What’s Impacting Your Business On Capitol Hill?

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Without a crystal ball, the future is hard to predict. We can, however, prepare to the best of our ability and maintain resilience no matter what lies on the horizon. Today’s insurers are facing a tough business climate, which is complicated by the changing investment and regulatory environments that continue to emerge from the financial crisis. Shifts in the marketplace, including demographic and customer behavior changes, also have a direct impact on the industry and your practice.

Social, technological, and even environmental factors influence the insurance industry, but key issues emerging on Capitol Hill and at your state capitals can deeply affect your business. Fiduciary standards and tax reform are the two biggest policy debates that can dramatically alter the future of insurance professionals. The U.S. Securities and Exchange Commission (SEC) and Department of Labor (DOL) continue their work on fiduciary standards. While no formal action has been taken, signs point toward rules mandating greater transparency and responsibility on the part of financial professionals who work with IRAs and 401(k) plans; these professionals would be held to the same standard as investment advisors. Many interested parties within the financial marketplace are adamant on taking the lead and publishing a rule before the DOL finalizes its own.

Cliff Andrews of CapCity Advocates, LLC, a Washington lobbyist for the National Association for Fixed Annuities, says, “The efforts by the DOL and the SEC to establish uniform fiduciary standards for broker-dealers and investment advisors could easily creep into the insurance space, which is effectively covered by robust National Association of Insurance Commissioners (NAIC) suitability standards.” Broker-dealers would not be allowed to recommend any of their own products to investors or make commissions on the investments they propose to their clients for fear of breaching their fiduciary duty. The agencies want to ensure investors are getting investment advice that is in their best interest and not tied to a commission.

Any number of restrictions might emerge, but most notably a fiduciary standard could force financial professionals to abandon millions of potential customers that they could otherwise serve under current standards.

Both the DOL and SEC have received pushback on their plans to amend the definition of fiduciary. Andrews adds, “Our focus is ensuring that needs-based annuity sales are not impacted by a complex and confusing duplicative standard on top of the suitability standard. DOL has indicated it plans to release a proposed rule by August, which would not be limited to ERISA plans but would reach out to IRAs. Since almost half of fixed annuities are sold in the independent IRA market, the proposal could have a disastrous impact on our industry. The SEC is considering if it wants to propose a rule. Currently, DOL is the biggest threat and despite concerns raised by the industry, it appears DOL is moving forward.”

A survey by the National Association of Insurance and Financial Advisors found that 84% of financial professionals believe their business costs will increase if the SEC raises its bar on financial advice. Nearly 44% of survey respondents said they would pass on the higher costs to their clients by increasing their fees, while another 48% said they would limit their practice to clients with a minimum amount of assets.1 Producers could preserve their non-fiduciary status by telling clients their investment advice isn’t impartial, but this obviously can have an effect on the client relationship.

Possible IRA Changes

In the House, Chairman Dave Camp (R-Mich.) of the Ways and Means Committee proposed eliminating stretch IRAs, modifying allowable contributions to Roth IRAs, and potentially prohibiting contributions to traditional IRAs. “He has proposed a 10-year COLA freeze, no new SEPs or SIMPLE 401(k)s, and limits on pre-tax contributions to large employer plans,” Andrews explains. “Clearly, these changes will limit consumer contributions and choice. However, a plan is not expected to move as it has received strong criticism from his party and the private sector. And while his term expires at the end of this year, the Chairman’s plan is a significant marker that the industry must address.”

Financial Industry Regulatory Authority (FINRA) and the SEC are also reviewing rollover rules, which should be of interest to DOL since it adds a new facet to the ongoing policy deliberations. FINRA plans to review a firm’s rollover practices, which are related to marketing materials and supervision in this area. FINRA will also evaluate securities recommendations made in rollover scenarios to determine whether they comply with suitability standards.

IRAs have always been covered by the DOL’s fiduciary rules, though the IRS has never enforced them. The amount of money that will roll from 401(k) accounts to IRAs is estimated to reach $2.14 trillion over the next five years.2 Broker-dealers and registered investment advisors that offer advice and recommendations regarding IRA rollovers could face increased regulatory scrutiny of their services. The worry is that lower-income clients would no longer have access to financial guidance after their 401(k) accounts are rolled over into an IRA, mainly because IRAs traditionally charge more in administration fees than defined contribution plans do.

FINRA noted that a recommendation to roll over retirement plan assets to an IRA typically involves securities recommendations subject to FINRA rules regarding suitability. FINRA contends that the marketing efforts related to IRA rollovers must be “fair, balanced, and not misleading.” Because IRA rollovers will likely increase as more Americans reach retirement age, further regulatory activity in this area is expected – including potential changes from the IRS. The transparency, disclosure, and assessment of risk surrounding rollover decisions should continue to be a main focus.

A Look at Tax Reform

“In D.C., the federal government is constantly looking for money. As it does, it looks at tax ‘expenditures’ on many items, including the tax treatment of life insurance and annuity products, qualified and non-qualified plan rules, and insurance carrier tax law,” Andrews discusses. “As pressure grows, policy makers are considering altering these tax preferences.”

