What carriers should consider as federal courts delay implementation

The Retirement Security Rule, also known as the “Final Rule,” issued by the U.S. Department of Labor (DOL) is a regulation that significantly updates the standards for financial professionals who provide retirement advice. This rule aims to broaden the definition of who qualifies as a fiduciary under the Employee Retirement Income Security Act (ERISA), changes that would impact the sectors of the insurance industry that underwrite annuities.

The rule includes several key components:

• Fiduciary duty: Financial advisors must act in the best interest of their clients when providing retirement investment advice, prioritizing the client’s needs over potential personal gains.
• Best interest standard: The rule enforces a “best interest” standard, mandating that advisors provide advice that benefits the client, rather than focusing on commissions or fees.
• Disclosure requirements: Advisors are required to disclose any potential conflicts of interest and the rationale behind their recommendations, enhancing transparency.
• Prohibited transactions: Certain transactions that could lead to conflicts of interest, such as receiving commissions for specific investment products, are restricted under the new rule.
• Monitoring and compliance: Firms and advisors must implement policies to monitor compliance with the fiduciary standard and document adherence to these requirements.

The fiduciary rule’s current status?
Mired in legal challenges.

Despite the DOL’s intentions to enhance investor protection, the implementation of the rule has faced significant legal hurdles. Two federal district courts in Texas have issued stays on the rule’s implementation, which was to go into effect on September 23, 2024. In issuing the stays, judges appeared sympathetic to arguments that the DOL overstepped its authority by expanding the definition of a fiduciary beyond what ERISA originally intended.

The courts’ orders suggest that the rule could place undue burdens on insurance agents and brokers, exposing them to increased compliance costs and potential lawsuits.

Beyond these legal challenges, various industry groups, including the American Council of Life Insurers (ACLI), the National Association of Insurance and Financial Advisors (NAIFA), and the National Association for Fixed Annuities, have opposed the rule. They argue that it could limit access to a range of investment options for consumers and increase operational costs for financial advisors, especially those managing smaller accounts.

Ultimately, the fate of the rule may depend on this ongoing litigation and potential changes to the political landscape. As legal battles continue, there is a growing likelihood that the rule might not survive in its current form, especially given the precedent set by a 2018 ruling from the Fifth Circuit Court, which struck down a previous iteration of the fiduciary rule.

Impact on the insurance industry

Many insurance professionals, particularly those involved in selling annuities and other retirement products, would feel significant impacts if the courts’ final decisions were to allow this rule to go into effect.

Insurance agents and brokers who provide advice related to retirement investments could be classified as fiduciaries, even if their advice is given on a one-time basis, such as advising on rolling over assets from a workplace retirement plan to an IRA.

The need to comply with new disclosure requirements and implement policies to avoid conflicts of interest could impose significant administrative and financial burdens on insurance firms and advisors, potentially driving smaller firms out of the market or forcing them to limit their client base to larger accounts.

The rule also could reduce the variety of investment products available to clients, as advisors might shy away from recommending products that could lead to conflicts of interest under the fiduciary standard.

Since 2020, 41 states covering 90% of U.S. consumers have adopted the NAIC Annuity Best Interest model, and updated standards of the SEC Regulation Best Interest Rule similarly went into effect the same year. Together, these regulations provide an aligned state and federal best interest framework that already governs insurance and financial markets.

The main focus for insurers

For those in the financial and insurance sectors, the most critical aspects of the fiduciary rule to consider are:

• Increased financial obligations to customers: Financial professionals should assess their business models and advice frameworks to ensure they would be adaptive to an expanded fiduciary definition.
• Potential for legal risks of non-compliance: Firms must prepare for increased scrutiny and the potential for litigation should they be deemed non-compliant with any new standards.
• Need for adaptation: Organizations should focus on fortifying their compliance operations tools and systems and provide thorough training to advisors to navigate the complexities of any rule changes.

Learn more about Vertafore’s trusted compliance technology

This pending fiduciary rule represents a significant shift in how retirement investment advice is regulated. While the rule’s intent is to protect investors by ensuring that advice is given in their best interests, pushback from industry groups combined with the DOL’s ongoing legal setbacks indicate the rule’s implementation remains in doubt. An inevitable election-year change in administration, too, only clouds the future.

Insurance carriers that underwrite annuities must keep informed about this rule’s status and be prepared to adapt their practices to comply with the evolving regulatory landscape.

By Dan Kolakowski, Manager, Regulatory Compliance

Dan’s entire professional career has been in insurance and financial technology. Before Vertafore, he worked for an insurance technology company focused on commercial insurance building underwriting/risk analysis platforms and policy/program benchmarking analytics. He joined Vertafore’s Product Management department in 2012 and served nine years as Senior Product Owner, working on software solutions for insurance carriers, agencies, individual agents, securities firms, and state departments of insurance. Read more.