially misleading statement or omission.
  • Disclosure Requirements. Prior to effecting the recommended transaction, the financial institution must provide the Retirement Plan with (1) a written acknowledgement of the fiduciary status of the financial institution and the investment professional with respect to the transaction, and (2) a written description of the services provided and an accurate (not misleading) description of all material conflicts of interest. The DOL stated that these statements should not create a private right of action between the financial institution or investment professional and the Retirement Plan investor. Accordingly, these written disclosures should not be deemed a reflecting the creation of a fiduciary relationship between the Retirement
  • Plan Policies and Procedures. The financial institution’s policies and procedures must be prudently designed to avoid violations of the Impartial Conduct Standards, including: (1) the avoidance of incentive practices that create a conflict of interest (e.g., sales contests), and (2) the documentation of the specific reasons why a recommendation was made to roll over assets from a 401(k) or other ERISA-covered plan to an IRA. n and the financial institution and/or investment professional.

In addition to the IRS and DOL’s guidance, from an investment and life insurance needs perspective life insurance in a Qualified Plan offers:

  • A noncorrelated asset class.
  • Guarantees in the overall portfolio.
  • Guarantee income.
  • Access to insurance.

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