2024 0102 - ACLI to GOV-DOL / EBSA - 40p

  • 2024 0102 - ACLI to GOV-DOL / EBSA - Subjects: Retirement Security Rule: Definition of an Investment Advice Fiduciary (RIN 1210-AC02); Proposed Amendment to Prohibited Transaction Exemption PTE 84-24 (Application No. D-12060); Proposed Amendment to Prohibited Transaction Exemption PTE 2020-02 (Application No. D-12057) - 40p
  • (p20) - The Proposal Fails to Address the Impact of a Fiduciary-Only Rule on Middle, Lower-Income and Underserved Households
    • The Department has unreasonably and improperly discounted three studies that examine how the rule will impact small savers and underserved groups.17
      • 17 Hispanic Leadership Fund, Analysis of the Effects of the 2016 Department of Labor Fiduciary Regulation on Retirement Savings and Estimate of the Effects of Reinstatement, November 8, 2021 - 84p
        • U.S. Chamber of Commerce, The Data is In: The Fiduciary Rule Will Harm Small Retirement Savers, Spring 2017 - 20p
        • Deloitte, The DOL Fiduciary Rule: A Study in How Financial Institutions Have Responded and the Resulting Impacts on Retirement Investors, August 9, 2017.- 29p
      • ⇒ Finally, a 2021 Hispanic Leadership Fund study concluded that “low and middle-income individuals will lose access to valuable investment assistance that the Department disregarded in its 2016 analysis”, and that “the effects on minority populations will be most adverse”. Specifically, the study concludes that, had the 2016 rule remained in place, 2.7 million workers with income less than $100,000, would have been adversely impacted. The study further concluded that personalized financial guidance is particularly important for minority populations, and that loss of such guidance could increase the wealth gap by 20 percent over 10 years, reducing savings balances of Black and Hispanic households.
  • (p21) - The Proposal Fails to Address the Impact on Americans’ Retirement Savings
    • The Proposal and RIA contend that retirement savers benefited from the 2016 rule and will continue to benefit from the 2023 version. But other than speculating about returns and the timing of trades, the Department does not specify exactly who benefited, how they benefited, or how much they benefited.
    • (p22) - Similarly, figure 8 shows the increasing gap in retirement savings between white and Black, and white and Hispanic households. Since 2010, median retirement savings balances of white households nearly doubled from $50,000 to $97,000 in 2022 (an average 7.8 percent annual growth). Meanwhile, median balances of Hispanic households only increased from $20,000 in 2010 to $27,000 in 2022 (2.9 percent average annual growth), and Black households from $20,000 to $28,000 (3.3 percent average annual growth).
  • (p22) - The Proposal Fails to Address the Impact on Life Insurance
    • In several instances, the Proposal states that: “The term ‘investment property’ does not include health insurance policies, disability insurance policies, term life insurance policies, or other property to the extent the policies or property do not contain an investment component.”
      • Consequently, selling life insurance products with an “an investment component” would trigger fiduciary status. 
        • This would include sales to a welfare benefit plan or recommendations to plan participants.
      • Importantly, outside of specifying that term life insurance products won’t fall under the rule, the Proposal only refers to life insurance when making a point about regulatory regimes (a study about the Indian life insurance industry is cited).21
        • 21 Santosh Anagol, Shawn Cole & Shayak Sarkar, Understanding the Advice of Commissions-Motivated Agents: Evidence from the Indian Life Insurance Market, 99(1) The Review of Economics and Statistics 1-15, (2015). - 70p
      • The Proposal makes no attempt to identify any issues with the market for these products, the value of the protection these products provide to American families in their time of need, nor the impact of the Proposal on the future availability of these products to workers through welfare benefit plans or through the use of ERISA plan or IRA funds to purchase life insurance.
      • This is a substantial oversight given the size of the non-term life insurance market. In 2021, there were 95.4 million permanent life insurance policies in-force with a total face-value of $7.1 trillion.22
        • Further, in 2022 life insurers sold 5.8 million whole life policies with a face value of $551.2 billion.23
      • If the Proposal is enacted, the market for life insurance will be negatively impacted, exposing the financial wellbeing of millions of families to greater mortality risk.
        • Life insurance ownership has been steadily declining since the early 1970s.
        • Today, only 52 percent of American adults report that they have coverage.24
      • If the Department adopts this Proposal, it will only result in greater financial vulnerability for American families.
