Observers Worry DOL Rule Change Could Hurt Fixed Indexed Annuities
April 12, 2016 by Frank Klimko
WASHINGTON – Although the new conflict-of-interest fiduciary rule adopted a broad swath of insurance industry-friendly language, trade representatives continue to harbor misgivings that the standards on fixed indexed annuities could hurt sales, reduce commissions and disrupt the annuity marketplace.
The new FIA rules are part of the final fiduciary regulation just published by U.S. Department of Labor. Although the rule contained some concessions to the industry, it toughened the rules by adding FIAs to the Best Interest Contract Exemption, along with variable annuities. FIAs previously were covered under the old Prohibited Transaction Exemption — PTE 84-24.
The inclusion of the FIAs in the Best Interest Contract Exemption was no surprise, said Insured Retirement Institute President and Chief Executive Officer Cathy Weatherford.
“We have been advising our members that this was a possibility, based on our discussions with the DOL and the administration,” Weatherford told Best’s News Service. “We received some indication that the DOL would try to differentiate between conventional annuities that existed in 1984 and some of the more innovative products available to consumers today.”
The FIA rule could cause a severe disruption for many securities brokers and dealers and may be devastating for those who sell annuities, according to the Americans for Annuity Protection CEO Kim O’Brien.
“It will hurt the marketplace and it will hurt consumers,” O’Brien told Best’s News Service. “We had hoped for so much more from the department.”
“FIA recommendations that involve commissions or compensation not paid directly by the customer for a level fee or through the customer’s assets will require a BICE,” O’Brien said. “This means that FIAs are treated like VAs under ERISA (Employee Retirement Income Security Act) and potentially exposes them to security regulation through re-characterization under ERISA law.”
Arbitration is not required via the BICE, opening the door to FIA-related lawsuits, O’Brien said. She worried the new rule would conflict with licensure laws and allow uncertified agents to sell annuities and other products. O’Brien also expressed concern the new rule will change the way ERISA 401(k) plans are treated, exempting them from the BICE requirements.
“This concession to the 401(k) marketplace creates an un-level playing field between 401(k) advisers and IRA advisers,” O’Brien said. “Favoring the 401(k) adviser at the expense of the private insurance market, limits consumer’s ability to move to portable, aggregated and self-owned IRAs.”
With indexed annuities, a type of fixed annuity, the insurer invests most of the customer’s principal in bonds to ensure the policy will generate a small annual return but uses a small portion of the premium to buy options in a stock market index, usually the S&P 500. Options that are exercised can result in additional interest credited to a policy, potentially more than an investor might achieve through other fixed-income investments.
Any impact on sales won’t happen immediately, Jamie N. Johnson, communications specialist at Wink and Moore Market Intelligence, told Best’s News Service.
“We aren’t anticipating sales declining until the rule goes into effect in January 2018,” Johnson said. “There will be more administration, more forms, and more disclosure to annuity purchasers; because of this, there will probably be a decline in indexed annuities.”
“In the meantime, we are anticipating that indexed annuity sales are going to continue to do well because interest rates are so low,” Johnson said.
The indexed annuities market was robust last year. Allianz in 2015 led the industry, with $8.75 billion; followed by American Equity Investment Life ($6.79 billion) and in third, Great American ($3.69 billion), according to year-end figures compiled by Limra’s Secure Retirement Institute. The institute said it has observed a number of companies, which have traditionally been strong in the variable annuity market, now increasing their attention on the indexed annuity market (Best’s News Service, March 18, 2016).
(By Frank Klimko, Washington correspondent, BestWeek: Frank.Klimko@ambest.com)
