At LIMRA’s recent Retirement Industry Conference, speculation abounded on how the fiduciary rule would restrict access to the very products that can help Americans best prepare for retirement: annuities.
Frustration mounted as session after session included survey and study data predicting the negative impact on annuity sales. From manufacturers to distributors to agents on the ground, all face a difficult adjustment period.
And it will get ugly before it gets better, said Joseph Montminy, assistant vice president of the LIMRA Secure Retirement Institute.
This year, variable annuity sales are expected to decline 15 to 20 percent, he said, but that will be offset by a similar increase in the sale of fixed annuities. But next year will be another story.
The majority of the fiduciary rule goes into effect in April 2017, with some aspects delayed until Jan. 1, 2018. That will hurt the market for VAs and FAs, Montminy said.
Total annuity sales will decline 15 to 20 percent next year, with VAs plummeting 25 to 30 percent, and FAs slipping 5 to 10 percent. The LIMRA data comes from its 2016 Advisor Survey.
“We see the decline as very significant,” Montminy said.
The stakes are high, speakers noted. The median retirement account balance is $3,000 for all working-age households and $12,000 for near-retirement households, according to the National Institute on Retirement Security.
The fiduciary rule covers financial products sold within Employee Retirement Income Security Act (ERISA)-qualified retirement plans. These plans include individual retirement accounts (IRAs), which were not previously covered by ERISA. Non-ERISA plans would be covered by the restrictive Best Interest Contract (BIC).
According to LIMRA research, variable and indexed annuities account for 84 percent of IRA annuity sales.
Product Design Changes
Several presenters shared fresh data to project how the various players in the annuity chain see products evolving under a fiduciary standard.
The changes are expected to start with annuity designs, said Todd Giesing, assistant research director with the LIMRA Secure Retirement Institute.
Seventy percent of manufacturers say variable annuity designs will change, the LIMRA survey revealed.
“Manufacturers are going to have to find solutions because the demand is not going to go away,” Giesing said. “Over time, the products that we see tomorrow will be different from the products we see today.”
Another 70 percent of respondents said they have no plans to stop producing specific annuities.
How quickly products can go from the idea stage to the agent’s brochure is a matter of concern. At one LIMRA session, participants debated the lengthy product development process.
Manufacturers planning to spin away from VAs will have to break some product design trends, according to a joint survey by LIMRA and Reinsurance Group of America.
Respondents said their companies initiated an average of 4.2 new product development efforts in a one-year time frame.
Of those, variable annuities accounted for 43 percent of new products, while indexed annuities came in at 28 percent. Single premium income annuities (12 percent), fixed annuities (11 percent) and contingent deferred annuities (6 percent) trailed.
About 30 annuity companies responded to the survey, said Donna Megregian, vice president and actuary at RGA.
The median time from idea origination to product launch came in at 47 weeks for VAs, 40 weeks for indexed annuities and 37 weeks for fixed annuities.
“The annuity (producers) in general said they were targeting the middle market, and that kind of surprised us,” Megregian said.
Industry observers are waiting to see how the big players approach distribution.
Will exemptions and commissions remain a favored route? Will fee-based products inch their way into the marketplace? Are some channels disappearing, to be replaced by others?
Forty percent of respondents expect manufacturers to sell more direct-to-consumer annuities.
Fee-based products are another option that manufacturers and advisors will have to consider. Raymond James has told manufacturers to “be prepared” to give them product designs for both fee- and commission-based annuities, said Scott Stolz, senior vice president at the company.
Pricing will have to become more specific, simplified and straightforward, he added. In the short term, annuity sales are likely to “drop dramatically,” Stolz said, but will bounce back.
One-quarter of advisors said they expect to sell fewer annuities, according to the LIMRA survey.
Many speakers characterized the fiduciary rule as a short-term disruption in an otherwise booming market with immense future potential.
“We’re facing a lot of change in this industry and a huge impact on the annuity market,” Giesing said.
Still, LIMRA reminded industry officials that 10,000 Americans are retiring every day, and the retirement income market is expected to balloon to $25 trillion by 2025.
Americans at or near retirement require an estimated $750 billion in guaranteed lifetime income, Montminy said. That represents a significant opportunity for advisors to work through the new rules and connect retirees with annuities.
“One thing we cannot lose sight of is that the role of the annuity has not changed through this process,” Montminy said.
Injunction Request Deadline This Month
Opponents had until early June to file for an injunction to put an immediate stop to the Department of Labor fiduciary rule.
People fighting the DOL rule say the injunction would delay it long enough to punt the issue into the next administration. Injunctions are difficult to win, however, and opponents must show irreparable economic harm.
The DOL published its rule April 6, starting a 60-day clock to file an injunction.
A stay isn’t the only legal route that opponents have at their disposal. Analysts believe a general challenge would focus on whether DOL followed the proper procedures in promulgating its rule.
The department made substantial changes to the rule before its final version without putting them out for public comment.
A second possibility would challenge the DOL’s authority to change arbitration rules. Instead of traditional arbitration only, the DOL rule would give investors greater power to seek damages through the courts.
As of press deadline, analysts remained bullish on multiple legal challenges.
Meanwhile, opponents in the House of Representatives passed a resolution to block the rule using the Congressional Review Act. It mirrors a resolution of disapproval introduced by Senate Republicans.
The Obama administration vowed to veto any bill seeking to overturn the fiduciary rule.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]