Peter J. Richter
Douglas C. Scriver
While insurance agents have long sold a variety of beneficial products, agents have generally not been considered ‘fiduciaries’ under the Employee Retirement Income Security Act (“ERISA”). The distinction between fiduciaries and non-fiduciaries is important because a fiduciary under ERISA is subject to a variety of rules and regulations regarding the products being sold and the sales process. However, recently enacted changes may impact a number of independent insurance agents.
Effective June 9, 2017, the U.S. Department of Labor broadened its regulations such that agents are now more likely than ever to qualify as ERISA fiduciaries with respect to the sale of certain employee benefits, IRAs, and related products. As a result, agents could owe heightened duties of care and undivided loyalty to plan participants, beneficiaries, and IRA owners (duties similar to those a trustee of a trust owes to the beneficiaries of the trust). Covered agents must provide prudent advice and recommend investments based solely on the participant’s, beneficiary’s, or owner’s financial interest.
Another, and perhaps more significant, consequence of becoming categorized as a fiduciary is that insurance agents are now unable to engage in transactions in which an agent is deemed to have a conflict of interest under ERISA. An agent may have such a conflict of interest if, for example, the agent receives commissions from an insurance company in relation to a sale to a plan or IRA. Thus, unless a ‘Prohibited Transaction Exemption’ applies, agents might violate ERISA when they collect commissions.
PTE 84-24: For Insurance and Fixed Rate Annuity Contracts
Until January 1, 2018, agents selling any insurance or annuity contract may rely on the DOL’s exemption from ERISA-prohibited transactions known as PTE 84-24 (the “Annuity Exemption”). The Annuity Exemption permits insurance agents to receive third-party payments in connection with a sale of insurance or annuities. Beginning in 2018, only agents recommending insurance contracts or ‘Fixed Rate Annuity Contracts’ (i.e., immediate annuities, traditional annuities, declared rate annuities, and fixed rate annuities) with respect to plans or IRAs may use the Annuity Exemption to engage in transactions otherwise prohibited by ERISA.
Impartial Conduct Standards
Any agent relying on the Annuity Exemption, now or in the future, is required to comply with ‘Impartial Conduct Standards.’ Thus, he or she must give prudent advice that is in the best interest of the pertinent plan participant, beneficiary, or IRA owner, avoid misleading statements, and receive no more than reasonable compensation. To give prudent advice, an agent must skillfully, knowledgably, and impartially take into account the participants’, beneficiaries’, or owner’s investment objectives, risk tolerance, financial circumstances, and needs; investigate and evaluate investments; make recommendations; and exercise sound judgment. Conversely, the agent must not take into account his or her (or any other third party’s) financial or other interests. Ultimately, the transaction the agent recommends must be on terms judged favorable to the participants, beneficiaries, or owner.
Disclosures and Recordkeeping
The Annuity Exemption, as amended effective January 1, 2018, will impose specific disclosure and recordkeeping requirements on agents. Depending on the particular circumstances, the agent may have to provide to a plan’s independent fiduciary or an IRA’s owner a written description of:
The plan’s independent fiduciary or IRA’s owner must acknowledge receipt of this information and approve the agent’s recommended transaction before the transaction may be finalized. Once the transaction is executed, the agent must keep, for a period of at least six (6) years, all records necessary to show that the Annuity Exemption’s conditions were met.
Best Interest Contract Exemption: For Variable and Indexed Annuities
After 2017, agents recommending variable or indexed annuities or other annuities that constitute non-exempt securities to employee benefit plan participants or beneficiaries or IRA owners must comply with the new ‘Best Interest Contract Exemption,’ rather than the Annuity Exemption, to collect commissions from insurance companies. As with the Annuity Exemption, any agent relying on the Best Interest Contract Exemption must adhere to the Impartial Conduct Standards described above.
However, the Best Interest Contract Exemption imposes even more strenuous contracting, disclosure, recordkeeping, and other requirements on agents and the insurance companies whose annuities they recommend. As a result, it will be very important for any agent planning to rely on the Best Interest Contract Exemption to work with those insurance companies to ensure all of the exemption’s conditions can be satisfied.
Working Within the New Requirements
The amended Annuity Exemption and Best Interest Contract Exemption are scheduled to take effect on January 1, 2018. Nevertheless, the DOL recently issued a request for information regarding the fiduciary rule. The request and even more recent filings by the DOL suggest that the January 1, 2018 applicability date may be extended and that revisions to the Annuity Exemption amendments and the Best Interest Contract Exemption may be forthcoming.
Rather than adhering to a Prohibited Transaction Exemption, some agents may find it beneficial and more practical to examine their compensation arrangements and other business operations to avoid all conflicts of interest under ERISA. Regardless of how an agent chooses to proceed, he or she has likely already been, and will continue to be, affected by the DOL’s new regulations. Fiduciary status brings numerous implications, and we encourage agents to work with their companies, advisors, and attorneys to ensure they are in compliance with all of their legal responsibilities.
If you have any questions about how the information in this article may affect you or your business, please contact Peter Richter at firstname.lastname@example.org or Doug Scriver at email@example.com or (608) 257-2281 or your Stroud attorney.
DISCLAIMER: The information in this article is provided for general informational purposes only, is not necessarily updated to account for changes in the law, and should not be considered tax or legal advice. This article is not intended to create, nor does the receipt of it constitute, an attorney-client relationship. You should consult with your own legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.