The New DOL Fiduciary Rule for 2024 and Insurance Producers

What the “Retirement Security Rule” is and why it matters

The Department of Labor (DOL) is at it again. We lived through the fiduciary rule that never happened, and the compromise of 2019, but the discussion on fiduciary roles has once again resurrected here in 2024, and it has more teeth for insurance agents than before.

Before we dive in on insurance agents and the new rule – yes, we’ll get to it in a bit, and yes, we understand you’re just gonna scroll to it anyway – let’s revisit the baseline of the DOL’s fuss on fiduciary regulations for those Grade-A champs who do the reading. 

Where does the Department of Labor get off thinking it can regulate insurance and securities?

Usually, the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA) governs securities regulations. And state governments nearly always regulate insurance. So what gives?

The DOL largely regulates labor. But one of the most pivotal financial regulations of the last century was a labor package, the Employee Retirement Income Security Act of 1974, or ERISA. ERISA rose from the 1960s failure of the Studebaker car company, which subsequently defaulted on its pension obligations, leaving thousands of workers – both current and retired – at a loss without hard-earned retirement funds. They weren’t the only big defaulters, but they certainly set the standard for financial devastation at the hands of an employer. ERISA set rules around transparency and funding standards for employer-sponsored retirement accounts and put the Department of Labor at the head of plan oversight. 

Also important: This is the set of regulations that unintentionally created that darling of modern retirement, the 401(k). 

So, while securities and insurance regulation would usually be outside the scope of the DOL’s jurisdiction, there’s a wide swath of the American market that’s subject to DOL oversight. For perspective, at the end of 2023, Americans held about $7.4 trillion in assets in their 401(k)s, in an American market that totaled at $50.8 trillion. For you kids doing the math at home, that means about 15 percent of U.S. market assets are held in a 401(k). 

ERISA ultimately governs two types of employer-sponsored plans: Defined-benefit plans and defined-contribution plans. Defined-benefit plans commit to an outcome, and your employer must use whatever means at their disposal to meet its obligation – classic pensions fall into this category. Defined-contribution plans have outcomes that depend on factors like market and whimsy, but your employer commits to a specific contribution to the plan (sometimes that contribution is $0 and it’s all on you, buddy). The 401(k) is one of many variants on the defined-contribution theme. So pensions and 401(k)s are subject to Department of Labor authority thanks to ERISA and the DOL’s interest in protecting workers’ retirement outcomes.

OK, so the DOL can regulate 401(k)s. What does that have to do with insurance?

To talk about the DOL and insurance, we have to talk about retirement, the main import of Florida. Retirement is tricky, and many people who’ve saved in a 401(k) have questions about whether the 401(k) is the best vehicle to use once they get to retirement. 

Assets in a 401(k) are generally invested in the market via mutual funds, exchange-traded funds, bonds and bond funds, and even annuities. If your 401(k) is largely invested in the stock market, that can give you pause. After all, plenty of people remember the three years in a row in the early aughts where the S&P 500 delivered a double-digit negative return. And sure, the average return is close to 10 percent, but there are no guarantees. Withdrawing your money from a depleted portfolio is a double-whammy, as well; you’re selling stocks under their previous value and you end up with less money in the account to recover with when the market rebounds. Staring down years of losses in your 401(k) and wondering if you’ll have enough left for groceries in 10 years is nobody’s idea of a good time in retirement.

This is where we get into insurance: Insurance carriers underwrite products called annuities, which are insurance contracts designed to ensure income for either a certain period, like 10 years, or for the rest of the insured’s life. Having the guarantees of a consistent income that’s protected from market losses can be a big psychological safety factor. To sweeten the deal, insurance carriers have added ways you can purchase an annuity decades in advance and allow that money some opportunities for modest growth. However, mathematically, those annuities and their growth credits will still almost always underperform the market over the long term.

Annuity benefits are attractive to retirees who don’t have pensions. But annuities are also attractive to insurance producers because, historically, they’ve had very high upfront commissions and sales incentives.

That’s where the Department of Labor comes in.

Few “average” Americans have piles of cash sitting around with which to purchase annuities, so, if an insurance producer sells you an annuity, the most common way to fund your annuity purchase is with the money you’ve saved in your 401(k). The Department of Labor’s interest is in regulating the ways people take money from their 401(k)s, and protecting them from bad advice or misleading information from insurance producers and investment brokers.

And before you think we cherry-picked annuities to pick on, several materials about the new rules have mentioned the products directly.

“Recent analysis by the Council of Economic Advisers of just one investment product — fixed index annuities — suggests that conflicted advice could cost savers up to $5 billion per year,” said a DOL news release. “Such conflicts can reduce retirement investors’ returns and increase costs that chip away at many workers’ savings.”

So what’s the DOL’s new rule, then?

