DOL fiduciary rule: Indexed, variable annuities big winners of a proposed delay

Indexed annuity distribution would have been upended in January, but a delay preserves the status quo.

Indexed and variable annuities are the biggest winners of the Department of Labor’s recently telegraphed fiduciary rule delay.

Sales of the products, especially indexed annuities, would arguably have been the most adversely impacted under the original timetable, which had the full regulation going into effect on Jan. 1, 2018.

Limra, an insurance industry trade group, forecast in May that indexed annuity sales — which have been on an almost decade-long run-up — would dip 5-10% this year and another 15-20% in 2018 because of the regulation.

The Labor Department on Wednesday filed a court brief indicating it had submitted a proposal to delay the remaining parts of the regulation by 18 months to July 1, 2019.

“I think the people who are feeling the most relief about it are likely indexed annuity distributors,” said Sheryl Moore, president and CEO of Moore Market Intelligence, a market research firm.

“They were sort of out there hoping for a miracle, and now we got a Hail Mary,” she added. “So they’re definitely breathing a sigh of relief.”

Variable annuity sales, already in the midst of a multiyear slide, were also expected to decline this year by a further 10-15%, according to Limra.

Some parts of the rule, including one broadly expanding the number of brokers and insurance agents serving as fiduciaries when giving investment advice to retirement savers, went into effect in June. But the dominant part of the regulation — its primary enforcement mechanism, the best-interest contract exemption — hasn’t yet taken effect to a significant degree.

As a result, indexed and variable annuities have enjoyed a more lax regulatory regime, which would have continued until January.

Then, however, the whole distribution system for indexed annuities would likely have been thrown into disarray. BICE didn’t provide an easily identifiable route for many independent insurance agents, who originate about 60% of indexed-annuity sales, to continue selling the products on commission.

Now, assuming the proposed delay becomes final, which many observers view as a foregone conclusion, the status quo will be extended by 18 months.

“A lot of people in the insurance world are happy with the delay,” said Jamie Hopkins, a professor in the retirement income program at the American College of Financial Services, who agreed indexed and variable annuity distribution would have been impacted most under the rule’s full force. “Their processes and sales don’t have to change as much.”

Indexed annuity distributors and insurers were dealt a bit of a surprise blow when the fiduciary rule was released in its final form in April 2016. And earlier version hadn’t included indexed annuities under BICE, but instead under a provision many viewed as less onerous and disruptive.

Variable annuities had originally been included in the BICE provision, and observers forecast a sea change for the industry as a result.

As part of the BICE, a contract executed between an investor and financial institution (broker-dealer, registered investment adviser, insurance company or bank) during the sale of an investment product on a commission basis would have made it easier to bring class-action lawsuits against those institutions.

But independent insurance agents, who typically sell indexed annuities through entities called independent marketing organizations, were facing an uncertain future because IMOs weren’t considered to be one of the four “financial institutions.”

Mr. Hopkins believes that the DOL will craft new, product-specific rule provisions during the delay period that would make it easier to sell indexed and variable annuities than under the current wording of the regulation.

“A lot of people are expecting during the one-and-a-half-year delay to see vastly expanded prohibited transaction exemptions,” Mr. Hopkins said. The DOL has already, to a certain extent, telegraphed a new mutual-fund-related exemption.

The BICE contract requirement may also go away, and the “financial institution” requirement along with it. These developments would make the sales environment for both variable and indexed annuities more favorable.