1. The proposal, as written, would turn the promotion by an insurer of its own health, life and disability insurance products to a small business (or its broker/fiduciary) or employees (of any size employer) into a fiduciary act even where no trust assets are involved, which may not have been intended. Companies that offer private exchanges in the health plan market would also be affected. There are several steps in the analysis of this issue. The ERISA definition of fiduciary applies by its terms to both retirement plans and welfare benefit plans. Under ERISA, the term fiduciary applies by its terms to all types of plans, including both retirement plans and welfare plans. Moreover, the DOL proposal explicitly defines a plan covered by the fiduciary proposal as including both retirement plans and welfare benefit plans. See Section 2510.3-21(f)(2)(i). The DOL proposal applies to any recommendation as to the advisability of acquiring... securities or other property. Under the proposal and generally, it is clear that insurance contracts are property. For example, the DOL proposal uses the term Asset to refer to a specific subset of property both covered by the new definition and eligible for an exemption. The term Asset is defined to include insurance contracts. See Section VIII(c) of the Proposed Best Interest Contract Exemption. The DOL proposal only applies to advice regarding the property of a plan or Individual Retirement Account ( IRA ); this requirement is satisfied too. Under longstanding DOL rules, if employees contribute toward the cost of benefits, such as health, life or disability insurance, the employee contributions are considered property of a welfare benefit plan, even if the contributions are not held in trust. See 29 C.F.R. Section 2510.3-102; DOL Advisory Opinion 96-12A. Thus, in every case where employees contribute to the cost of a plan, advice regarding the insurance products is advice regarding the property of a plan. The advice is rendered for a fee. Under the definition of fiduciary investment advice, the advice must be rendered for a fee or other compensation, direct or indirect. The DOL has long taken the position that this does not require a separate fee for the advice; on the contrary, it is sufficient for the advisor to receive compensation in connection with the recommended transaction, as clearly occurs when an insurer receives premiums for health, life, or disability insurance. If this were not the rule, financial institutions would, for example, be 1
able to give free advice to purchase their own proprietary investment products and thus avoid fiduciary status. The DOL proposal specifically treats individualized marketing to small plans and individuals as fiduciary advice, not as marketing. Under the proposal, individualized marketing to large plans can be selling, not advising; individualized marketing to small plans and individuals cannot be selling, but rather is treated as investment advice. See Section 2510.3-21(b)(1). The DOL explains this rule in the preamble to the proposal: in this retail market [for small plans and individuals], a seller s carve-out would run the risk of creating a loophole that would result in the rule failing to improve consumer protections.... It is this significant change in position, from both current law and the 2010 DOL proposal, which causes this issue to arise. The following example may illustrate this matter. An insurer markets its group-term life insurance product to employees of any size employer in a situation in which employees are required to contribute toward the cost of the plan. The insurer, as expected, promotes the virtues of its product, as compared to its competitors products. As the DOL proposal is currently drafted, this promotion is fiduciary advice because: Individualized marketing to an employee is advice under the proposal. The advice is for a fee, i.e., the premium that would be paid for the insurance. The advice relates to the acquisition of property, i.e., the insurance contract. The advice relates to the use of plan property, i.e., the employee contributions. The advice is specifically directed to the employee for her consideration. The advice relates to an ERISA plan, i.e., a group-term life insurance plan. This means that the insurer is subject to fiduciary liability for promoting its own products. So an employee who buys the insurance might later claim that the insurer violated its fiduciary duty by promoting its own product when a competitor s product may have been less expensive and/or provided superior services or benefits. In order to defend itself, the insurer would need to show that it considered promoting its competitors products but reasonably concluded that its own product was a better product for the employee. This, of course would not make sense. Taking the consequences one step further, not only might the insurer be subject to the lawsuit described above, the insurer promoting its products to a small business (or its broker/fiduciary) could be found to have performed a prohibited transaction and thus have violated ERISA even if the insurer could show that its product was the best product for the employer to offer. Under DOL regulations, a fiduciary engages in a prohibited transaction if the fiduciary uses its power to cause a plan to make payments to the fiduciary. See Section 2550.408b-2(e)(1). And that is exactly what would be happening here. The insurer would be providing fiduciary advice (i.e., marketing its life insurance product) to attempt to cause the plan to make payments to the insurer. Thus, 2
