Session 58 Panel Discussion Department of Labor …...Session 58 PD, Department of Labor Fiduciary Rule Hot Topics Moderator: Daniel J. Rueschhoff, FSA, MAAA Presenters: Emily Jeanne

Session 58 PD, Department of Labor Fiduciary Rule Hot Topics

Moderator:

Daniel J. Rueschhoff, FSA, MAAA

Presenters: Emily Jeanne Lorentzen, FSA, MAAA

Jean-Francois D. Mannina Daniel J. Rueschhoff, FSA, MAAA

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Symetra Life Insurance Company777 108th Ave. NE, Suite 1200, Bellevue, WA 98004

For Continuing Education Use Only. Not for Use with the Public.

Assistant Vice President

Symetra Retirement Product Management

Society of Actuaries Conference May 9, 2017

Preparing for the DOL Fiduciary Rule as an Insurance Carrier

5/17EFAM-685

J-F Mannina

Symetra Life Insurance CompanyThis material should be regarded as educational information and is not intended to provide specific advice.

See important disclosures at the end of this presentation.Symetra® is a registered service mark of Symetra Life Insurance Company.

What is the DOL Fiduciary Rule? A look at how Symetra trained its workforce.

What does an insurance carrier do to prepare to implement the DOL Fiduciary Rule?

A look at how Symetra prepared.

What is the status of the DOL Fiduciary Rule?A look at regulatory reform.

Agenda

Not for Use with the Public.2 For Continuing Education Use Only. Not for Use with the Public.

Why is the U.S. DOL taking an interest in financial services?


Thanos Zartalouids, “Theories of Origin as to the Progenitor of the Trust,” Birkbeck College of the University of London, accessed online May 19, 2017: www.academia.edu/3568421/On_the_Origin_of_the_Uses_and_Trusts

Let’s jump in time machines and go back in time…

In medieval England, Franciscan Monks were not allowed to own land.• And so, TRUSTS came along.

3

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=imgres&cd=&cad=rja&uact=8&ved=0ahUKEwj6qLz-5YXQAhUHTI8KHYGiB3YQjRwIBw&url=https://www.pinterest.com/nikgaukroger/monks/&psig=AFQjCNGeC8sqFCq7U1bI_78mr48z3b7g8g&ust=1478029203098543

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=imgres&cd=&cad=rja&uact=8&ved=0ahUKEwj6qLz-5YXQAhUHTI8KHYGiB3YQjRwIBw&url=https://www.pinterest.com/nikgaukroger/monks/&psig=AFQjCNGeC8sqFCq7U1bI_78mr48z3b7g8g&ust=1478029203098543

What’s a TRUST?

4 For Continuing Education Use Only. Not for Use with the Public.

Let’s look at those medieval monks…

Some English landowners wanted to give the monks a home, but they couldn’t legally transfer ownership.What to do?• Landowners “trust”ed ownership

to individuals (or trustees), who signed legal documents requiring them and their heirs to hold the land for the use of the monks.

A 401(k) is built on trust

For Continuing Education Use Only. Not for Use with the Public.5

Trustor = Company

Trust = Company 401(k)

Trustees = CEO, CFO, Head of HR

Record Keeper

FundManagers

Beneficiaries = Plan participants = Employees

Fiduciary Responsibility to

place trust in


Employee Retirement Income Security Act (ERISA)

In 1974, ERISA introduced Trust Law and Fiduciary Responsibility to retirement plans, including 401(k)s and pensions. • But, NOT to Individual Retirement

Accounts (IRAs).

1975 1995 2015

$3B

$91B

$320B

$1.3T

$1.7T

$3.4T

$6.7T

$7.3T

$8.0T

7

U.S. Total Retirement Assets (1975-2015)ERISA had authority over group retirement plans, including 401(k)s and pensions, but not IRAs.

