DOL Rule May — Or May Not — Be Cause Of Drastic VA Sales Drop
September 14, 2016 by Ben Mattlin
In the first half of 2016, overall sales of variable annuities slumped 22 percent to $53.5 billion, the lowest total since 1998. This marks the first time VA sales have amounted to less than $30 billion in two consecutive quarters since 2002.
This, in part, led LIMRA to some pessimistic projections. For all of 2016, the insurance industry institute predicted in mid-August, VA sales would show a decline of between 15 percent and 20 percent compared to 2015 levels — and drop another 25 percent to 30 percent next year.
More startling still, perhaps, it forecast an about-face in fixed indexed annuity sales, often seen as a direct beneficiary of declining VA sales. Indexed annuity sales may be expected to grow between 15 percent and 25 percent this year over last, marking the ninth consecutive year of sales growth, but they’re anticipated to plunge 30 percent to 35 percent next year. Some think fixed index annuities are benefiting from the same appeal as structured notes, implicit guarantees.
What lies behind these dreary sales predictions? The simple answer is the new DOL fiduciary standard, which will render both VAs and indexed annuities subject to the Best Interest Contract Exemption guaranteeing full disclosure of fees and other terms. This could have a chilling effect on VAs and their closest competitors in the annuities world, indexed annuities. But is that explanation too simple?
One industry expert who spoke on condition of anonymity thinks there are more factors at work. “It’s a perfect storm. The market is having its second-longest bull run in history, which has made people overly confident. They no longer think they need the downside protection that VAs offer,” he said. Continued low interest rates are also a contributing factor, because they keep people in the market, buoying share prices. “The bang for the buck that you can get from any type of protection is less attractive than it was in a higher interest rate environment.”
This isn’t necessarily prudent, however. A market correction of at least 20 percent is a near certainty, though no one can say exactly when, and a variable annuity can be one of the best ways for retirees to protect some of their assets from such a downturn. But, this analyst observed, it can be difficult to convince someone to fix a hole in the roof if it hasn’t rained in six months. People generally take action after the fact, when it’s already too late.
Yet it’s also true that the DOL ruling has unnerved many retirees and advisors alike. To avoid regulatory hurdles and potential lawsuits, providers are erring on the side of caution — limiting new product innovations and, in some cases, limiting availability. This is ironic, since the new fiduciary standard was intended to increase confidence in retirement products. Some even expected a jump in VA sales as a result. But so far at least, it seems many purveyors of VAs plan to avoid the liability risk.
Another result of increased fiduciary scrutiny is the termination of many L-share VAs. L-shares are the type that come with short surrender periods, meaning they can be sold without penalty after, say, four years as opposed to the typical B-share’s seven-year waiting period. In return, L-shares charge higher fees and an ongoing, trailing commission to brokers. Regulators had already expressed concern about these fees not being fully disclosed or in clients’ best interests. Last February, before the new DOL rules were issued, Commonwealth Financial Network announced it would stop selling L-share VAs. Then, in August, both Jackson National Life Insurance Co. and Pruco Life Insurance Co., an annuity unit of Prudential Financial, eliminated the share class.
On the other hand, VAs with a level fee structure — essentially paying the advisor, the broker-dealer, and all affiliates the same rate (as long as there are no third-party payments for, say, recommendations) — may be on the rise. They aren’t new, but they have the benefit of effectively neutralizing potential conflicts of interest and so are more likely to pass muster with the fiduciary authorities. “I wish we could have more gravitation toward levelized compensation,” mused the anonymous advisor, explaining that if the same percentage were charged across all products, clients would know that their advisors are only recommending what they truly think is best, not what pays the highest or quickest compensation.
With all this change in the VA market following the DOL ruling, it’s surprising that one recent study found that two-thirds of advisors believe the new regulatory standard won’t have any impact — positive or negative — on the use of variable annuities.
