Some in the insurance industry who are resistant to being subject to the ERISA fiduciary duty when providing advice about annuities to retirement savers claim that they are already subject to the National Association of Insurance Commissioners (NAIC) “best interest” standard via state rules that are based on this standard when they recommend annuities to retirement savers.
In reality, the NAIC standard is a “best interest” in name only standard, allowing insurers and insurance professionals to falsely claim to be acting in consumers’ best interest when they are not actually required to do so. Instead of helping consumers, the NAIC standard will mislead consumers into expecting protections the rule does not actually provide.
The NAIC standard suffers from the following deficiencies:
- It does not actually impose a best interest standard. The NAIC standard merely requires that the producer have a reasonable basis to believe the recommended annuity “addresses the consumer’s financial situation, insurance needs and financial objectives.” That is not a best interest standard; it is simply a restatement of the obligation to make suitable recommendations. Calling it a best interest standard is misleading.
- It does not rein in the most harmful and pervasive conflicts of interest that taint annuity recommendations. The NAIC standard excludes all forms of cash and non-cash compensation from the definition of material conflict of interest. As a result, compensation practices at the heart of a whole host of recent life insurance and annuity sales scandals would be preserved.[i] This alone renders the NAIC standard much weaker than the SEC’s Regulation Best Interest standard of conduct for broker-dealers’ securities recommendations, which considers all forms of compensation in the definition of material conflict of interest.
- Its ban on certain sales contests and incentives is too narrowly drafted to promote real reform. The NAIC standard’s ban on time-limited, product-specific sales contests and incentives appears, at first glance, to be a major step toward eliminating some of the most anti-consumer practices common in the industry today. However, closer scrutiny reveals that it is so narrowly drafted that its only effect will likely be to force insurers to redesign, rather than eliminate, such practices. As a result, these harmful sales incentives will likely persist, just in a new form.
- It relies too heavily on disclosures that are poorly designed and unlikely to help consumers make informed decisions. In a number of key areas, the NAIC standard is satisfied through disclosure, but we know that disclosures of complex concepts and conflicts of interest are ineffective at informing or protecting consumers. As a result, the disclosures are likely to do more to shield insurers and producers from liability than to inform or protect consumers.
- It does not apply to recommendations of annuities inside 401(k)s or 403(b)s. As a result, retirement savers who receive advice to purchase annuities in these plans would not receive even the most minimal protections that the standard purports to provide. In addition, employers who sponsor and operate retirement plans for their employees could receive harmful advice to include annuities with suboptimal features in their plan for employees to purchase.
For these reasons, the NAIC standard will not protect retirement savers from the harms that result from low-quality, conflicted advice for retirement savers to purchase annuities. On the contrary, it will do more harm than good by misleading consumers into expecting protections the standard does not actually provide.
Only the DOL can protect retirement savers from harmful advice. ERISA’s fiduciary duty requires firms and professionals to comply with a real and meaningful best interest framework that ensures retirement investment advice is high-quality and not tainted by conflicts of interest. Unfortunately, there are several loopholes in the definition of who is a fiduciary under ERISA that allow insurers and insurance professionals to retirement investment advice without being held to the fiduciary duty appropriate to their role. Among other things, the rule requires the advice to be provided on a “regular basis.” Because retirement savers typically receive recommendations to purchase annuities on an infrequent basis, these recommendations typically do not meet the “regular basis” requirement. As a result, insurance firms and insurance professionals are not typically considered fiduciaries under ERISA when recommending the purchase of an annuity, even when that recommended purchase concerns all or substantially all of the retirement saver’s assets.
It is incumbent on the DOL to update its fiduciary duty to apply to insurers and insurance professionals who function as advisers to retirement savers. Closing the loopholes in the definition of who is a fiduciary under ERISA and requiring insurance firms and insurance professionals to act as fiduciaries when advising retirement savers about annuities will help to ensure that employers receive annuity advice that is in retirement savers’ best interest and is not tainted by conflicts of interest. As a result, retirement savers would receive recommendations to purchase higher-quality, lower-cost annuities that improve their retirement outcomes.
[i] See Office of Senator Elizabeth Warren, Villas, Castles, and Vacations: How Perks and Giveaways Create Conflicts of Interest in the Annuity Industry, October 2015, https://www.warren.senate.gov/files/documents/2015-10-27_Senator_Warren_Report_on_Annuity_Industry.pdf; Office of Senator Elizabeth Warren, Villas, Castles, and Vacations, 2017 Edition, Americans’ New Protections from Financial Adviser Kickbacks, High Fees, and Commissions are at Risk, February 2017, https://www.warren.senate.gov/files/documents/2017-2-3_Warren_DOL_Rule_Report.pdf; Greg Iacurci, Elder financial abuse grows more prevalent in annuity, life insurance products, InvestmentNews, May 16, 2016, https://www.investmentnews.com/elder-financial-abuse-grows-more-prevalent-in-annuity-life-insurance-products-66327