This email Alert states our conclusions about the impact of the Department of Labor (DOL) proposal to expand the definition of fiduciary investment advice and to modify prohibited transaction (PT) exemptions on sales of insurance products to plans, participants and IRAs.

The proposal affects insurance agents, insurance brokers and pension consultants who receive commissions for selling insurance or annuity contracts to plans and IRAs. (We refer to them collectively as “Insurance Advisors.”) The DOL’s proposal materially expands the definition of fiduciary investment advice to include common investment sales practices. As a result, we use “sales” in this Alert to refer to fiduciary recommendations of insurance products. 

Here are our conclusions along with the link to our more in-depth analysis:

  • Conclusion No. 1: PT relief for the receipt of sales commissions has been available under Prohibited Transaction Exemption (PTE) 84-24 for sales by “fiduciary” Insurance Advisors of fixed and variable insurance products to plans and IRAs, and this will continue (but with some changes).  Under the proposal, the PTE will continue to be available for sales of fixed and variable products to plans and participants, and for sales of fixed annuity products to IRAs. (By “fixed,” we mean insurance products that are not treated as securities.) However, for IRAs 84-24 relief will not be available for insurance products that are treated as securities under federal securities laws “annuity securities”).  To satisfy the conditions of the exemption, the Insurance Advisor and the insurance company would need, among other things, to comply with “Impartial Conduct Standards.”  That is, they would need to act in the best interest of the plan, participant or IRA in making recommendations.  Also, Insurance Advisors and their affiliates would not be able to receive revenue sharing, administrative and marketing fees.  
  • Conclusion No. 2: Under the expanded re-definition of fiduciary, recommending a distribution or rollover or making recommendations about the investment of property to be distributed or rolled over also constitutes fiduciary investment advice.  As a result, Insurance Advisors making these recommendations would be considered fiduciaries, would be subject to the ERISA PT rules, and would need exemptive relief to avoid the adverse consequences of a PT.
  • Conclusion No. 3: The exemption for sales of insurance products that are securities under federal securities laws, such as variable annuities, was transferred to the proposed “Best Interest Contract Exemption” or “BICE,” which has a number of new and difficult conditions.

These rules are complex and this email provides a brief summary of our conclusions. To understand the rationale for these conclusions, click here