Generating over 19,000 written comments, the DOL’s proposed fiduciary rule changes clearly hit a “vein.” Though the proposed changes are complex and multi-tiered, there are two of them which are particularly garnering most of the attention.

The first is the proposal to compel the application of a version of the retirement plan fiduciary rules to the retail sale of non-registered individual annuity contracts, at the point of sale, to an individual’s IRA. As substantial, expensive and potentially disruptive a change that this will introduce, these rules are still generally compatible with those which sales organizations must apply at the point of sale where “registered” investment products are sold by registered representatives.

This differs dramatically from the second of these proposed changes, that is, the proposed regulation of an annuity product’s compensation design. Abusive sales practices have been the bane of federal and state regulators, and most financial service companies, for as long as investment products have been developed and sold. However, regulating investment sales practices-whether it be by the SEC, FINRA, state regulation or even the DOL-have mostly been imposed at the point of sale.

In a departure from this regulatory norm, the DOL now seems to be attempting to regulate the design of the product the insurer builds-not just its sale. This is truly uncharted territory, especially as it is likely to widely impact the retail sale of annuities.

Like the design of any investment product, whether it be a mutual fund, annuity contracts or CIT, compensation design is an integral part of their development. These businesses produce investment products which are designed, priced and managed by very serious investment professionals (and, in the case of insurers, actuaries) which seek to profit off of their expertise. A key element of investment design is the manner in which marketing and sales compensation are actually built into the product features.

This regulatory practice may well give rise to a few issues for which to be on the watch should these rules be finalized as proposed.


DOL proposes to require that the insurer avoid certain, specific types of incentive based compensation (such as, of all things, award trips) that it builds into its products. The fundamental mandate is that any compensation design must not prioritize the financial interests of the insurer over that of the purchaser.

This seems to be a very odd requirement to impose on insurance companies-or any business, for that matter. These companies are judged by the market (and their investors or-in the case of a mutual insurer-its policyholders) by, among other things, their profitability. It seems like there may be all sorts of legal and behavioral issues which spring from such a counterintuitive demand in the regs. Among other things, it imposes this “obligation” in a competitive business environment where sales are a critical factor in the organization’s success (and survival), and where each other insurer has competing products and compensation schemes. As a result, I’m not quite sure any business has the capability of meeting this standard-especially considering that an insurer must maintain its financial viability over the policyholder’s lifetime in order to guarantee lifetime benefits. This legitimately raises the question of the rule’s workability- and whether this regulatory design can be effective at preventing abusive sales practices at the point of sale.

Note that this element is also a bit of an outlier, by its own terms: the DOL (rightfully) exempts investment companies (mutual funds) from this product compensation design requirement (and the requirement that it establish and monitor “best interest” practices), which it now seeks to impose on insurance companies.

Disjointed enforcement authority

DOL enters this uncharted territory being hobbled by ERISA’s Reorganization Plan #4. This rule gives the DOL the responsibility to promulgate conflicted advice rules under IRAs, but gives it no authority to enforce those rules. The ultimate result is that the DOL, SEC nor FINRA have the authority under federal law to enforce the imposition of this compensation design regulation as it applies to non-registered annuity contracts by non b-ds to IRAs. Though Treasury appears to have some authority regarding these sales, it seems to only have the ability to tax this behavior, not to otherwise regulate sales behavior.

That responsibility falls to the states. The states then only have the authority to enforce their own annuity design rules, not the DOL’s. This means that successful implementation of the proposed rules necessitates the coordination between some federal entity (which needs to build insurance expertise) and the states.

Dealing with enforcement practices related to the implementation of this rule is likely to be a challenge.

Conflation of IRA and retirement plan issues

In addition to the workability and enforcement issues being raised by these elements of the proposed rules, I do want to share an observation regarding the “mashing” together of IRA and retirement plan compensation rules. The announcement of the new fiduciary scheme by the White House was accompanied by a scathing (and to my mind) unfounded indictment of fixed indexed annuities-the design of which, by the way, are well suited for retirement plans. These comments actually demonstrated a much broader point: there seems to be limited awareness of the vast difference in the product design, pricing and sales practices related to annuities (including fixed indexed annuities) sold to retirement plans and of those sold to IRAs.