unless an exemption applies, the insurer would be engaging in a prohibited transaction solely by reason of promoting its own life insurance product. As described below, it is not apparent that any existing or proposed PTE would provide an exemption from such a prohibited transaction. Consequently, we are very concerned that the proposal as written would prohibit insurers and their agents from promoting their own life, health and disability insurance products to small businesses (or their broker/fiduciaries). 2. Neither the best interest contract exemption PTE nor PTE 84-24 clearly provides relief to the prohibited transaction that would occur when an insurance company promotes its own insurance products to a small business where plan assets are not held in trust. Best Interest Contract Exemption In coordination with the DOL s proposed definition of a fiduciary, the DOL also published a proposed best interest contract exemption (BICE) 1 to allow certain persons to continue receiving compensation that would otherwise be prohibited in connection with transactions that involve plans and IRAs. As stated in Section I of the BICE, the exemption addresses the following: (b) Covered transactions. This exemption permits Advisers, Financial Institutions, and their Affiliates and Related Entities to receive compensation for services provided in connection with a purchase, sale or holding of an Asset by a Plan, participant or beneficiary account, or IRA, as a result of the Adviser s and Financial Institution s advice to any of the following Retirement Investors: (3) A plan sponsor as described in ERISA section 3(16)(B) (or any employee, officer or director thereof) of a non-participant-directed Plan subject to Title I of ERISA with fewer than 100 participants. [emphasis added] Based on the language provided above, the BICE only applies a small business sponsoring a plan that does not allow participants to control the investment of their own account. In other words, the BICE is limited to those situations where the ultimate investment decision is made by the plan fiduciary, not by the individual employees. For example, assume that a small business health plan offers multiple options, as is typical. In that case, employees decide which coverage to purchase. The BICE would not provide relief in this situation where the small business offers a health plan under which each participant may decide which option, if any, to enroll in, thereby 1 Proposed Best Interest Contract Exemption, 80 Fed. Reg. 21,960 (proposed Apr. 20, 2015). 3
directing the investment of his or her employee contributions (i.e., plan assets). Consequently, insurers or their agents would not be relieved by the BICE from the prohibition from selling their health, life, and disability insurance products to small businesses. PTE 84-24 We have reviewed PTE 84-24 and the proposed amendments to it, 2 and while it is possible that the situation we are concerned about the ability of insurers and their agents to continue promoting group health, life and disability insurance to small businesses or employees where plan assets are not held in trust would be afforded relief by PTE 84-24, many of our members are concerned that this may not be the case. 3. Under the proposal, plan sponsor employees could be investment advice fiduciaries if they make statements e.g., under a financial well-being program or oral statements by a human resources employee that are viewed as encouraging another employee to consider the purchase of a particular employersponsored life, health or disability insurance option. Under the DOL proposal (as described above), any person who encourages an employee to use her employee contributions to purchase employer-provided life, health or disability insurance would be an investment advice fiduciary. Assume, for example, that a human resources employee were to tell another employee that she really needs life insurance now that the other employee has a family and that the basic group-term life insurance offered by the company is a good deal. That is fiduciary advice under the proposal: The advice is for a fee, i.e., the human resources employee is paid a salary to help employees with benefits issues (among other responsibilities). The advice relates to the acquisition of property, i.e., the insurance contract. The advice relates to the use of plan property, i.e., the employee contributions. The advice is specifically directed to the other employee for her consideration. The advice relates to an ERISA plan, i.e., a group-term life insurance plan. Thus, the human resources employee becomes a fiduciary attributable to this benign conversation. Since it seems relatively certain that the plan sponsor will need to indemnify such employees, this potentially subjects the plan sponsor to lawsuits from other employees who, for example, feel in retrospect that they signed up for the wrong 2 Proposed Amendment to and Proposed Partial Revocation of Prohibited Transaction Exemption (PTE) 84-24 for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies and Investment Company Principal Underwriters, 80 Fed. Reg. 22,010 (proposed Apr. 20, 2015). 4
coverage and would have benefited from purchasing more protection. Alternatively, the plan sponsor, which is clearly a fiduciary regarding the plans, could have cofiduciary liability for the well-intentioned actions of its employees. * * * * * In conclusion, we are concerned that the DOL s proposal to redefine the term fiduciary would result in the promotion by an insurance company of its own group life insurance, health insurance or disability insurance to small businesses or employees becoming a fiduciary act in cases where there are no plan assets held in trust. Likewise, the fiduciary proposal could negatively affect the offering of private exchange services to health and welfare plans. In addition, routine discussions with plan sponsor employees about employer-sponsored life, health and life insurance will be converted into fiduciary discussions. We respectfully request that the DOL clarify the proposal to address these apparently unintended results. 5