The U.S. Department of Labor’s new fiduciary proposals will "undoubtedly" attract a legal challenge, most likely from the insurance and annuities industry which will be most dramatically impacted by the proposal, Fred Reish, an ERISA expert and attorney, predicted.
The DOL proposals would “dramatically expand the definition of who is a fiduciary” to anyone who offers rollover retirement advice and, in a second proposal, include independent producers and insurers in the definition, requiring many to follow the fiduciary rules for the first time, Reish, a partner with Faegre Drinker, said during an InvestCOM webcast today.
“Undoubtedly there will be a lawsuit filed against . That seems to be a way of the world these days,” Reish said of the proposals, noting that “the big, big changes” hit the insurance industry and particularly independent producers, who have successfully sued the DOL to overturn fiduciary standards in the past.
One proposed change for insurers and independent brokers and reps would require them to provide written analysis to participants detailing why it’s in their best interest to do a rollover from a retirement plan to an IRA or annuity product.
The proposed rule also contains a mandate that insurance companies supervise independent producers and brokers and do a retrospective review of rollover activities to ensure they are in investors’ best interest. Since brokers can use multiple insurers' products, the industry has balked at this supervisory duty in the past.
The DOL and White House both singled out fixed-index annuity products as needing additional safeguards for investors. According to the White House, which cited Cerulli data, “conflicted advice” regarding fixed-index annuities alone could cost savers up to $5 billion per year.
“I think for broker-dealers and investment advisors that have already been treating rollovers as fiduciary advice, there isn’t going to be a whole lot of impact,” Reish said. “It’s insurers and independent producers that will experience the most changes."
Reish said he believes the industry will see a final regulation from DOL by next summer, but that the agency is likely to defer the applicability date until Jan. 1, 2025.
The release of the rules today set off a storm of reactions from organizations that have lined up either for or against the expected regulations for well over a year.
Organizations that successfully sued the DOL to overturn its Obama-era fiduciary rule, including the Financial Services Institute (FSI) and the National Association of Insurance and Financial Advisors (NAIFA), wasted no time expressing their concerns.
FSI President and CEO Dale Brown said his trade group is concerned about the proposed rule’s “potential negative impact on Main Street Americans’ access to financial advice as they save for retirement. ... It is imperative that new regulations harmonize with Reg BI. Introducing more conflicting regulations would be unnecessary and could potentially hinder middle-class Americans’ ability to achieve a financially secure retirement."
NAIFA CEO Kevin Mayeux called the proposal "the offspring of the department’s failed fiduciary-only model for advisory services that would limit consumers’ choices and curtail the access of many middle- and lower-income investors to individualized advice and services.
“This is the fourth time since 2010 the federal government has tried to expand fiduciary requirements for advisors. This DOL proposal is particularly unfortunate, coming at a time when many Americans are concerned about their economic security and ability to prepare for retirement,” Mayeux said.
In contrast, the CFP Board, Consumer Federation of American and Institute for the Fiduciary Duty expressed support for the proposed rule.
“We celebrate the work of the advisors who seek to do what is best for their customers. However, the outdated law does not prevent advisors from taking advantage of gaps in the regulations to steer their clients into high-cost, substandard investments that pay the advisor well but eat away at retirement investors’ nest eggs over time, the CFP Board said in a statement.
“The rule is essential to fill the gap in federal regulation—the Grand Canyon gap—in investor protection left by the [SEC’s] Regulation BI,” said Knut Rostad, founder of the Institute for the Fiduciary Standard, said.
Rostad cited a recent decision by Massachusett’s highest court which affirmed that the Reg BI is only a regulatory floor as a reason the added investor protection from DOL is needed.