Consumer Groups Applaud Biden Administration’s New Fiduciary Rule Designed to Protect Retirement Savers

November 16, 2023

Consumer Groups Also Warn of Coming “Train Wreck” In California If Senate Bill 263 Is Passed By The California Legislature

A coalition of consumer groups, including the Life Insurance Consumer Advocacy Center, have expressed strong approval for the proposed “Retirement Security Rule” announced by the United States Department of Labor on October 31, 2023. The rule protects people saving for retirement by expanding the definition of an investment advice fiduciary to include life insurance agents selling annuities in retirement plans, such as 401k’s and IRAs (DOL Fact Sheet). Other consumer groups in the coalition include the Consumer Federation of California, Consumer Federation of America, United Policyholders, and the Center for Economic Justice.

Currently, life insurance agents have no obligation to act in the best interest of their customers in most states. This is true even when they are selling annuities and other life insurance products, such as universal life policies, that are designed and marketed as retirement savings vehicles. Likewise, the agents have no obligation to disclose conflicts of interest with their customers, even though the agents often stand to gain many thousands of dollars in commissions if the customer accepts the agent’s recommendation.  If the rule becomes final and is upheld against the inevitable legal challenges by the insurance industry (an earlier version of the rule was struck down by a court in 2018), it will provide consumers who buy annuities in retirement plans with among the strongest sets of protections applicable to any consumers of financial products.

The rule’s expanded definition of investment advice “fiduciary” works in tandem with a set of “Prohibited Transaction Exemptions” (PTE 84-24 and PTE 2020-02) that permit investment advice fiduciaries to receive compensation from sales of annuities if they comply with a rigorous set of “Impartial Conduct Standards.” These standards require:

  • Advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components: prudence and loyalty:
    • Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemptions.
    • Under the loyalty standard, advice providers may not place their own interests ahead of the interests of the retirement investor or subordinate the retirement investor’s interests to their own.
  • The investment professional and firm must charge no more than reasonable compensation and comply with federal securities laws regarding “best execution.”
  • The advice must be free from misleading statements about investment transactions and other relevant matters.
  • Independent agents (those that sell for more than one insurance company) must disclose the compensation they will receive if their recommendation is accepted, expressed both in dollars and as a percentage of gross annual premium payments, if applicable, for the first and each succeeding year. Agents who sell for only one insurer must disclose such information upon request and must tell consumers that the information is available.
  • Insurers must adopt policies to mitigate conflicts of interest and may not use quotas, bonuses, contests, differential compensation, or similar action or incentives that a reasonable person would conclude are likely to result in recommendations that are not in the consumer’s best interest.

The full text of the rule can be found HERE.

President Biden has personally spoken out in favor of the rule, stating, “Some advisors and brokers steer their clients toward certain investments not because it’s the best interest of the client; because it means the best payout for the broker… they’re putting their self-interest ahead of their clients’ best interest. And they’re scamming Americans out of hard-earned money.” See full remarks.

President Biden discussed sales of fixed index annuity as an area of special concern. The President’s Council of Economic Advisors reported that conflicted advice by agents selling fixed index annuities (i.e., annuities whose returns are based on the performance of an index such as the S&P 500) may cost consumers $5 billion annually. See CEA Blog.

Because the DOL’s authority to impose the proposed rule is based on The Employee Retirement Income Security Act (ERISA), the rule is limited to annuity sales made in retirement plans such as IRAs and 401k’s. But consumers buying annuities outside such plans need protection from conflicted advice just as much as consumers who buy annuities in the plans. Protection of consumers buying fixed index annuities is generally left to the states, but most states are adopting very weak consumer protections advocated by the life insurance industry and codified in the National Association of Insurance Commissioners (NAIC) “Suitability in Annuity Transactions” Model Regulation #275 in 2020.

The DOL strongly criticized the NAIC Model Regulation, pointing out that it disregards agent conflicts of interest stemming from cash or noncash compensation. In other words, it disregards almost all agent conflicts of interest.  The DOL also explained that the NAIC Model Regulation purports to adopt a “consumer’s best interest” standard but in fact fails to do so because the fine print of the Model Regulation allows agents to meet their obligations merely by having a “reasonable basis to believe the recommended option effectively addresses the consumer’s financial situation, insurance needs, and financial objectives…” The obligation not to put their own interests ahead of the consumer’s interest effectively disappears from the statute if the fine print is satisfied.  See 88 Federal Register 75898.

New York has resisted industry pressure to fall in line by adopting the NAIC Model Regulation and has instead adopted a strong “consumer’s best interest” rule in New York Department of Financial Services Regulation 187.

Industry efforts to impose the NAIC Model Regulation in California through Senate Bill 263, which was sponsored by the California Department of Insurance (CDI) and authored by Senator Dodd, hit a snag in August 2023, when the Assembly Appropriations Committee held the bill, making the bill a “two-year bill” and requiring CDI and Senator Dodd to try again to pass the bill in 2024.

As previously reported in this blog, SB 263 in its present form is hostile to consumer interests. Not only does it fail to protect them, but it affirmatively misleads them into thinking that:

  1. they are protected by an obligation by the agent to act in the consumer’s best interest, and
  2. agent conflicts of interest are being disclosed.

In reality, neither of these beliefs is true. Said LICAC Executive Director, Brian Brosnahan, “The DOL rule highlights how badly the NAIC Model Regulation (and thus SB 263) fails to protect consumers and in fact deceives them. California annuity consumers are looking at a train wreck in 2024 if industry succeeds in ramming SB 263 through without very substantial changes. California needs to change course now.”