DOL fiduciary rule continues to take toll on annuity sales

The Department of Labor fiduciary rule and the interest-rate environment delivered a one-two punch to annuity sales last year, pushing them down for the third consecutive year.

Compared with the previous year, overall annuity sales dipped 8% in 2017, to $203.5 billion, according to the LIMRA Secure Retirement Institute, which tracks insurance data. All major product lines were in the red.

“One of the biggest impacts we saw was from the regulatory side of the business, particularly with the DOL fiduciary rule,” said Todd Giesing, director of annuity research at Limra.

The fiduciary rule, which was partially implemented in June, raises investment-advice standards in retirement accounts such as 401(k)s and IRAs. One of the goals of the Obama-era regulation was to curtail conflicts of interest that may exist when brokers sell financial products for a commission, as they predominantly do with annuities.

The fiduciary rule, major parts of which have been delayed until July 2019 and may be changed by the Trump administration pending a review, led to uncertainty among insurers and distributors such as broker-dealers, which contributed to a disruption in annuity sales, Mr. Giesing said.

Annuity sales into IRAs were down 13% in 2017, whereas those in non-qualified taxable accounts — which weren’t directly affected by the fiduciary rule — were down only 1%.

Variable and indexed annuities were the hardest hit among annuity types, with annual IRA sales down 16% and 9%, respectively, said Mr. Giesing.

He expects sales to be flat or up marginally in 2018, amid persistent market uncertainty surrounding the DOL fiduciary rule, a potential fiduciary rule from the Securities and Exchange Commission this year, and a swelling number of states pushing for their own fiduciary regulations.

“Nobody knows at the end of the day what their new world is going to look like, and that’s created some tentativeness out there in terms of use of annuities,” Mr. Giesing said.

Interest-rate movements and forecasts also seem to have spooked investors out of handing their money over to insurance companies for some annuity products.

The U.S. yield curve — the spread between short- and long-term interest rates — flattened dramatically in 2017. With short-term interest rates drawing closer to those over longer time periods, such as 10 years or more, locking money up in a deferred annuity appeared less attractive to investors on a relative basis.

In addition, the Federal Reserve forecast three interest-rate hikes in 2018, and some economists believe four may be in store.

Investors likely stashed money in liquid or semi-liquid fixed-income products, such as money-market funds or shorter-term certificates of deposit, as a “parking lot” in anticipation of more attractive rates on longer-term annuity products in the future, Mr. Giesing said.