I don’t remember a bolder regulatory move in my career that compares to what the DOL has undertaken with its issuance of its new fiduciary rules. Regardless of what one may think of the new set of rules in substance, EBSA’s organizational courage needs to be appreciated. I have little doubt that this comment will garner more than a few guffaws from those who have been engaged in this emotional battle for the past few years. For those cynics, however, I invite you to step back for a moment to see what has been done.  EBSA has been willing to conduct an extensive  self-review of the sort I have never seen in any organization (other than those private companies on the verge of collapse), in the face of tremendous (and often conflicting) political pressure, with the full knowledge that it will be open to incredible  scrutiny during the public comment period. It has really broken the bureaucratic mold in a way that I expect not to see again in my practice.

This effort represents a fundamental change in a very broad regulatory scheme which will ultimately have some effect on most every part of the ERISA marketplace, many of which we will never really know until we bump into them in the years that follow their eventual finalization. Though the rule changes themselves are not particulalry complicated, they will affect ERISA plan relationships in so many different ways that it really will be hard to judge its ultimate impact-other than it will be substantial.

There is much to like in the new rules; some troubling things;  and, I think, perhaps a mistake or two which will be all flushed out in the coming months.

In my own, small world, I think there are a couple of technical points which I think are worthwhile sharing because they represent what we can expect of the “unexpected” as we work through the changes’ impact.

The first has to do with our old friend, the provision of lifetime income from defined contribution plans. Lurking in the shadows of the implementation of these programs is a problem to which none of us has given much attention yet: ultimately, participant decisions to use a portion of account balances to purchase any annuity (because, remember, guaranteed lifetime income still requires an annuity of some sort) are very personal decisions. They are based on the individual participant’s circumstance, not the least of which being age, marital status, and other assets.  This, then would make any counseling by an advisor clearly the provision of fiduciary advice, even under existing rules.  In the small to mid size markets, where there is a lack of employer staff to assist in these decisions, this advice will often only be able to be given by advisers many who, by the way, may also receive potentially conflicted compensation from the purchase of the annuity.

I wasn’t sure how we were going to able to solve this problem, as there has been bigger fish to fry in the regulatory scheme (such as insurer insolvency risk and education) before we even got to this point. Quite unexpectedly, the new rules will permit annuity contracts under commission arrangements be sold as long as the adviser is willing and able to “pay the piper” and comply with the Best Interest Exemption, as it really expands the current state of affairs as provided under PTE 84-24. The “if” is that it will be dependent on the DOL working out some of the quirks and potentially fatal logistical challenges in some of the proposed terms of that exemption. But that is the purpose of the comment process, which will flush out the most legitimate of these issues, and hopefully cause appropriate changes. This will be a robust comment process, no doubt.

The second is an example of what I truly hope is merely unfortunate drafting.  In Section VI of the Best Interest Exemption, the DOL flatly states that :

“In addition to prohibiting fiduciaries from receiving compensation from third parties and compensation that varies on the basis of the fiduciaries’ investment advice, ERISA and the Internal Revenue Code prohibit the purchase by a Plan, participant or beneficiary account, or IRA of an insurance or annuity product from an insurance company that is a service provider to the Plan or IRA….purchases of insurance and annuity products are often prohibited purchases and sales involving insurance companies that have a pre-existing party in interest relationship to the Plan or IRA.”

The DOL then goes on to say that the Best Interest Exemption will apply to plans with less than 100 employees to permit such sales. What this appears to say is that an insurance company with an existing relationship with a plan, cannot provide a new annuity (such as those for providing lifetime income) to a plan participant without it being a prohibited transaction or, for small plans, using the Best Interest Exemption or,  for large plans, apparently using the large plan carve-out rules.

What is troubling about this broad statement is that it seems to ignore the statutory exemptions for the purchase of annuities under ERISA Sections 408(b)(2) and 408(b)(8), and unnecessarily forces annuity purchases into the burdens of the Best Interest Exemption or the large plan carve out rules. But even worse, before these new rules come into play, the DOL seems to be saying that plans cannot purchase lifetime income annuities-including QLACs- from insurers from whom they have already purchased a contract or which is serving the plan unless they somehow comply with PTE 84-24 for more than just commission payment. Please say it ain’t so!