While the Department of Labor fiduciary rule is officially a part of history, its impact lives on while regulators and insurers sort out what comes next.
Tossed out by a federal appeals court March 15, the rule finally died for good in mid-June. Because the DOL rule was partly in place for one year, the industry cannot simply ignore it away.
Its impact lives on in two ways: from the changing norms fueled by the three-year dabble with the DOL rule, and from lingering department guidance that lives on.
The department guidance is Field Assistance Bulletin 2018-02, issued May 7 to clear up confusion among agents and advisors.
The FAB states that prohibited transaction claims will not be brought against advisors who “are working diligently and in good faith” to satisfy the impartial conduct standards set forth in the DOL rule exemptions.
This guidance remains in effect until new guidance is issued countermanding it, said Drinker Biddle & Reath, a law firm specializing in regulatory and fiduciary issues.
A DOL spokesman did not respond to our request for comments.
Because the FAB is essentially still in place, the impartial conduct standards remain in place, said Kim O’Brien, CEO of AssessBEST, a compliance software company. [Disclosure: INN Publisher Paul Feldman is part owner of AssessBEST.]
The impartial conduct standards require advisors to:
» Act in the best interest of their clients.
» Make no misleading statements.
» Accept only reasonable compensation.
Insurance carriers are not releasing agents from these compliance standards, O’Brien said.
This might amount to erring on the side of caution, and on how the industry has come to operate in recent years. The next DOL bulletin could come any day, but until then, compliance teams are advising sales teams to act as though the impartial conduct standards are the law.
A New Understanding
The more complicated lingering impact from the late DOL rule is how it changed perceptions and interpretations of existing rules.
In particular, Drinker Biddle addressed broker-dealers who were not generally considered fiduciaries under the ERISA five-part test standard.
“We do not believe this presumption can be sustained going forward,” the law firm said in a blog post. “The Fiduciary Rule and the developments that came along with it have caused investors and regulators to scrutinize these issues and re-examine previous understandings. Going forward, broker-dealers should expect to be held to the ‘letter’ of the Five-Part Test.”
The now-reinstated 1975 five-part test (part of the Employee Retirement Income Security Act, ERISA) considers advice to meet the “fiduciary” standard if it is:
1. Regarding the value of securities or other property, or as to the advisability of investing in, purchasing or selling securities or other property.
2. Provided on a regular basis.
3. Provided pursuant to a mutual agreement or understanding, written or otherwise.
4. That the advice will be a primary basis for investment decisions.
5. Individualized, based on the particular needs of the investor.
While not as strict as the fiduciary definition set out in the Investment Advisors Act of 1940, the five-part test is still a tough standard on ERISA fiduciaries.
However, it has long been generally understood that brokers do not fall within this standard when selling investment or insurance products. Most of their transactions fail to meet one or more of the five parts.
DOL rule debate likely changed that reading of the five-part language, according to a client alert written by Joshua Waldbeser and Brad Campbell, lawyers with Drinker Biddle.
“Consider a broker who has a longstanding relationship with a 401(k) plan sponsor, offering regular recommendations on plan investment options,” they wrote. “If the advice has been followed by the plan fiduciaries (as is typically the case), it will be increasingly difficult to argue that there is no ‘mutual understanding’ that the advice is ‘a primary basis’ for investment decisions.”
In short, the application of the 1975 rules will most certainly be broader than in the past, Drinker Biddle said.
“While we await further rulemaking from the DOL, broker-dealers find themselves at somewhat of a crossroads; that is, ‘old’ rules viewed through the lens of a new day,” the firm noted. “We recommend that firms assess carefully when, and under what circumstances, their representatives’ recommendations may constitute fiduciary advice.”
Chipping Away At The ACA
Congress may have given up on repealing the ACA, but the Trump administration and the courts continued their assault on the health care law. So far this summer, there have been a number of measures that weakened the ACA. Here’s a rundown of the hits the health care law has taken.
The ACA requirement that insurers cover those with pre-existing conditions could be at risk after the Justice Department argued in federal court that it would not defend that part of the law. The reason behind this? The department argued that the parts of the ACA requiring insurers to cover people with pre-existing conditions are intertwined with the portion of the law that mandates people have coverage or pay a tax penalty. But Congress repealed the tax penalty, so the Justice Department argued that the requirement to cover pre-existing conditions is no longer constitutional.
A federal appeals court ruled that the federal government doesn’t have to pay health insurers money they say they are owed under the ACA’s risk corridor program. Health insurance carriers say they are owed about $12 billion from the risk corridor program. Insurers claim the government’s failure to make these payments resulted in skyrocketing premiums and dwindling competition in the ACA marketplaces.
The court sided with the administration in ruling that the federal government didn’t have to make the payments because Congress had taken action — after the ACA’s passage — requiring the program to be budget neutral year after year.
The Department of Labor released a rule making it easier for employers to join together to create what are known as association health plans. These plans are touted as a lower-cost way for smaller companies and the self-employed to band together to obtain coverage. But they bypass the ACA’s requirements, including the requirement to offer “essential health benefits,” which include coverage for maternity services, pediatric care, prescription drugs and mental health. The rule will also allow the plans to be sold across state lines, which would make it more difficult for state regulators to oversee them.
Actuaries Warn Of Rate Increases
The American Academy of Actuaries warned that the elimination of the individual mandate penalty as well as the expansion of association health plans will lead to ACA plan premium increases for the 2019 enrollment season. The next sign-up season for coverage under the ACA begins Nov. 1.
Health care experts say the wider availability of cheaper health plans could draw healthy people away from the ACA marketplace and raise premiums for those who remain.
Several insurers who are seeking rate increases for 2019 are blaming the repeal of the mandate penalty as a primary reason for hiking premiums. Insurers in New York requested an average increase of 24 percent while Washington state health insurers proposed an increase of 19 percent in premiums for 2019.
The premium increases will have little effect on consumers who are eligible for subsidies, as the ACA’s subsidies are designed to increase as premiums go up. However, those who are not eligible for subsidies but rely on the marketplace for coverage will be hit by the premium hikes.
But Some Carriers See Good Times Ahead
Now that the ACA is approaching its sixth open enrollment season, some carriers are finding success under the health care law and are even planning to expand in many states.
Oscar Health filed to sell ACA plans in Florida, Arizona and Michigan for the first time, and it will enter new markets in Ohio, Tennessee and Texas, The Hill reported. Bright Health will begin selling plans in Tennessee, and Presbyterian Healthcare will return to the New Mexico exchange after leaving it in 2016. Medica will sell coverage in the Kansas City area.
The entrance of smaller carriers into the ACA marketplaces comes as major players — such as UnitedHealthcare, Humana and Cigna — pull out of the majority of the markets. Aetna left the ACA business entirely.
Experts said insurers have finally figured out how to become profitable in the ACA environment. “We have finally reached the point where insurers are making money in the marketplaces,” said Larry Levitt, a senior vice president at the Kaiser Family Foundation.