Fred Reish Comments on DOL’s Proposal for New Adviser Fiduciary Rule

The Department of Labor (DOL) published the latest version of its fiduciary rule proposal on October 31, 2023. Several leading publications — including InsuranceNewsNet, PLANADVISER, PLANSPONSOR, AdvisorHub, ThinkAdvisor and InvestmentNews — turned to benefits and executive compensation partner Fred Reish for insight into the potential impact on the industry.

Speaking to InsuranceNewsNet, Reish said he had long expected the DOL to target prohibited transaction exemption (PTE) 84-24 in any fiduciary rule rewrite. “I think that [PTE 84-24] will be amended to include more demanding conditions, such as requiring a best interest process, disclosures of conflicts of interest, and a fiduciary acknowledgment.”

In PLANSPONSOR and PLANADVISER, Reish explained that if an adviser is in the business of providing retirement investing advice generally, then no long-term relationship with a specific client would be needed before the adviser was considered a fiduciary for that client. He concluded, “Undoubtedly, there will be a lawsuit against it.”

Reish told AdvisorHub that the fiduciary obligations for “a single recommendation” stood out as “particularly impactful.” He continued, “In effect, if the rule becomes final as is, a rollover recommendation will need to be made in the best interest of the participant, taking into account the relative costs, services and expenses in the plan and the proposed individual retirement account.”

Further, Reish said in ThinkAdvisor that he sees the insurance industry challenging the new fiduciary proposal and the related amendments to PTE 84-24, which covers annuity transactions. “While it is less certain, I think it is likely that some part of the securities industry will also challenge the proposed fiduciary definition that says that a rollover recommendation is a fiduciary regulation subject to the fiduciary standards and the conflicts restrictions.” The full article is available for subscribers.

Reish also explained two major changes to the new rule in another InsuranceNewsNet article. First, it makes any rollover recommendation from a retirement plan a fiduciary recommendation, and second, any money made from a rollover would be considered a “prohibited transaction,” Reish said. Additionally, the exemption normally used — PTE 84-24 — “has some really burdensome requirements that are particularly imposed on independent agents, independent producers.” There’s also “a heightened duty of supervision placed on the insurance companies of those independent agents,” he added.

InsuranceNewsNet also shared Reish’s insights on how the new rule is going to hit insurance companies and independent insurance agents the hardest, and insurance companies would have much greater oversight responsibilities for their selling agents under the rule. But those compliance requirements could overwhelm smaller independent agents, according to him. “The Fifth Circuit Court of Appeals decision was a two-to-one decision,” Reish explained. The DOL might feel another court might render a different decision on its fiduciary effort, he added. “They didn’t appeal the [Fifth Circuit] decision. They didn’t ask for an en banc hearing…So, we don’t know what the ultimate outcome would have been. All we know is what two out of three judges [decided].”

In InvestmentNews, Reish noted that the Biden DOL appears to be focused mostly on fixed indexed annuities rather than variable annuities, as the latter type requires a securities license to sell. Today, there are a variety of in-plan annuities and guaranteed minimum withdrawal benefits available for target-date funds, but “usage isn’t high,” he said. “There is very little that I have seen with independent annuities in plans, and I don’t know if that will change” in connection with the DOL’s proposals, according to Reish. He concluded that while the DOL is likely open to suggestions to improve the proposal’s provisions, it probably won’t budge on the overall concept of making one-time advice a fiduciary obligation.