Compliance December 31, 2019

NAIC Committee Advances Annuity Transaction Suitability Rules

Notably, the proposed revisions to the Suitability in Annuity Transactions Model Regulation would provide a safe harbor for firms and producers that comply with the SEC’s Regulation Best Interest.

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The Life Insurance and Annuities Committee of the National Association of Insurance Commissioners (NAIC) voted on Monday to advance its revised Suitability in Annuity Transactions Model Regulation for final consideration.

The NAIC is the United States’ standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer reviews, and coordinate their regulatory oversight.

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The full NAIC still must approve the annuity transaction suitability regulation before individual states may consider it for adoption, but Monday’s committee vote was significant in that the updated model now formally includes a safe harbor for all insurance producers who are subject to, and actually comply with, the Securities and Exchange Commission’s (SEC) Regulation Best Interest or the fiduciary standard under the Investment Advisers Act.

Jason Berkowitz, the Insured Retirement Institute’s chief legal and regulatory affairs officer, says he is confident the full NAIC executive committee and plenary will vote to adopt the revised suitability model regulation early in 2020.

“This revised model regulation will advance consumer protection with a best interest standard for insurance producers,” Berkowitz says, noting that the Insured Retirement Institute advocated for the inclusion of the Regulation Best Interest safe harbor. “Throughout this process, insurance regulators at NAIC working group and committee level have worked in an open, transparent manner to craft a model that is generally consistent with Regulation Best Interest and the right approach to provide strong consumer protection.”

Important provisions of the Regulation Best Interest, or “Reg BI,” take effect on July 1, 2020. Finalized in 2019, Regulation Best Interest has both fans and detractors. Supporters say Reg BI represents a workable and sufficiently flexible framework for tamping down on conflicts of interest through greater disclosure requirements. On the other hand, pointing to this disclosure-based approach and the fact that brokers and advisers will continue to be subject to different standards of conduct, Reg BI’s opponents say the ruleset will likely fall far short of its stated goals.  

“We are optimistic that the NAIC will approve this important revised model regulation,” Berkowitz says. “If approved at the February retreat, [we are] prepared to work immediately with states to quickly implement this important new consumer protection regulation.”

Compliance December 27, 2019

Ways to Find Missing Participants

Failure to find missing participants could disqualify a retirement plan under the tax code and lead to breaches of the ERISA fiduciary duty.

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Since 2015, the Department of Labor (DOL) has focused on plan sponsors’ duty under the Employee Retirement Income Security Act (ERISA) to find missing participants, according to a blog on Morgan Lewis’ website penned by a trio of attorneys at the firm.

The DOL says that under ERISA Section 404(a)(1), “Consistent with their obligations of prudence and loyalty, plan fiduciaries must make reasonable efforts to locate missing participants or beneficiaries, so that they can implement directions on plan distributions from the participants or beneficiaries.”

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Another blog, on the website of The Rosenbaum Law Firm, says sponsors tend to ignore the problem of missing participants. The signs of a missing participant include returned mail, returned emails, no recent activity on the Internet or phone, or an outstanding distribution check that has not been cashed.

Rosenbaum attorneys say that missing participants could pose a fiduciary risk to sponsors: “Missing participants don’t get the required notices on major changes to the plan, including an updated summary plan description, plan statements, blackout notices, and any changes to plan investments—which is a liability risk. Missing participants are viewed as a more critical problem when they are at or near a distributable event, [such as] a required minimum distribution.”

The Rosenbaum attorneys say that when a distribution is due, the IRS wants to collect taxes, and the DOL wants to ensure that participants receive the money due to them. Failure to take care of this could lead to an audit.

While finding missing participants can be expensive, if they remain in a small plan, they could push the headcount above 100, in which case the plan would need to go through an audit, which typically costs more than $10,000. Another real problem, the attorneys add, is that neither the DOL or the IRS have offered much guidance on how to find missing participants or how to deal with uncashed checks.

The DOL says sponsors should send notices via certified mail, check their records, send an inquiry to the beneficiary of the missing participant and use free electronic search tools as a minimum.

Beyond that, the Rosenberg Law Firm blog says, sponsors can use commercial locator services, credit reporting agencies and Internet search tools. And, like all of their activity with their plans, sponsors need to document their actions.

Norma Sharara, a partner with Mercer, in a podcast, “Missing Participants—Risks and Remedies,” said that if there are missing participants that plan sponsors have not made a genuine effort to find, “the entire plan could be disqualified under the tax code and plan fiduciaries may be found to have breached their ERISA duties.”

Shahara recommended several potential actions that the blogs did not mention, including searching for updated contact information across all of the company’s records, not just the retirement plan records, such as health care and personnel files. She also said that if the benefit is large, sponsors should use more than one method.

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