Think about it: the “suitability” required of the sale of annuities to IRAs under state law looks at each individual’s personal circumstances, with a correlating need to match the annuity’s terms with the individual’s needs. This takes time and expertise of a different sort than where an annuity is purchased under a retirement plan, the purchase of which is required to be “prudent” for the plan.

The ultimate goal of averting abusive sales practices may not be well-served by conflating the regulation of the processes involved in a retirement plan purchase of an annuity with those necessary for an individual purchasing an annuity for an IRA. Uniformity has its value, of course, but there is likely to be substantial value for tailored solutions in such a diverse marketplace. Continue Reading The Fiduciary Rule’s Foray Into Uncharted Territory

There is much to be considered under the new set fiduciary rules recently proposed by the DOL, especially as we sort through the (very extensive) details of this new regulatory regime. We are already hearing much about the impact and change which would be introduced into the market over the expansive reach of this new

202(b) actually does not make any statutory change to any of the Code’s or ERISA rules governing the distribution of a plan’s assets pursuant to divorce or separation orders. Instead, it instructs Treasury to amend its QLAC rules, which are obscurely found under Required Minimum Distribution applicable to dc plans which purchase annuities (Reg 1.401(a)(9)-6). The regs must be changed to reflect that if a QLAC is issued as a joint and survivor annuity (which it is required to be unless spousal consent is obtained, under plans to which such rules apply), and a divorce subsequently occurs prior to the date the annuity payments actually begin, the DRO “will not affect the permissibility of the joint and survivor annuity benefits” as long as that order meets certain requirements.
Continue Reading Secure 2.0’s New QDRO Rules: The Mainstreaming of the QLAC?

“Decumulation” of retirement benefits has shifted from defined benefit plans to defined contribution plans. I had written in 2009 that the demise of the DB plan was inevitable because of the rise and fall of plan sponsors. It is one thing to rely upon an employer’s current funding of the accumulation of the lifetime income benefit through its employer sponsored retirement plan; it is quite another to expect that same employer sponsored plan to actually provide the guaranteed retirement payout over the retiree’s lifetime.DC plans can avoid this fate.

Continue Reading Avoiding Studebaker

There are substantial efforts underway throughout the retirement market, attempting to wrap minds around the various aspects of providing lifetime income from DC plans. This incudes efforts to design new programs and how to explain them to sponsors, fiduciaries and advisers who must make the ultimate selection election between competing choices.This will not only involve getting familiar with a whole new vocabulary, but ultimately there needs to be at least a working knowledge of the different types of annuities which may be in play in any of these designs.
Continue Reading Building a Lifetime Income Product

Even with all of the interest in the Fiduciary Rule, the DOL is still paying attention to lifetime income-so much so that the Qualified Longevity Annuity Contract (the “QLAC”, established by the IRS) was granted broad relief under the Rule. This relief is so favorable that one of the claims being brought in the 5

With regard to the DOL’s fiduciary proposed regulations, There is much to like in the new rules; some troubling things; and, perhaps, a mistake or two which will be all flushed out in the coming months. There are a couple of technical points which are worthwhile sharing because they represent what we can expect of the “unexpected” as we work through the changes’ impact. These include the impact on lifetime income , and the application of the PT rules on the purchase of annuities-including QLACs.
Continue Reading DOL’s Proposed Fiduciary Rules May Unexpectedly Open Lifetime Income Door, If…….

In Lifetime Income, ERISA’s statute of limitations may serve to provide the basis for a workable standard when dealing with the long term financial risk posed to fiduciary by insurer insolvency following the purchase of an annuity.
Continue Reading Lifetime Income: Using the Statute Of Limitations to Minimize Insurer Insolvency Risk