*Combines private-sector defined benefit plans, state and local government defined benefit plans, and federal defined benefit plans.**This category includes private employer-sponsored defined contribution plans (including 401[k] plans), 403[b] plans, 457 plans, FERS, and TSP).Source: Investment Company Institute (ICI) 2015


Defined Benefit Plans (a.k.a. pensions)” Defined Contribution Plans** Individual Retirement Accounts (IRAs)

The DOL Fiduciary Standard


The DOL sought to expand ERISA by extending fiduciary status to advisors of clients with IRAs.So, there will be lots of fiduciaries…• All acting in the “best interest” (as

defined by the DOL) of their clients.

Make prudentdecisions as a

“prudent person”• Hire & fire record

keepers / recommend account offerings – based on service, quality, capabilities, cost

• Hire & fire / recommend fund managers – based on performance, cost, risk levels

• Hire & fire advisors, auditors, etc.

Be impartial in his/her conduct

• No accepting favors, money, gifts

• No picking his/her cousin’s auditing firm

• No picking his/her best friend’s fund company’s funds

Be loyal

• Loyal to employees’ / clients’ interest above his/her own

• Not use the assets in the retirement plan / IRA to his/her benefit

9

What makes a sponsor/advisor a “fiduciary”?Fiduciary of a retirement plan or IRA must:




Best Interest of the Client

The DOL is defining the rules and principles for what advisors and their firms can and cannot do to act in their clients’ best interest.

10

The DOL Fiduciary Standard:


Best Interest of the Client

Advisor must understand and make recommendations to meet clients’:• Financial needs• Risk tolerance• Future goals• Lifespan expectations• Estate plans

Advisor cannot receive:• Variable compensation

(e.g., differing commissions)



Why no variable compensation?

DOL says a conflict of interest exists when an advisor is in a position where he/she can recommend different products to IRA clients with different commissions.Let’s assume these products are the same except for a difference in commission paid to the advisor and the guaranteed interest rate paid to the client.

Product A• Pays advisor 6.0%

commission.• Gives client 2.0%

guaranteed interest rate.

Product B• Pays advisor 5.5%

commission.• Gives client 2.1%

guaranteed interest rate.

IRA rollover example


Assumes 4/10 6/9/17 applicability date for DOL Fiduciary Rule

After June 9, 2017• Advisor and firm must evaluate client’s

three 401(k)s:• Features

• Costs

• Investments

• Advisor and firm must document how the rollover into the IRA meets the client’s best interest in order to give investment advice, make a recommendation, and receive compensation.

Before June 9, 2017• Advisor, following firm’s financial

planning guidelines, may recommend client simplify and consolidate all the 401(k)s together by rolling their balances into one IRA.

• Advisor can receive compensation from these transactions.

• Advisor is not deemed a fiduciary, in part because ERISA does not currently extend to IRAs.

The client has retirement balances in three 401(k)s from three different jobs:

401(k) 401(k) 401(k)

IRA rollover exampleLet’s look at one of the client’s 401(k)s and the IRA up for consideration.


• Stable Value Fund yielding 1.5% annual interest net of fees

• U.S. Large Cap Fund costing 0.75% of assets

• U.S. Small Cap Fund costing 1.00% of assets

Three investments

• No stable value fund available. Only Money Market Fund yielding 0.02% annual interest net of fees.

• U.S. Large Cap Funds costing 0.60% to 1.25% of assets

• U.S. Small Cap Funds costing 0.85% to 1.50% of assets

Many investment choices

401(k) IRA

IRA rollover example

After April 10 June 9, 2017, should the advisor and firm recommend a

rollover from the 401(k) to the IRA?

It depends. Ultimately, the recommendation must be in the best interest of the client.

