Bloomberg Law (January 25, 2024) By Austin R. Ramsey
- Best-interest model considered a better alternative
- As fiduciary rule nears finish line, insurers ramp up
Opponents of newly proposed US Labor Department retirement advice standards are pushing state insurance regulators to fill in policy gaps of their own to boost their case for more lenient federal-level conduct requirements.
Vermont recently became the latest state to require financial professionals to act in their clients’ best-interest when selling annuities, narrowing the number of states that have failed to adopt this set of National Association of Insurance Commissioners standards to just eight.
Insurers favor best-interest standards of conduct over the DOL’s proposal because they pose the least disruption to their business models by not threatening the commissions brokers make on their sales. Together with the US Securities and Exchange Commission’s 2019 best-interest regulation covering securities trades, industry groups claim the investment advice landscape is already sufficiently regulated without the Biden administration’s proposed fiduciary rule.
The proposed fiduciary rule unveiled Oct. 31 would apply the highest standards of conduct under trust law and federal benefits statutes to broad sectors of the financial industry, throwing a wrench into the insurance industry’s plans to expand its share of the 401(k) market.
“We fully expect and are actively working to get 50 states to adopt a best-interest standard,” Marc Cadin, CEO of Finseca, told a House Financial Services subcommittee earlier in January. “But a fiduciary-only approach basically has the practical effect of banning commissions.”
Self-Imposed Standards
Lobbyists are hard at work in states such as Indiana and New Hampshire to convince state insurance commissioners to adopt NAIC’s 2020 best-interest model regulation as a means of demonstrating a united front. They are betting that the more Americans covered by ostensibly self-imposed toughened standards, the clearer it is that the DOL’s latest fiduciary rulemaking project simply isn’t necessary.
The NAIC regulation, which now covers roughly 78% of the country by the American Council of Life Insurers’ count, enhances consumer protections by putting advisers and their clients on a level playing field—both can benefit from a transaction, as long the financial product is truly in the client’s best interest. It’s entirely up to states to adopt the standards, and they can do it through legislation or state agency regulations.
Fiduciary rules are older and less forgiving. Rooted in common law relationships of trust and confidence, they require an adviser to act exclusively in the interest of their client, without regard for their own bottom line.
Insurers want to make sure there’s a clear distinction between the two regulator standards. The last time DOL’s Employee Benefits Security Administration attempted to rewrite the rules on who was considered a fiduciary when it comes to retirement advice, critics say more than 10 million American workers lost access to the advisers of their choice, resulting in a $900 billion loss in savings.
“Life insurers have opposed the DOL’s efforts to expand the definition of fiduciary, not because it would preserve a so-called profitable status quo as some critics assert, but because it is unnecessary—ignoring substantive consumer protections that have been implemented in the last three years—and would ice-out Americans who rely on financial professionals and access to retirement security products,” said Susan Neely, president and CEO of ACLI.
Not So Fast
It may ultimately come down to the federal judiciary rather than the court of public opinion to decide whether state insurance regulation and the SEC’s Reg BI are enough to protect investors from conflicted investment management. When DOL’s 2016 fiduciary rule was struck down by the US Court of Appeals for the Fifth Circuit, the panel cited the department’s eagerness to step on other agencies’ toes.
Senior DOL officials and consumer interest advocates insist that best-interest standards and Reg BI don’t do enough to protect consumers from savvy financial professionals intent on earning an extra buck.
State best-interest models are best-interest in name only, said Benjamin Edwards, a business and securities law professor at the University of Las Vegas William S. Boyd School of Law. Most exempt cash contributions from any question of whether advice was conflicted.
“I hear horror stories again and again about people who had all their money inside a 401(k) and they met with an insurance broker or stock broker who made all these promises to them,” Edwards said. “They end up rolling all of their assets into these illiquid, expensive investments. You often see situations where they get locked inside variable annuities and non-traded assets and they can’t even access their money for 10 years.”
Reg BI, meanwhile, doesn’t apply to advice that’s delivered directly to a retirement plan, nor does it cover alternative assets such as real estate or cryptocurrency.
“There is so much abuse in this industry that the DOL has to do something about it,” said Joseph C. Peiffer, executive vice-president and president-elect of the Public Investors Advocate Bar Association.