    • (p23) - The Proposal Cites Studies That are Narrowly or Mis-Focused and Out of Date  
      • 25 Egan, Mark; Ge, Shan; Tang, Johnny, “Conflicting Interests and the Effect of Fiduciary Duty – Evidence from Variable Annuities”, Review of Financial Studies, vol. 35, no. 12, pp. 5334-5386. - 
    • (p24) - The Proposal May Lead to Investment Homogeneity and Systemic Risk
    • (p24) - The Proposal Incorrectly Assumes Financial Professionals Will Embrace Fiduciary Status
    • (p25) - The Proposal Fails to Properly Compare Commissions to Advisory Fees
      • The Proposal is founded on a premise that commissioned products influence financial professionals to provide conflicted guidance and recommendations to the detriment of retirement plan participants.
        • As such, the Proposal elevates fee-based advice and automated robo-advice systems as preferable alternatives because they are cheaper and aligned with the interests of retirement plan participants.
        • These premises are incorrect in many cases.
          • Recommendations under the Proposal may generate the least expensive product that may actually disserve and impair the participant’s best interests.
          • While fee-based or automated retirement recommendations are appropriate for some individuals, they are not necessarily appropriate for all.
      • Financial product recommendations and associated compensation arrangements for the sale of those products are most objectively evaluated according to the unique facts and needs of each financial customer and the individual compensation arrangement.
        • Financial advisers who obtain their compensation through annual fees based on assets under management (“wrap fees”) are not likely to recommend certain commission-based products, like annuities, because that purchase is not generally included within the assets under management on which the annual, recurrent fees are assessed by this type of fee-based financial adviser.
        • Recurrent annual fees may be ill-suited to individuals with moderate assets needing little annual advice.
        • Annuity disbursements also result in a declining asset value and declining fees, making investment advisers less likely to recommend them even when they would be in a client’s best interest.
        • There is no discussion of this conflict in the Proposal.
      • FINRA issued guidance about fee-based arrangements, recognizing that while fee-based programs are beneficial for some customers, “they are not appropriate in all circumstances.”28 FINRA instructs that....
      • (p25) - For all of these reasons, the Proposal’s recurrent conviction that recommendations by financial professionals who receive commission-based compensation are always conflicted fails to fulfill the statutory, executive, and judicial mandates that the cost-benefit analysis should be balanced and consider several solutions to proposed rulemaking.
    • (p25) - V. The Proposal’s Administrative Procedure Act and Constitutional Defects
      • For the reasons provided above, the Department should abandon the Proposal in its entirety.
        • If, however, the Department proceeds to promulgate a final rule and adopt the amendments to the exemptions, the rulemaking package would be subject to numerous legal claims that that would compel judicial vacatur of the rulemaking package under the Administrative Procedure Act (APA).31
        • If Finalized, The Proposal Would Be Contrary to Law Under the APA Because It Would Vastly Exceed the Department’s Statutory Authority Under ERISA.
      • As a threshold matter, and for many of the reasons already explained, the Department lacks the statutory authority to finalize the Proposal.
      • (p27) - To the contrary, the Department effectively acknowledges that is presently not the case, in arguing that the rule is needed to create expectations of trust and confidence that, according to the Department, are missing.40
        • The rulemaking record thus makes clear that the Department is seeking to create fiduciary relationships by regulatory fiat, not to regulate already existing relationships under federal law.41
        • Critically, moreover, the Department provides no empirical support for the critical proposition that the transactions covered by the rule arise out of mutually understood relationships of trust and confidence.42
      • (p27) - The breadth of the Department’s proposed definition of fiduciary makes clear how far the Department has strayed beyond its statutory authority.
        • For example, the Proposal extends fiduciary obligations to transactions between sellers and independent fiduciaries and other sophisticated parties—which is deeply inconsistent with ERISA’s common-law conception of fiduciary.
          • In this respect, the Proposal sweeps more broadly than the 2016 rule by omitting the “seller’s carve-out” for transactions with financial professionals who are themselves fiduciaries43—such as a pension risk transfer transaction, in which the pension fund already has a named fiduciary charged with and responsible for managing the fund.
          • To subject insurance agents selling financial products to sophisticated pension fund managers to a redundant fiduciary obligation bears no relation whatsoever to the common-law conception of fiduciary embodied in ERISA.
          • Indeed, under the Department’s new definition, responding to an RFP for a pension risk transfer transaction would appear to make an insurance agent a fiduciary, even in circumstances where the plan did not want fiduciary advice.
        • As another example of the rule’s untenable breath, the rule provides that one-time “advice provided in connection with a rollover decision, even if not accompanied by a specific recommendation on how to invest assets, should be treated as fiduciary investment advice.”44
          • That, too, is entirely divorced from ERISA’s common-law conception of fiduciary.