Firms/Advisors begin utilizing New BICE or Existing

PTE 84-24 with only the Impartial

Conduct Standards and Best Interest Standards when recommending

Qualified Annuities and IRAs

Full applicability of the exemptions

permitting variable compensation across product types BICE and

PTE-84-24 unlesschanges are made

beforehand


IRAs in April June 2017 and beyondAssumes 4/10 6/9/17 Applicability Date for DOL Fiduciary Rule


IRA owner

Individual Retirement Account

Advisor & financial institution

Products (e.g., mutual funds, stocks, bonds, annuities)

Beneficiaries = IRA owner & heirs

Puts dollars in

Retirement dollars overseen and Financial Products Recommended by

Contribute, grow and withdraw money for retirement

Recommends

Fiduciary Responsibility to

Place trust in

401(k)

What Stays/What’s Delayed on June 9th 2017

17

(BICE & PTE 84-24)

Applicable 6/9/17:OLD PTE 84-24 can cover sales of FIAs and VAs through yearend, BUT existing disclosure requirements will now apply to these retail annuitiesBICE can also cover sales of FIAs and VAs WITHOUT any disclosure requirementsImpartial Conduct Standards• best interest standard of care • reasonable compensation• not making any materially misleading

statements

Applicable 1/1/2018:BICE (unless modified)• For FIAs and VAs• Contract for Variable Compensation,

Full Disclosures, Warrants

NEW PTE 84-24 (unless modified)• Disclosures of commissions and

relationships between firm and product providers

• Only for fixed rate annuities


Symetra Program Work Streams

18

IT Law & Compliance

Sales Partners Vendors

Product • Design• Pricing• Tools• Marketing• Training

Operations• Procedures for Qualified business• Data for disclosures• Reporting needs• New Business:

• Scripts for NB • In-Force Business:

• Scripts for Call Center• Training

Sales• Partner feedback• Selling Agreements• Sales Operations• Compensation changes• Call scripts• Training


Passing Judgment…

19

DOL Mocktails Contest

Symetra product development idea to launch a team-building, creative competition: the DOL Mocktail Revolution!Working Group Members competed for the prizes and claiming one of the following prestigious DOL-inspired exemption drink names:

– “84-24” – “The BIC” – “BIC-lite”


The Circuitous Road to Delay of DOL Fiduciary Rule


Go

Directed DOL to reexamine the fiduciary rule based on

certain criteria.

TRUMP MEMORANDUM

3FEB

as of 4/13/2017

“DOL will now consider its legal options to delay the applicability date as we comply with the

President’s memorandum”

Acting DOL Sec’y Hugler PRESS RELEASE

On April 7, 2017, three days before the original April 10 applicability date, the DOL Fiduciary Rule was officially delayed by 60 days (June 9, 2017). While Impartial Conduct Standards, including acting in a client’s best interest, become applicable on June 9, new requirements for the existing PTE 84-24 and the new BICE are targeted for January 1, 2018.

Before January 1, 2018, possible future DOL actions could include:• Issue a further extension of the

applicability date (for the entire rule or just PTE components?)

• Propose amendments to rule and/or PTEs• Propose to withdraw current final rule• Propose a new rule

17MAR

10FEB

2MAR

of the DOL’s proposed 60-day delay to fiduciary regulation requiring that it must be designated by DOL as “major” and “economically significant.” Permits a 15-day comment period

OMB Release in Federal Register

of a proposed regulation from DOL rumored to propose a delay in the applicability date

OMB Receipt

of 15-day comment period on whether to delay or not

End

20-28MAR comments about

whether to delay or not

DOL Reviews

as of 4/13/2017

15FEB

Puzder withdraws as DOL Secretary Nominee

Puzder Out of RunningAcosta is Trump’s new DOL Secretary Nominee –hearing for confirmation now scheduled March 22

Acosta In Running

16FEB

22FEB

additional information needed following meetings with DOL Rule advocates

OMB Request of DOL

22MAR

Alex Acosta, DOL Secretary designates vote for Congressional approval is now expected on April 21 (was March 30)

Confirmation Hearing


DOL delays April 10th

applicability date by 60 days with 63-page publication in Federal Register

Delay of Rule

7APR

17APR

1JAN 18

of comments, due on the Rule itself

DOL review

requirements for disclosures, warranties, financial institution policies & procedures applicable –unless modified beforehand