Any changes to tax deferral are a major concern, but currently nothing concrete has been offered. “Other proposed negative changes to carrier tax law, company-owned life insurance (COLI), retirement contribution limits, and stretch IRAs will alter product choice, affordability, and desirability for consumers,” states Cliff. “At this point, tax reform is in the early stages of consideration, but negative changes have been proposed and thus are a marker for discussion.”

One provision on COLI would impose new taxes on life insurance used by both small and large businesses. Many businesses typically use COLI to protect against financial risk or job loss stemming from the death of an owner or key employee. It also is a widely used funding mechanism for employee and retiree benefits. Possible provisions would impose new taxes on retirement savings and change contribution limits and distribution rules on these products.

The industry is also concerned about a whole new series of tax increases on life insurance companies that would, if adopted, make industry products such as life insurance and annuities less affordable. In the aftermath of the financial crisis, and with people living longer than ever before, the guarantees offered by the industry are more important than ever. As Cailie Currin, JD, from Currin Compliance Services, LLC, states, “It seems clear that the retirement product marketplace will be more important given the legislative themes at both the state and federal levels. With states and the federal government all trying to cut or maintain taxes, it is unlikely that there will be more public funds available for retirees.”

Current tax rules reflect lawmakers’ recognition that lifelong income protection products, such as life insurance and annuities, are tax-advantaged vehicles designed to transfer financial risks of death and longevity. The tax policies related to these products have been reviewed several times over the last century, and each time Congress has chosen to preserve the current tax treatment. A change in these rules could hinder the average person’s ability and willingness to utilize retirement planning vehicles.

The tax-deferred treatment of cash value in life insurance and of growth in annuities was specifically being targeted for review. Tax deferral is an important consideration for many clients when selecting a retirement product, so any changes to these products could raise concern. “Fortunately, changing inside buildup in individual accounts hasn’t been discussed,” states Andrews. “It is difficult to predict what changes will be made in the upcoming months and it is hard to see any major tax reform happening,” shares Currin. “However, there may be smaller pieces of the tax code that do get attention and make it through the legislative process. The tax treatment of insurance and retirement products seems to always be on the table.”

Adding to this sentiment, Andrews notes, “Comprehensive tax reform will likely occur via a series of legislative packages that are negotiated over the next several years with much depending on the outcome of the election this fall. In the immediate term, Congress will tackle tax extenders, which are a series of expiring tax reduction policies. This extenders legislation shouldn’t impact the insurance industry.”

Social Security and Welfare

Outside the regulatory arena, there are also political trends to consider. Pressure on the solvency of Social Security and entitlement programs will increase because of the rising dependency ratio. The dependency ratio is the ratio of the number of people under age 18 or over 64 to the number of persons between these ages. This ratio is expected to increase by approximately 14% between 2000 and 2025.3 The law governing benefit amounts may change. In 2033, for instance, Social Security will be able to pay only 77 cents on each dollar.4 The rise in this ratio will strain government support for the elderly and sick, leading to prolonged employment or a reduction in the standard of living.

Consumers lacking faith in the solvency of Social Security and entitlement programs will need to focus on providing their own savings for retirement. This will create new opportunities for life and annuity producers. Andrews concludes, “The industry will have to remain vigilant and active over the next several years as policymakers in Washington tackle tax reform” and other key issues. It is essential that life insurance companies and financial professionals work with their state representatives to explain how industry products and services benefit American families and businesses across the country.

On the Home Front

As discussed in Pam Heinrich’s article in the March/April edition of NAFA Annuity Outlook magazine, what we are seeing at the state level is an expansion of statutes and regulations aimed at protecting elderly consumers from financial abuse or exploitation. “NAFA tracks a number of issues at the state level – as many as a dozen or so broad topics – such as suitability, disclosure, licensing and continuing education, producer designations and certifications, etc., including elder financial exploitation,” explains Heinrich. “By far this year, the number of bills that address elder financial abuse or exploitation dwarfs any other topic. This isn’t surprising, as we’ve certainly seen this trend at the federal level as well – at least in terms of an overall increase [of] attention to consumer financial protection, [which includes] the creation of the Consumer Financial Protection Bureau under the Dodd-Frank Act. Before this year, there were only a handful of states that had laws that specifically addressed financial exploitation of a senior consumer, which oftentimes is considered to be an individual aged 60 or older.”

Heinrich continues: “Most states have general financial protection laws for persons with medical issues that might affect their ability to watch out for their own financial interests, but the trend here is to treat all seniors, regardless of their mental capacity or financial acumen, as a protected class. In addition, there is an interest at the state level to increase and expand reporting requirements. The increased state-level activity, together with the attention brought by some of the high-profile legal actions taken against a handful of sales agents, means that insurance professionals need to be especially careful in their sales practices, especially where it concerns sales to senior consumers.”

“At both the federal and state levels, legislators and regulators will continue to consider reforms or changes to the tax laws that may affect the way retirement saving tools, including annuities, are treated for tax purposes,” Heinrich says. “Some states have evidenced an interest in expanding their role in regulating state retirement plans for employees in both the public and private sectors.”

