Unpleasant Surprise
Sheryl Moore, president and CEO of Moore Market Intelligence, said: “Indexed annuities were variable-annuity carriers' Plan B. Now, they're having to come up with Plan C.” Before the Department of Labor (DOL) issued the new rule in its final form, indexed and variable annuity contracts were exempted under a statute known as Prohibited Transaction Exemption (PTE) 84-24. This permitted the sale of indexed and variable products to retirement plan customers under a commissionable arrangement. But this exemption is now history for these products and they will both have to be sold under the Best Interest Contract Exemption provision that is laid out in the new bill. (For more, see: How Fixed Index Annuities Yield Retirement Income.)
Many critics feel strongly that this exemption will create undue liability for brokers and agents who sell them and lead to frivolous lawsuits regarding whether they acted in the client’s unconditional best interests. Chris Joline, one of the principals at PwC, states: “The final rule has made it very clear fixed-indexed annuities are now under the BICE and I know many of the annuity carriers were counting on that being 84-24, business-as-usual. What we initially thought was many VA carriers would go into fixed indexed annuities because it would be simpler to handle those, and they have many of the same characteristics. Now, we don't see that as being as likely.”
Needless to say, this turn of events has been quite a blow to insurance carriers who specialize in the indexed annuity market. But not everyone is surprised at the bill’s final ruling. The president and CEO of the Insured Retirement Institute said that conversations that the trade organization had with DOL officials gave them a fairly clear indication that only relatively simple annuity products such as fixed and immediate annuities would retain their exemption. (For more, see:What the Fiduciary Proposal Means for Annuities.)
Consolation?
But annuity producers do have one crumb of consolation, in that straight fixed annuity products did retain this exemption. Although the industry had expected indexed products to be lumped in with fixed products instead of their variable counterparts, they do still have one major avenue left untouched. The final language in the bill states that it made this choice because indexed annuities are “often quite complex and subject to significant conflicts of interest at the point of sale [and] should be sold under the more stringent conditions of the Best Interest Contract Exemption.”
Another crumb could be that the BICE provisions may not be quite as burdensome as was initially predicted, as the BICE agreement will not need to be signed until the point of sale under the final provisions of the bill. The total number of disclosures have also been reduced from what they were under the proposed bill, and the exemption has also been clarified so that there is no bias against presenting and selling proprietary products. Equally important is the fact that the time frame for implementing these changes has been stretched out to a year. This could all mean that sales of variable contracts may not drop as much as they were projected to. (For more, see: What the DoL’s Fiduciary Policy Means for Advisors.)
Laura Bazer, vice president and senior credit officer at Moody’s rating agency, stated: “I would say variable annuity sales will be impacted, but possibly not as much as people thought. But we'll have to see, and it will depend on the specifics of the company selling the product.” One possible change that may come from the bill is a movement towards fee-based annuity contracts in lieu of those that pay a commission. This type of contract would be exempt from the BICE requirements and may be a viable alternative for retirement plan advisors who want to stay compliant and still receive adequate compensation for their services.
The Bottom Line
The new fiduciary bill that was issued this week will have a substantial impact on the retirement planning industry even if the sales of variable and indexed annuity products remain unaffected. The BICE requirements and other provisions in this bill will likely lead to major changes in how annuity products are marketed, sold and managed by advisors of all stripes. (For more, see: Advising FAs: Explaining Annuities to a Client.)
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