The Department of Labor’s proposed Retirement Security Rule is necessary to close a gap in federal regulation that leaves investors vulnerable to costly conflicts of interest, especially those related to fixed-indexed annuities, proponents of the rule told the agency today.

Their comments, which come on the last day of the DOL’s comment period, underscore what attorneys say are the federal regulatory gaps and lack of mandated disclosure regarding the costs and potential underperformance by fixed-income annuities (FIAs).

The debate over the proposed regulation is raging as individual annuity sales are projected by LIMRA to exceed $300 billion in 2024 and 2025.

In arguing for the need of the proposed DOL rule, James Watkins, CFP, a fiduciary risk assessment attorney and CEO of InvestSense LLC, cited the findings of an analysis MassMutual sent their agents years ago that found that fixed-indexed annuities tied to the S&P 500 underperformed the index, both with and without dividend reinvestment, over a 30-year period ending December 2003.

Mass Mutual said that FIAs would have delivered just 5.8% a year, far below the 8.5% for the S&P 500 without dividends and the 12.2% for the S&P 500 with dividends reinvested, the Wall Street Journal first reported. 

Since rollover recommendations are not covered under ERISA, neither insurers nor advisors are currently required “to provide rollover customers with sufficient information to make an informed decision, which often exposes the fact that while the annuity owner may receive some income for life, the terms of the annuity, and the fact that issuer often reserves the right to unilaterally change such terms annually, often reduces the odds that the annuity owner will even break even,” Watkins said.

“The lack of providing a commensurate return to the annuity owner, combined with the annuity issuer's control over the annuity contract's terms and the right to unilaterally charges such terms to ensure a windfall, are the antithesis of a fiduciary's duties of prudence and loyalty,” said Watson, who does fiduciary analysis for investors, law firms and companies—often as a result of legal challenges.

Beyond significantly expanding a fiduciary standard to registered reps and agents who recommend insurance products and fixed income annuities (FIAs) to investors rolling over their retirement plan balances, the rule would also require advisors to give investors in writing the analysis they used to arrive at their investment recommendation, including the costs and performance of other investment options.

That should give investors a fighting chance in understanding whether advice to invest in a FIA is in their best interest, and give regulators a paper trail if advisors don’t act in investors’ best interest, Watson said.

The proposed rule would also close the gap in what he says is the currently nonexistent federal oversight and regulation of FIAs.

While industry lobbyists point to the National Insurance Commissioner Association’s suggested guidelines, which have been adopted by 40 states, “the fact that there is currently no federal oversight and enforcement of such guidelines has resulted in inconsistent and inequitable protection of employees and retirees in connection with rollovers from 401{k} and 403(b) plans into various types of annuities,” Watson added.

The DOL’s approach of focusing on conduct instead of singling out products reduces the industry’s arbitrage toward annuities products, Benjamin P. Edwards, a professor of law at the University of Nevada in Las Vegas said in his comment letter.

“Imposing a uniform standard for advice given to retirement savers about their retirement accounts will reduce needless complexity and create an even playing field and generally reduce misconduct,” Edwards said.

Edwards also said the DOL should be skeptical about the arguments of trade groups and their attorneys who stress that raising standards will reduce advice, when the same entities “have a long history of arguing to courts that commission-compensated [agents and reps] act as mere salespeople and not as reliable advice givers.”