          • ⇒ As the Fifth Circuit explained when vacating the 2016 rule, in “one-time IRA rollover or annuity transactions,” “it is ordinarily inconceivable that financial salespeople or insurance agents will have an intimate relationship of trust and confidence with prospective purchasers.”45
          • ⇒ The Department’s adoption of a nearly per se rule that rollover recommendations and guidance are necessarily fiduciary advice is flatly inconsistent with the common law, the five-part test as it has existed for decades, as well as the Fifth Circuit’s decision.
        • As another example of the rule’s vast sweep, the rule would apparently expand the scope of Title I’s enforcement mechanisms to reach any recommendations about a transaction that would involve funds being transferred out of a Title I plan into another retirement account.
          • As the Department trumpets, “recommendations on distributions” from Title I plans, “including rollovers or transfers into another plan or IRA,” would “fall within the scope of investment advice in this proposed regulation, and would be covered by Title I of ERISA, including the enforcement provisions.”46
          • That expansion improperly override Congress’s carefully drawn distinction between Title I and Title II remedies, as the Fifth Circuit emphasized in vacating the 2016 rule.47
        • For one thing, the Proposal arrogates to the Department authority that Congress delegated to the SEC or reserved to the states.
          • As the Fifth Circuit explained, the 2010 Dodd Frank Act
            • (1) delegated to the SEC the power to promulgate standards of conduct for broker-dealers and investment advisers who render personalized investment advice about securities to retail customers;48 and
            • (2) expressly reserved for the states the authority to regulate fixed income annuities.49
          • And, as noted in Section II above, by seizing these powers for itself and by expanding the definition of “investment advice fiduciary” beyond the limits Congress intended in enacting ERISA, the Department is claiming a “transformative expansion in [its] regulatory authority”—thus implicating the major questions doctrine.50
          • The major questions doctrine puts an exclamation point on why Department’s proposed sweeping expansion of fiduciary authority over major segments of the U.S. financial services and insurance industries is indefensible.
  • (p1) - ACLI and its members remain perplexed as to why the Department continues to commit governmental resources toward a re-definition of the term “investment advice fiduciary.”
    • This “new” Proposal incorporates many of the same inappropriately expansive concepts as were included in the Department’s 2016 fiduciary rulemaking package (2016 rule) that was vacated by the Fifth Circuit as inconsistent with the statutory text of ERISA.
    • As detailed below, this Proposal has several significant fatal flaws, is similarly inconsistent with the statutory text and, therefore, must be withdrawn:
  • (p2) - I. The Proposal Would Establish a Fiduciary Barrier Denying Access to Annuities
    • This Proposal would upend the marketplace for commission-based sales by broadly expanding the definition of “fiduciary investment advice” under ERISA to include virtually all financial service interactions in the retirements savings setting that could be construed to involve a “recommendation” of almost any investment product, strategy or service.
      • Under this Proposal, Americans would be forced to either forgo retirement guidance or engage a fiduciary investment adviser for any help with retirement finances, from taking the first steps to save for retirement to addressing their income needs in retirement.
  • II. The Proposal Is Contrary to Current Law
    • The Proposal Impermissibly Expands ERISA Fiduciary Duties to Sales Recommendations
    • In the Department of Labor’s 2010 proposal to amend the definition of fiduciary (75 FR 65263), the Department recognized the dichotomy between advice for a fee and sales and marketing activities by providing a “sellers exception.”
    • The Proposal is premised upon the Department’s rejection of the dichotomy under the law between a sales recommendation to a consumer on the one hand, and advice provided for a fee on the other.
      • The Department’s Proposal seeks to define the term “investment advice fiduciary” to include anyone who is in the business of making routine sales recommendations by persons engaged in commonplace sales and marketing efforts.
      • The Fifth Circuit disagreed with the Department’s conflation of sales activity and fee-based investment advisory activities back in 2018, observing that “when enacting ERISA, Congress was well aware of the distinction … between investment advisers, who were considered fiduciaries, and stockbrokers and insurance agents, who generally assumed no such status in selling products to their clients.”
      • Yet, the Department continues to reject this “purported dichotomy” – as it did in the preamble to its 2016 rule. The difference now, in 2023, is that in 2018 a federal court of appeals held that the Department was wrong in its rejection of this “dichotomy” and vacated the Department’s flawed rulemaking attempt. In reference to the current regulation issued in 1975, the court noted that “substantial case law has … adopted DOL’s original dichotomy between mere sales conduct, which does not usually create a fiduciary relationship under ERISA, and investment advice for a fee, which does.”
      • The court found that the Department’s interpretation of ERISA:
        • conjoins “advice” with a “fee or other compensation, direct or indirect,” but it ignores the preposition “for,” which indicates that the purpose of the fee is not “sales” but “advice.”
