A number of insurance agents may be violating U.S. Department of Labor rules by accepting “conflicted compensation” from annuities sales for rollovers from retirement assets because their insurance companies haven’t educated them, according to Fred Reish, a partner in the law firm of Faegre Drinker.
While insurance companies have their choice of following one of two DOL rules, both require agents to be fiduciaries if they want to qualify for exceptions for annuities and insurance transactions, especially those involving commissions, revenue sharing or 12b-1 fees where there is a perceived conflict of interest, said Reish, who specializes in regulatory issues.
While broker-dealers and registered investment advisors are required to use Prohibited Transaction Exemption (PTE) 2020-02 to qualify for an exception to “fiduciary prohibited transactions,” where sales of life insurance and annuities are involved, there is an option of using another rule, PTE 84-24.
Instead of mandating a “best-interest” requirement, PTE 84-24 requires insurers and agents to ensure that each transaction be on terms “at least as favorable” to the participant as an arm’s length transaction.
The rule also requires that the combined total of all fees, commissions and other consideration received by the insurance company or agent must be “reasonable.”
“I am concerned that there may be widespread noncompliance in the recommendations of rollovers to annuities by insurance agents and brokers. That is not due to any purposeful intent. Instead, my observation is that many insurance agents, and particularly independent insurance agents, are not aware of the DOL’s expanded fiduciary interpretation and do not know about the existence of PTE 84-24 and the need to satisfy its conditions,” Reish said.
Since PTE 84-24 is much easier to satisfy and does not place a compliance requirement on the insurance company, many insurers have opted to use it, Reish said.
It’s also attractive to insurers because PTE 84-24 does not require that the insurance company be a co-fiduciary with the agent, Reish said.
As a result, insurers have avoided using PTE 2020-02 and instead used PTE 84-24 to handle annuity and life insurance sales, but in many cases without the independent agent or broker being alerted to DOL requirements, he said.
Reish said that insurance agents and brokers appear to have the greatest challenges meeting the “reasonable” fees requirement since there is little publicly available data about customary commissions and trails on annuity products.
“The burden of proof of compliance ... is on the person claiming the exemption. Agents should have information about customary and ordinary commissions in a range of scenarios, that is, for different types of annuities of different amounts,” Reish warned.