The DOL released the Retirement Security Rule on April 24, 2024, and it was supposed to go fully into effect in September (more on this in a bit). The rule builds on an earlier rule, launched in 2020, which established a fiduciary duty for financial advisors who met a multi-part test. So, if you:

1. Render advice to the plan as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property,
2. On a regular basis,
3. Pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary or IRA owner, that
4. The advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and that
5. The advice will be individualized based on the particular needs of the plan or IRA,

Then you’re a fiduciary under the 2020 rule. However, the old rule allowed insurance professionals to argue that they were giving one-off advice that was covered under a suitability standard.

Reminder: A fiduciary standard means a professional has to put the needs of the client above their own needs. So they could get sued if the client feels they put them in a subpar product or made a sale based on the professional’s own commission interests instead of what was best for the client.

This disparity between a fiduciary standard and a suitability standard – meaning you have to ensure the product is “suitable” for a client, even if it’s not necessarily in their best interest – has become a bone of contention between the NAIC, SEC, and DOL. (For a refresh on what these professional standards mean, check out our blog.)

This new DOL fiduciary rule essentially removes any loophole for one-off advice or for insurance-only professionals, although it critically shields insurance carriers from fiduciary liability:

“Unlike the 2016 rulemaking, PTE 84-24 has been specially tailored for independent insurance agents and does not require insurance companies to assume fiduciary status with respect to these agents, an important concern of insurers with respect to the 2016 rulemaking.”

So, the biggest takeaway for our readers: The DOL fiduciary rule of 2024 holds insurance professionals to a fiduciary standard if they recommend anything to their clients that their clients will have to use a 401(k), IRA, or other employer-sponsored retirement asset to purchase.

Reception of the 2024 DOL fiduciary rule

The National Association of Insurance Commissioners

The NAIC hasn’t been thrilled. When the DOL issued the 2020 rule, commissioners sat down to release a model regulation that cracks down on annuity shenanigans under a “best interest” standard. This standard – which the majority of states have adopted – essentially allows insurance producers to operate under a suitability standard except when they sell annuities, and holds annuity sales and training to a slightly elevated standard (but not as a fiduciary).

The DOL acknowledged its new regulation oversteps the state-based regulation for annuities, saying:

“The Department’s rule and exemptions, however, impose broader and more stringent standards of conduct and conflict mitigation than the NAIC model regulation, as applied to retirement investments. These higher standards appropriately reflect ERISA’s focus on constraining conflicts of interest, the fundamental importance of tax-preferred retirement savings, and the need for a uniform standard applicable to all retirement investors. Retirement investors should receive advice from trusted advisers that meets appropriate standards of care, loyalty, and conflict-mitigation, regardless of who makes the recommendation.”

How does the NAIC take this federal toe-stepping? Well, feel free to read for yourself in their open letter, but NAIC members aren’t super thrilled, saying:

“We are also greatly disappointed in, and fundamentally disagree with, the Administration’s characterization of state consumer protections around annuity sales as ‘inadequate’ and providing ‘misaligned incentives.’ The rationale and justification for DOL’s work should stand on its own as complementary to robust state efforts, and not mischaracterize differences in regulatory philosophy as an absence of regulatory competence or efficacy in this space.”

The insurance industry’s response

Unsurprisingly, insurance producers aren’t thrilled about the change. From attempts to lobby Congress to block implementation to lawsuits in the making, professional organizations have mobilized against the rule’s September 2024 implementation.

Currently, thanks to industry lobby groups’ efforts, court rulings through the spring and summer have pushed out the rule’s implementation. Perhaps the biggest threat to the DOL’s newest fiduciary rule, however, is recent rulings by the Supreme Court of the United States.

SCOTUS and the DOL fiduciary rule

In one of its more consequential decisions of 2024, the Supreme Court overturned something called the “Chevron doctrine.” The essentials are this: Prior courts held that federal agencies, such as the Environmental Protection Agency, Federal Trade Commission, Securities Exchange Commission, Department of Labor, Department of Commerce, etc., had wide latitude to interpret and act on Congressional orders. Congress typically doesn’t sit around coming up with lists of duties, responsibilities, powers, and limitations for the departments it creates – they’d have to, like, show up and vote for those things, and everything! Instead, departments are given broad directives, and then they carry out those missions, from rulemaking to enforcement at their discretion.

SCOTUS essentially said “nope” to that with a decision this year that whittles down the scope of what federal agencies can do and subjects federal decisions and rulemaking to far more restrictive interpretations by the courts. As one ThinkAdvisor piece points out, this decision could see a serious, industry-changing curtailing of SEC and DOL ability to set rules and enforce them. It also will make courts and their particular political cultures far more front-and-center in interpreting Congressional mandates for these agencies, since the courts no longer have to defer to the agencies’ interpretations.

And in case any of this left you with literally any degree of certainty, continuity, or stability, please remember, November is coming, and what a Harris or Trump Administration might do to this rule is really anybody’s guess.

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For now, producers and agencies will need to gear up for a yearlong rollout of the new standards for insurance professionals, as they begin to take effect in September 2024. If you’re wondering how to risk-proof your business against unscrupulous producers regardless of who’s in the White House, check out what AgentSync Manage can do for you.