        • Therefore, taken at face value, the provision rejects “any advice” in favor of the activity of “render[ing] investment advice for a fee.”
        • Stockbrokers and insurance agents are compensated only for completed sales (“directly or indirectly”), not on the basis of their pitch to the client. Investment advisers, on the other hand, are paid fees because they “render advice.”
        • The statutory language preserves this important distinction.
      • The Department is bound by the court’s ruling and is not free to engage in rulemaking activity that defies the court’s binding interpretation of the scope of the Department’s authority.
    • This broad expansion of sales activity encompassed by the Proposal is not limited to the retail marketplace. The definition captures insurance companies which, as commercial businesses, recommend the purchase of their products and services and seek to best align their recommendations to the specific needs of their customers. Under the Proposal, an insurer responding to a request for proposal and recommending specific insurance products and services to employers such as the offer of a group variable annuity contract to fund a plan, including a pooled employer plan, with a set of investment options or the offer of a group annuity contract to fund pension benefits would be categorized as a fiduciary.
      • Insurers treated as fiduciaries under the Proposal would not be permitted to earn any revenue at all on the products they sell to ERISA plans or IRAs unless they can meet the terms of a single exemption – PTE 2020-02 – that is ill-suited for use by any commercial business enterprise. There is no basis in law for this expansive interpretation of ERISA and for the Department’s intrusion into the direct regulation of the business of insurance.
    • (p6) - It is incorrect to equate the fiduciary relationship that forms when a retirement investor specifically contracts for the advisory services of an investment advisor, with the non-fiduciary sales relationship that arises when an investor seeks the assistance of a broker-dealer or insurance agent to purchase an annuity for retirement planning. Counterparties have duties of good faith and fair dealing even in a sales relationship. However, the fact that a broker-dealer or insurance agent acts in a manner that is trustworthy and provides guidance and recommendations in the investor’s best interest does not alter the sales relationship and does not implicate or confer fiduciary status.
    • (p6) - The court notes a treatise that describes fiduciaries as “individuals or corporations who appear to accept, expressly or impliedly, an obligation to act in a position of trust or confidence for the benefit of another or who have accepted a status or relationship understood to entail such an obligation, generating the beneficiary’s justifiable expectations of loyalty.” When a customer engages an insurance agent, the customer does not agree to pay a fee for investment advice as a condition of engaging in discussions with an insurance agent. Nor does the insurance agent expect to be paid as a condition of engaging in discussions with a prospective customer. The agent is acting as the paid sales representative of one or more insurers and expects to be paid a commission only in the event there is a completed sale of an insurance product. Compensation for a completed sale is paid to the agent by the insurer and not by the customer. The customer is free to seek recommendations from a number of insurance agents without being required to pay any of the agents for any recommendations made.
    • (p6-7) - These relationships are between a buyer and a seller and are not among those described by common law as trust-and-confidence relationships. This result is not altered merely because an insurance agent is a professional, who is knowledgeable, skilled and adept at identifying customer needs and recommending insurance and annuity products that meet those needs.
      • Indeed, as the Fifth Circuit explained, “[s]tockbrokers and insurance agents are compensated only for completed sales (‘directly or indirectly’), not on the basis of their pitch to the client. Investment advisers, on the other hand, are paid fees because they ‘render advice.’”
      • Once again, as the Department attempted to do in its vacated 2016 rulemaking package, the Proposal illustrates the Department’s failure to understand and apply this clear legal distinction outlined by the Fifth Circuit and by Congress.
    • (p7) - The Proposal's Exemptive Relief Amendments Illustrate the Improper Application of Fiduciary Status to Customary Sales Practices
      • The proposed revisions to PTE 84-24 and PTE 2020-02 would significantly narrow the compensation that an insurance agent can receive when selling an annuity, with predictably disruptive effects on the marketplace and resulting in denial of access to retirement investors.
        • Under the proposed revisions to PTE 84-24, independent insurance agents may only receive insurance sales commissions.
        • Under the proposed revisions to PTE 2020-02, the Department -contrary to its own original rationale in PTE 2020-02, without either identifying adverse experiences under the original version of the exemption, or otherwise justifying the need for the change - proposes to further narrow compensation in a manner that leaves open the question as to whether anything other than uniform insurance sales commissions or a fixed salary with no performance increases would be acceptable.
        • In attempting to apply a fiduciary duty to sales recommendations, the Department calls into question a variety of forms of compensation that are customary to those working in a sales capacity.