DOL Rule’s Exemptions’

9JUN

as of 4/13/2017

DOL Rule’s Impartial Conduct Standards, including best interest standards, apply to IRAs

DOL’s Delayed Applicability Date

last of 45-day period for public to offer comments on the DOL Fiduciary Rule, per direction of Feb 3rd Trump Memorandum

Rule Comment Period Ends

29MAR after indicating earlier,

along with the IRS, that neither will enforce DOL Rule if delay does not officially go into effect

DOL files for delay at OMB

18-?APR

Beyond9 JUN would a further delay apply

to the entire rule or just PTEs? what about Impartial Conduct standards?

Further Delay?


Questions?


DisclosuresAnnuities are issued by Symetra Life Insurance Company, 777 108th Avenue NE, Suite 1200, Bellevue, WA 98004 and are not available in all U.S. states or any U.S. territory. Annuity contracts have terms and limitations for keeping them in force

Guarantees and benefits are subject to the claims-paying ability of the issuing insurance company.

Spousal benefits and rights described here may be subject to Internal Revenue Code provisions.

This material is not intended to provide investment, tax or legal advice. If your clients have questions regarding their particular situation, they should contact their legal or tax advisors.


Symetra® is a registered service mark of Symetra Life Insurance Company

2017 Life & Annuity Symposium

J-F Mannina MBAEmily Lorentzen FSA, MAAADaniel Rueschhoff FSA, MAAA, MS

Department of Labor Fiduciary Rule Hot TopicsMay 9th, 2017

Department of Labor Fiduciary Rule Hot Topics

2

The Fiduciary RuleI. Purpose of the Rule

• “The marketing material that I see from many firms is, ‘We put our customers first,’…This is no longer a marketing slogan. It’s the law.”1

II. How Does the Rule Do This?• Rule looks to remove conflicts of interest, and does this by expanding the definition of “investment advice fiduciary”

under ERISA. This means that advisors must… Act in the best interest of their clients and put their clients’ interest above their own Disclose all conflicts of interest including fees and commissions

• Any advisor or other professional making any recommendation that could be construed as investment advice is held to this higher standard

• Important Note: Only applies to qualified, individual retirement accounts

III. A Few, Not-So-Minor Problems• How can advisors prove they always acted in the best interest of their clients?• If any advisor making a recommendation is held to the fiduciary standard, who bears the legal responsibility for their

advice?• Given most annuities pay commissions to advisors, how will advisors get paid and how much?

Two key exemptions: PTE 84-24 and the BICE

IV. Key Dates• 9 June 2017: Initial compliance date• 1 January 2018: Full compliance required

Department of Labor Conflict of Interest Rule

1. https://www.nytimes.com/2016/04/07/your-money/new-rules-for-retirement-accounts-financial-advisers.html

PTE 84-24 and the BICEI. Prohibited Transaction Exemption (PTE) 84-24

• Exemption allows for the payment of sales commission to agents for purchase of insurance, annuities, and mutual fund shares

• Rule now only covers non-annuity insurance contracts and annuities that meet the definition of a “Fixed Rate Annuity Contract” But what about contracts that don’t have fixed rates (e.g. FIAs and VAs)?

II. Best Interest Contract Exemption (BICE)• In order to receive commissions for FIAs and VAs, the conditions of the BICE must be satisfied

Acknowledge fiduciary status Requires advisors to adhere to impartial conduct standards Receive no more than reasonable compensation Make appropriate disclosures of any potential conflicts of interest Someone must sign a contract saying they will do and have done all the above

III. A Switcheroo• In the initial draft of the rule in April 2015, FIAs were originally designated to remain under PTE 84-24• In the final rule, FIAs were moved to the BICE

Source: http://www.naic.org/cipr_topics/topic_dep_of_labor_fiduciary_rule.htm


A Quick Case StudyI. High Level Overview

• Company involved a number of different departments Legal Sales Marketing Technology Actuarial

• Company considered a number of items surrounding the rule What is reasonable compensation? Who can sign the BICE? At what level can compensation be differentiated? What bonus programs are no longer admissible?

