Broker-Dealers: Adapting to The Retirement Security Rule

September 2024

The rules governing how financial professionals (FPs) offer investment advice are complex and promulgated by multiple regulatory bodies at the federal and state level. Among the most noteworthy new regulations is the Department of Labor’s proposed Retirement Security Rule, which defines whether an FP is an investment advice fiduciary for purposes of the Employee Retirement Income Security Act (ERISA).

Retirement Security Rule

Along with other changes involving avoidance of conflicts of interest, reasonable costs and disclosures, the proposed rule would significantly impact how broker-dealer (B-D) representatives can provide advice related to rollovers from workplace retirement savings plans into individual retirement accounts (IRAs). While investment advisor representatives affiliated with registered investment advisory firms already operate within a fiduciary standard of care, B-D representatives generally do not, and instead have acted within a suitability standard when advising their clients on rollovers (and, if selling variable products, within the precepts of Regulation Best Interest). The rule may also impact representatives’ annuity product mixes, specifically by shifting toward lower-cost products — or by shifting away from annuities entirely.

To understand their perspective on the Retirement Security Rule, LIMRA surveyed over 300 registered representatives of B-Ds in May-June 2024 (for additional information, see Annuities and Advisors’ Practices, LIMRA, 2024). Most registered representatives surveyed have at least some familiarity with the Retirement Security Rule. Just over half (54 percent) claim to be “somewhat familiar” and one-third (34 percent) claim to be “very familiar.”

Rollovers

When those who were at least somewhat familiar with the rule were asked how it might affect how they and their firms handle IRA rollover transactions, the most common response was needing more time to complete these transactions (Table 1). Nearly half of insurance B-D-affiliated representatives believe the rule will slow down the handing of rollovers. To help with the extra workload, about 1 in 9 reps indicated that their firm will need to assign specially trained staff; this expected reaction was more common among full-service national B-D-affiliated representatives, who likely have more resources available for this purpose. 

In addition to the impact on efficiency, more than 1 in 5 representatives also claimed that the rule will discourage them from handling small-balance rollovers — though only 7 percent said that overall rollover volume would be reduced. As many as 3 in 10 insurance B-D-affiliated representatives, who tend to serve clients with lower average wealth levels, could limit their small IRA rollover transactions in light of the rule.

Despite the rule’s impact on some representatives, more than a third said that it would have little or no impact on their practices. It is possible that some B-Ds are effectively operating under a fiduciary standard; this standard of care might be more likely under full-service national B-Ds, some of whom made adjustments several years ago in response to an earlier version of the rule. Moreover, the Security and Exchange Commission’s Regulation Best Interest and the National Association of Insurance Commissioners’ Suitability in Annuity Transactions Model Regulation (#275) require that recommendations are made in the best interest of the customer. While not as demanding as the Retirement Security Rule could turn out to be, these regulations have likely improved the ability of B-D firms to withstand its impact.

Product Mix

In terms of the rule’s impact on their product mixes, about one-quarter of representatives and one-third of full-service national B-D-affiliated representatives signal a greater sensitivity to product fees (Figure 1). Only 14 percent of registered representatives expect their annuity sales production to decrease. Similar proportions anticipate a shift to nonqualified annuity sales, fixed annuity sales in favor of variable annuity sales, and greater indexed annuity sales as a consequence of the rule. Representatives are more likely to anticipate minimal or no impact than any of these specific effects on their annuity businesses. Still, almost 1 in 5 representatives are uncertain about the impact of the rule on their product mixes, suggesting that the actual outcome of the rule could be more significant.

Conclusion

When operating under an ERISA fiduciary rather than suitability standard of care, representatives will need to spend more time and resources to determine each client’s goals, preferences and overall financial situations. With wealthy clients and large-balance rollovers, it is easier to offset these additional compliance expenses than is possible with less-wealthy clients conducting low-balance rollovers. If representatives do scale back their efforts with less-wealthy clients, those investors could be shut out from in-depth, customized advice that FPs can provide.

The research suggests this outcome as a possibility, but also points to the resilience of the B-D community, as many registered representatives feel they can adapt. Carriers, distributors and other stakeholders must find ways to ensure that all FPs have the resources and training they need to make that happen.