    • The NAIC Suitability in Annuity Transactions Model Regulation #275 (NAIC Model) was developed by state insurance regulators and adopted by the NAIC in 2020 to apply to persons in the business of selling annuity products.
      • The Department’s proposal would deny relief for the receipt of numerous categories of customary sales and marketing compensation to those who would be considered fiduciary sales representatives.
      • “Independent producers” would only be permitted exemptive relief for commissions, effectively prohibiting marketing, office support, retirement, health and welfare benefits, training and educational conference opportunities and other reasonable compensation beyond sales commissions.
      • For all other insurance agents, the proposal calls into question compensation practices that reward sales professionals with superior performance.
      • ⇒ The Department’s Proposal would effectively regulate and restrict the sale and marketing of insurance products, thereby rejecting the dichotomy between those who provide investment advice for a fee and the sale and marketing of insurance products, i.e., the business of insurance.
    • The PTEs fail to recognize the variety of arrangements used by insurers when selling and marketing insurance products.
      • For example, the dramatically revised PTE 84-24 is restricted to “independent producers,” defined as persons licensed to sell insurance contracts of multiple unaffiliated insurers who are not an employee or statutory employee of an insurer.
      • PTE 2020-02 requires an insurer to supervise insurance agents to ensure every sale is in compliance with the PTE.
      • Neither PTE would work when an insurance agent is a statutory rather than common law employee who sells insurance products of multiple insurers if the Department requires one insurer to supervise the sale of another insurer’s insurance products.
      • Again, the Department’s Proposal is not compatible with the business of insurance.
      • The revised PTE 84-24 is impractical for insurers that distribute annuities through thousands of independent producers.
        • Every insurer doing business with an independent producer would be required to perform the same annual background check on that producer, review each recommendation before an annuity is issued even when it is not yet clear that there will be a sale upon the completion of the review (likely to lead to delays for consumers), and conduct separate retrospective reviews, each year with respect to each and every one of the producers, with such review to include the producer’s compliance with the terms of the PTE.
        • Thus, the Department proposes that the business of insurance now includes serving as a surrogate enforcer for a federal agency.
  • The Proposal Impermissibly Imposes ERISA Title I Fiduciary Duties on Fiduciaries to IRAs
    • The standards of conduct that Congress developed for Title I plans, duties of loyalty, care, skill and prudence, are simply not applicable to Title II fiduciaries.
    • It is not within the authority of the Department to impose Title I standards of conduct on Title II fiduciaries as a condition to exemptive relief for transactions involving Title II plans.
    • ⇒ The Department continues to rely, as a basis for justifying its new rulemaking, on claims of changing market environment conditions and asserts that existing regulations should be revised to “reflect the current realities.”
    • According to the Department, this includes the “growth of participant directed accounts and IRAs.”
    • This “need” for rulemaking is not new, the Department used this justification for rulemaking in its 2016 rule.
      • In response, the Fifth Circuit held “that times have changed, the financial market has become more complex and IRA accounts have assumed enormous importance are arguments for Congress to make adjustments in the law, or for other appropriate federal or state regulators to act within their authority.
      • A perceived need does not empower DOL to craft de-facto statutory amendments or to act beyond its expressly defined authority.”
  • The Exemptions Violate the Separation of Powers and Impermissibly Raises Private Right of Action Liabilities
  • The Proposal Improperly Conflates “Best Interest” With ERISA’s “Sole Interest” Obligation
    • The term “best interest” has no meaning under ERISA. The Department’s use of the term “best interest” creates confusion among the public and those regulated by ERISA Title I as to the actual obligations a fiduciary has to an investment advice recipient under Title I. The comparison to the best interest obligations owed by persons engaged in sales transactions under federal securities law and state insurance law adds to this confusion. Standards that apply to sales and marketing professionals are the purview of the prudential regulators of those professionals. Whether or not a person is subject to a “best interest” standard under other law has no bearing on whether they are providing “investment advice for a fee” under ERISA.
    • ERISA demands nothing less than that a fiduciary act in the sole interest of the advice recipient. Such a standard is incompatible with the very nature of sales and marketing activities. Both the SEC in adopting Reg. BI and the NAIC in adopting its best interest model regulation recognized and accounted for this distinction. A sales professional compensated by the firm that engages them to sell products can never act in the sole interest of the advice recipient due to this very fact. The Department’s efforts with this Proposal appear to rest on the premise that sales activities can be compatible with ERISA’s sole interest standard, but the Department offers no reasoned basis for that premise. The reality is that a sole interest standard would effectively impose a one-size-fits-all fiduciary model on all retirement recommendations relating to Title I or Title II plans.