Another trend at the state level is the adoption of NAIC and other entity model rules and regulations, such as the suitability model, the Standard Valuation Act, the Uniform Power of Attorney Act, and the Annuity Disclosure Model and its accompanying Annuity Buyer’s Guide, as well as increased participation in the Interstate Insurance Product Regulation Commission. The Annuity Disclosure Model provides standards for the disclosure of certain information about annuity contracts to protect clients and foster consumer education. The regulation specifies what must be disclosed, the method for disclosure, and the use and content of illustrations in connection with the sale.

Overall, the industry has long faced a complex regulatory environment. Although the implementation time frame of proposed regulations remains uncertain, businesses may need to anticipate greater regulatory intervention and explore ways to adapt data, technology, and processes and to integrate updated compliance requirements into business procedures.

A Look Toward the Future

“The biggest issue today is uncertainty,” Currin reflects. “It is very hard to run a business, especially related to an individual’s financial well-being, when so many state and federal issues are unclear. Not only is there uncertainty for insurance producers, but also for their clients. That makes it very difficult to make clear recommendations and for clients to feel confident in the suggestions from their insurance professionals.” Persistent regulatory uncertainty at the federal and state levels continues to impact the industry on both the buyer and seller sides. Regulations are in flux, and it’s important to remain alert for potential changes.

So what can you do to maintain resilience and achieve success during these times? “It is tough, no doubt,” comments Currin. “It is tough for all businesses and for insurance producers; there are many pressures that are particular to this industry. Of course, my perspective is that a compliant practice shouldn’t take a back seat to profitability and competitive advantages. That is a recipe for a short-lived business advantage. Compliance efforts may seem like a hindrance, but a strong, compliant firm is one that will last and be profitable over time, not just in the short run.”

The ultimate goal is for the regulatory climate to improve, with greater harmonization at the federal and state levels. Moving away from the enforcement of burdensome regulation and striving for standardization across products and practices can provide an ideal environment for businesses to thrive.

It is important that all industry leaders embrace the opportunity to form public and/or private partnerships to offer value-added solutions in response to a political challenge. Maintaining a constructive dialogue with regulators and lawmakers regarding these issues is key to ensuring that consumers can continue to access information about their retirement planning options. It is also beneficial to further build strategies and value propositions that help you differentiate your business. Staying connected with organizations like NAFA can keep you at the forefront of regulatory happenings and help you navigate any future headwind that arises.

Let Your Voice Be Heard

Your role in influencing policymaking is crucial, and you can make a lasting impression with legislators. The federal government doesn’t have a monopoly on policymaking; important policy decisions are made at the state level as well. Just as informing and maintaining connections with your clients are essential to your business, building relationships with your state officials is vital too. “Do what insurance professionals do best: establish personal relationships with your elected officials,” Andrews suggests.

“Schedule a meeting with your House representatives and your two senators two times a year. Initially you might meet with staff (ask for a district director or chief of staff) as they are well-informed, and once they are comfortable with you, they can help open the door to their boss. Explain your business and your clients (their constituents) that you serve and most importantly, share positive stories and policy concerns.”

Currin adds, reach out to “a combination of professional lobbyists who have the relationships and the in-depth understanding of how things work in the various state and federal legislatures, and [also connect with] individuals with stories to tell. Insurance consumers who are happy with their products and the producers who sold them are great additions to any successful policymaking initiative. Legislators get a lot of information from a lot of sources, and it is much easier to remember the people with stories to tell than the details of a policy paper.”

Every voice matters, and together we can influence positive outcomes in the government policy arena. From Washington to the states in which we reside, policymakers need further education and guidance in the topics affecting your business. As a combined force, we can decipher fact from fiction and shape a marketplace that is advantageous for both the client and the financial professional.

As mathematics professor John Allen Paulos said, “Uncertainty is the only certainty there is, and knowing how to live with insecurity is the only security.” Choosing to be proactive within a very reactive, sometimes ambiguous environment allows you to work smarter, not harder. Financial professionals who can anticipate and plan for change can create their own future, expand into new parts of the market, and be successful no matter what the winds of change may bring.


Fiduciary Rules will Cost Millions in Compliance. Paula Gladych, October 2013.

DOL’s Fiduciary Reg Expected in Early ’15. Steven Lang. March 24, 2014.

Alliance for Health & the Future, The Dependency Ratio, Issue Brief Vol. 2, Number 1.

Social Security, Retirement Estimator. http://www.ssa.gov/estimator/.

Lindsay Meleshko is a Marketing Communications Consultant with Insurance Insight Group LLC, a marketing and strategic consulting firm. Prior to joining IIG, she authored comprehensive training programs, endorsed a national-brand building tour, devised marketing campaigns and created agent and consumer advertising for Aviva USA. She now supports clients by developing valuable training and compelling marketing strategies that convey the client’s message and have a powerful impact on their target market. She is versed in compliance, life and annuity training and innovative recruiting and strives to stay on the forefront of industry trends and sales opportunities.

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