II. The Main Actuarial Consideration• If how we pay our agents and advisors is changing, what does that mean for our products?


DoL Rule and Product DesignI. Product Features Currently Compensated for Differently

• Company offered FIA, FA and SPIA in many different flavors• Compensation differentiated by

Product Type and Flavor Riders Distribution Channel Surrender Charge Schedule Age of Annuitant

• Thought Question: How could compensation change in light of DoL rule for these features?

II. Profit Approach• Company utilized a net invested earned rate and cost of funds approach to determine profit margin

Profit Margin = NIER – Cost of Funds• Cost of funds includes

Customer Returns Maintenance and Other Expenses Compensation Expense, which was subject to change

III. Where Does The Change in Compensation Go?• Given a change in compensation expense, what can the company do with the “unallocated” earned funds?

Increase customer returns, increase profit margin, invest in advisor experience, and/or invest in operations


Current Status: Legal CasesI. During Obama administration, many suits were filed against the DoL

• 4 Main Court Cases: National Association for Fixed Annuities v. Thomas E. Perez et al. (Washington DC) Market Synergy Group, Inc v. United States Department of Labor et al. (Kansas) Chamber of Commerce of the United States of America et al., v. U.S. Department of Labor et al. (North

Texas) Thrivent Financial for Lutherans v. Thomas Perez and U.S. Department of Labor (Minnesota)

II. Rulings For Three Court Cases Were in the DoL’s Favor• 4 Nov 2016: DC court rejects NAFA’s claim that the DoL did not follow the necessary process for issuing its rule• 28 Nov 2016: Kansas court asserts the DoL did not fail to follow appropriate procedures in its rule change

Specifically, the court stated the DoL included that it was considering to move FIAs from PTE 84-24 to the BICE

• 8 February 2017: North Texas court ruled the DoL did not exceed its authority or violate rulemaking parameters 22 March 2017: Emergency injunction pending appeal also denied

III. The Fourth Case• Slightly different suit; only challenges the BICE by asking the court to rule against its class action provision• Orals were set for 3 March 2017, but the DoL asked for stay as a number of things have changed since the

original date


Current Status: Trump Administration I. President Trump’s 3 February 2017 Presidential Memorandum

• Ordered the DoL to reevaluate the rule and asked for a number of things Does the rule adversely affect investors by limiting access? Will the rule likely increase litigation? Is the rule likely to increase the price of retirement services?

II. Department of Labor Response• 10 March 2017: The DoL released a proposed rule to extend the applicability date of its rule by sixty days

Moves initial date back from 10 April 2017 Had a 15 day comment period for public comments/questions about the intent of the rule as well

as President Trump’s memo• April 2017: DoL officially delays the Fiduciary Rule until June 9, at least.


The Future: Market TrendsI. The cost of compliance is proving to be expensive

• Compensation updates, product changes, new monitoring and reports

II. Compensation Adjustments• Overall compensation may have downward pressure

• Compensation transparency will likely lead to lower overall compensation• Companies have not changed their current compensation structure

• Most organizations have opted to use the BICE; long-term trend appears to be towards fee-based compensation

III. The advent of robo-advisory is here• Expect to see more consumer directed platforms to assist middle to modest income households

IV. Companies are beginning to throttle back overall compliance efforts even though the rule remains• Many companies are only going to minimally comply for 9 June and see what happens• Reassessing decisions originally made due to regulatory uncertainty

• DOL rule change based on political change and legal challenge

V. Fiduciary oversight could be thought of as operational, not regulatory, risk• Strong negative consumer reaction to compensation structures mean changing compensation might be best for

business


Documents

Session 58 Panel Discussion Department of Labor …...Session 58 PD, Department of Labor Fiduciary Rule Hot Topics Moderator: Daniel J. Rueschhoff, FSA, MAAA Presenters: Emily Jeanne