    • The Department must make clear to both fiduciaries to Title I plans and their investment advice recipients that it has a clear understanding of the law, including the sole interest obligations under ERISA, and that it will enforce the law as written.
  • (p9) - The Proposal Indicates Confusion as to the Purpose of and Authorities for PTEs
    • The administrative feasibility of the exemption amendments is highly questionable.
    • As was the case with the 2016 rulemaking package, among the new requirements, brokers and insurance salespeople assume obligations of loyalty and prudence only statutorily required of ERISA plan fiduciaries. The consequences will be the same with this proposal. These newly imposed affirmative obligations and liabilities, which inappropriately impose ERISA’s statutory obligations of loyalty and prudence on brokers and insurance salespeople, will result in a limitation in access to financial guidance to retirement savers. We fail to see how the amendments to the two PTEs are therefore in the interest of a plan or its participants and beneficiaries if it will result in limited access to retirement savings guidance and products – especially lifetime income products sold on a commission basis.
  • (p10) - The Proposal Violates the McCarran-Ferguson Act
    • The McCarran-Ferguson Act, passed by Congress and signed into law in 1945, entrusts states with the authority and responsibility for the regulation of the business of insurance.
      • The sales and marketing of insurance products fits squarely within the boundaries of the “business of insurance” for to be in business is to market and sell goods and services.
      • The preemptive authorities under ERISA do not extend to the business of insurance.
    • The Department has no authority to regulate the conduct of agents compensated solely for the sale of insurance products.
    • For example, the Department’s Proposal would impair the ability of insurers to provide allowances for training and education.
      • For those insurers regulated by the New York Insurance law, Section 4228 specifically allows training allowances, varying expense allowances, varying commissions, and business meetings for agents. Business meetings are highly prescribed by the statute and seen as a regular part of the insurance distribution landscape.
      • This is a clear case of a state “regulating the business of insurance.”
  • (p10-11) - The Proposal Seeks to Usurp Authority Reserved to Congress
    • The Department contended in the preamble to its 2015 Proposal that since 1975, “the retirement plan landscape has changed significantly.” It went on to posit that in the landscape of 2015 “the existing 1975 regulation no longer serves ERISA’s purpose to protect the interests of retirement investors, especially given the growth of participant-directed investment arrangements and IRAs, the conflicts of interest associated with investment recommendations, and the pressing need for plan participants, IRA owners, and their beneficiaries to receive sound advice from sophisticated financial advisers when making critical investment decisions in an increasingly complex financial marketplace.” This change in the landscape is the argument used by the Department to scuttle the 1975 regulation.
    • The Department also seeks to justify its actions with its concerns regarding the efficacy of the SEC’s Reg BI and the NAIC Model issued in 2020 that has been adopted in more than 40 states. The merits of this justification are not relevant here. The Department has no authority to impose its judgement and supplant the authority of the SEC and the states with regard to sales activities in which the person receives no special compensation to provide investment advice alone or in combination with a sale.
    • The Department acknowledges in the preamble to the Proposal that it has no idea how the Department could ever have promulgated the 1975 regulation under ERISA in the first instance, noting that three of the five “components of the five-part test are not found in the statute’s text,” a statement that could also be made regarding this Proposal.
      • ⇒ Finally, the Department argues that “there are currently many situations where the retirement investor reasonably expects that their relationship with the advice provider is one in which the investor can (and should) place trust and confidence in the recommendation, yet which are not covered by the current regulation.”
    • In the Fifth Circuit’s ruling vacating the 2016 rulemaking package, the court stated that the 1975 regulation “captured the essence of a fiduciary relationship known to the common law as a special relationship of trust and confidence between the fiduciary and his client,” that the regulation echoed the then thirty-five-year old distinction drawn between an “investment adviser,” who is a fiduciary regulated under the Investment Advisers Act, and a “broker or dealer” whose advice is “solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor.”
  • (p12) - It is Congress, not the Department of Labor, who should consider whether to revise the law to impose a fiduciary status on commission-based sales activities.
    • It is Congress that has the authority to determine whether the SEC’s Regulation Best Interest and the state best interest efforts adequately protect consumers while preserving commissioned-based services and the extent to which these changes sufficiently address the change in the landscape since 1975.
    • Four fifths of state legislatures and state insurance departments under existing authorities have adopted the NAIC Model following a review of many of the landscape change issues raised by the Department in the Proposal’s preamble. The states did so with rules tailored to preserve the role of sales professionals and without the adoption of new fiduciary rules.
    • It is Congress that has the role to examine whether federal laws should change and the costs and benefits of such change for investors and service providers.
  • (p12) - The Proposal Implicates the Major Questions Doctrine
  • (p12) - III. The Proposal Will Cause Severe Market Disruption for Consumers
    • .... we anticipate major market disruption for consumers seeking annuities to address their retirement security needs. While there are similarities in some of the elements currently required under other regulatory regimes, this rulemaking is of another kind altogether.
  • (p13) - The Proposal Will Upend the Independent Distribution Marketplace to the Detriment of Consumers
    • ⇒ AlIV.
      The Proposal’s Regulatory Impact Analysis is Flawed and Fails to Provide Justification for Regulatory Actionthough insurance companies are not formally co-fiduciary financial institutions under PTE 84-24, they are required to engage in almost all of the same supervision activities as co-fiduciary financial institutions under PTE 2020-02 – despite the fact that insurance companies selling in the independent distribution market do not have the ability to control an independent agent’s sales conduct in the same way that a broker-dealer can with respect to their registered representatives.
    • PTE 84-24 effectively demands that insurers take actions to control every action taken by independent producers, i.e., producers that are independent of the insurer, an approach that is simply not possible.
    • ⇒ The Department argues that, in working with independent producers, insurance companies are not fiduciaries and only need to supervise the sale of their own products, but in fact the Department seeks to compel insurers to serve in the role of supervisors of the conduct of independent fiduciaries.
    • The Department provides no legal basis for a non-fiduciary entity supervising a fiduciary entity.
    • Under the Proposal’s draconian eligibility provision, a failure to comply with PTE 84-24 could effectively put an insurer that only works with independent agents out of the business of providing annuities to ERISA plans and IRAs.
  • (p13) - The Proposal’s Newly Expanded Criminal “Ineligibility” Provisions Will Have a Detrimental Impact on Consumer Access to Financial Savings Products
  • (p14) - IV. The Proposal’s Regulatory Impact Analysis is Flawed and Fails to Provide Justification for Regulatory Action
    • The Proposal’s Regulatory Impact Analysis is Flawed and Incomplete
      • In fact, direct evidence from investment advisers, publicly available research, and testimony of interested parties show that low and middle-income households, including the underserved, will bear the most substantial cost of the rule in the form of foregone advice, access to fewer solutions, and greater financial vulnerability.
      • (p15) - The Proposal ignores the broad objective of Congress to improve retirement security for as many people as possible.
    • The Proposal Process Did Not Include a Request for Information
      • The Department’s RIA seeks answers to over 180 questions, many of which require extensive analysis and research for which there is insufficient time and, the answers to which will purportedly impact the Department’s final rule.
        • We are troubled by the number and nature of these questions, especially in light of the EBSA Assistant Secretary Lisa Gomez’s statement in a letter rejecting the financial services trades’ request for more time to review the proposal.10
      • (p16) - The life insurance industry could provide information to further inform the Department, but compiling and aggregating responses to the wide variety of questions posed is not possible in the time frame provided.
        • In our experience, a relatively short and simple industry-wide survey requiring a single individual from a company to respond typically takes up to six weeks from fielding of a survey to final analysis, and generally results in about a 50 percent response rate (by total industry assets, less by number of companies, depending on the nature of the survey).
        • Given the 60-day comment period (which encompasses several major holidays, secular and religious), the numerous, varied, detailed questions posed, and the coordination necessary to generate responses from several people in different departments within a company, the Department’s requests are onerous and unreasonable.
        • The numerous requests for information should have been addressed in an official request for information and well-understood prior to release of the Proposal, particularly given the short and ill-timed comment period.
        • The number and varied nature of questions posed by the Department strongly suggest that the Proposal was released prematurely and the Department’s approach of regulating first and asking questions later is plainly contrary to basic principles of reasoned decision-making governing agency action.
  • (p16) - The Proposal Fails to Properly Address the Value and Utility of Annuities
    • When risk exposure is lowered, savings are more secure and are less likely to be impacted by market volatility, increasing the likelihood that savings will last throughout retirement, a phase of life when earned income flow permanently stops.
      • An annuity is designed to manage such risk, thereby guaranteeing a consistent income flow throughout a retiree’s lifetime. In other words, annuities do more than simply offer an investment return.
      • An annuity is designed to manage such risk, thereby guaranteeing a consistent income flow throughout a retiree’s lifetime. In other words, annuities do more than simply offer an investment return.
  • (p17) - The Proposal and RIA are short-sighted.
    • ... a higher commission is typically offered to compensate the financial professional for the time and effort required to educate the customer and ensure that a product meets the customer’s needs and objectives, and that it addresses longevity and other risks, if needed.
    • A series of basic text searches demonstrate that the Department has entirely ignored the function and role of annuities for retirement security and, by extension, did not properly assess how the rule will impact the annuity market for consumers.
    • The Department has failed to even properly acknowledge the primary purpose of an annuity or the utility of annuity-specific features and is instead focusing only on the investment component of some annuities.
    • (p18) - For example, the Department states that “while the rate of return of the indexed annuity is linked to performance of the index, indexed annuity returns are subject to contractual limitations which effectively cap returns.” This is true, but the Proposal neglects to mention that there is also a floor which limits losses and ensures that there is some return during market down-turns (i.e., during volatile periods). The Proposal implies that the cap is a deficiency but neglects to mention that the corresponding floor is also a valuable feature and is part of the entire package. This type of subtle bias (i.e., bias by omission) permeates the Proposal. Elsewhere, the Department concludes that the rule will protect consumers “from losses that can result from conflicts of interest [emphasis added],” yet ignore the fact that the rule will limit access to products that protect consumers against losses due to market downturns, volatility, and inflation, as well as longevity risk. Based on these omissions alone, the Department must withdraw this Proposal.
    • When assessing any proposed regulation that may have an impact on U.S. retirement security via the annuity market, it is imperative that the role, function, and importance of annuities for retirement security be clearly understood and acknowledged. Most of the academic studies cited in support of the Proposal do not adequately take the function of annuities into account, if at all, and are instead narrowly focused on the investment component of some annuities, neglecting the trade-off between returns and risk mitigation. In effect, most of the cited studies treat annuities like expensive mutual funds where the added expense only benefits the financial professional and harms the retirement investor/saver.
  • (p18) - The Proposal Neglects the Fact That Annuity Owners Value Guarantees
    • A recent MetLife study found that nine in ten retirees and pre-retirees feel that a guaranteed monthly income in retirement is either ‘very important’ or ‘absolutely essential’.12
      • 12 MetLife, “2022 Paycheck or Pot of Gold Study: The Great Retirement Decision” - 31p
    • 13 The Committee of Annuity Insurers, “2013 Survey of Owners of Individual Annuity Contracts”, the Gallup Organization; Mathew Greenwald and Associates, 2013. Similar surveys were conducted in 1993-1999, 2001, 2005, and 2009. - 40p
  • (p18) - The Proposal Fails to Adequately Address Consumer Choice and Consumer Differences
    • Accumulation and decumulation needs and preferences vary widely by individual and household.
    • (p19) - The Proposal neglects consumer differences and the importance of consumer choice when planning for retirement.
    • uniformity of advice, seems to be the Department’s desired objective. In fact, “uniformity of regulation” is listed as an unquantified and unproven benefit of the regulation.
    • (p19) - We agree with the Department that small savers (i.e., “individuals, or households with low account balances or of modest means”) “cannot afford to lose any of their retirement savings”, but take a longer-term, retirement-focused view, that small savers cannot afford to lose any of their retirement security.
      • That means savings need to last throughout retirement, whether 4 months or 40 years.
      • It also means planning for decumulation, rather than fixating on returns.
      • ⇒ Making savings last throughout retirement should be the primary focus of all retirement savers in or nearing retirement, with investment returns being just one variable to consider.
      • Because people cannot usually predict how long they will live (longevity risk), the state of their health (morbidity risk), or the state of the economy and financial markets (inflation, investment, and volatility risks), they rationally turn to annuities.
    • Rather than focusing on how consumers depend on annuities and what consumers receive for fees paid, the Department chose to fixate on compensation for financial professionals, concluding that:
      • “conflicts sometimes lead advisers to recommend products with lower expected net returns than available alternatives.
      • Consumers’ losses from [such] advisory conflicts tend to exceed what can be justified as fair compensation for good advice as these consumers could often benefit more from competitively priced impartial advice”.
  • (p19) - While critical of expenses, the Department makes no attempt to investigate the cost of insurance.
    • The solvency rules applicable to life insurance companies compel insurers to hold reserves equal to liabilities and to hold additional capital.
    • At year-end 2021, life insurers held $1.6 trillion in variable annuity reserves for contracts with guaranteed minimum death benefits and $1.0 trillion for contracts with guaranteed living benefits.15 In 2022, life insurers held a total of $4.0 trillion in annuity reserves.16
    • In a similar vein, when formulating the Proposal, the Department admits to relying on stale data regarding the number of life insurance companies in the annuity business.
      • The Proposal states that “[i]n the Department’s 2016 RIA, it estimated that 398 insurance companies wrote annuities.
      • The Department continues to use this estimate although the number may have changed in intervening years [emphasis added].”
      • In other words, the Department didn’t bother to fully examine how the annuity market has changed since 2016, or how annuity producers were impacted.