Two of the largest variable annuity product manufacturers are ceasing the sale of some L-share VAs, which have attracted the watchful eye of regulators and whose suitability has been further questioned given new Labor Department regulations governing investment advice in retirement accounts.
Jackson National Life Insurance Co. and Pruco Life Insurance Co., an annuity unit of Prudential Financial Inc., have announced the closure of L-share sales in certain variable annuities, according to filings with the Securities and Exchange Commission.
Prudential — the
No. 6 seller of variable annuities last year, with $8.7 billion in sales — is no longer making its Premier Retirement L Series contracts available for purchase,
effective August 8.
Similarly, Jackson National — which, with $23.1 billion in sales, was the VA leader in 2015 — closed its Perspective L Series contracts to new purchasers
as of July 11.
Rodney Branch, senior vice president of product and marketing for Prudential Annuities, said the move is reflective of the current market environment and the firm's broader product and marketing strategy.
“We routinely assess the marketplace, evaluate the risk and review our product offerings," Jackson spokeswoman Elizabeth Kosar said in an emailed statement.
“The fact that these big players are eliminating them is fairly significant,” Steven McDonnell, president of market-research firm Soleares Research, said.
Variable annuities sold in an L share are becoming more unpopular among insurers because broker-dealers don't want to sell them, according to Tamiko Toland, the managing director of retirement income consulting at Strategic Insight.
“It's less about the manufacturers and more about the distributors,” Ms. Toland said. “If their partners say, 'We don't want to do this,' then the easiest thing is to say, 'Fine, we're just going to stop selling these products.'”
“I think it's clear the door is closing on L shares,” she added.
In February, independent broker-dealer Commonwealth Financial Network
disallowed the sales of L-share VAs by all brokers in its network.
“We have recently learned that some insurance carriers have discontinued or will be discontinuing the offering of the L share class of annuities. It has also been widely publicized that this share class is coming under increased scrutiny from regulators,” Jim Adelman, senior vice president and general counsel, said at the time of the announcement.
In June 2015, Voya Financial Advisors
restricted its registered representatives from selling those types of VA contracts if they include riders.
L-share variable annuities carry shorter surrender periods, traditionally around four years, than other types of share classes such as a B share, which typically carry a seven-year surrender-charge schedule, analysts say. A typical L-share variable annuity also has higher ongoing base contract charges and carries a trailing commission, whereas a traditional B share has lower charges and doesn't carry a trail.
L shares sold with living benefit riders, meant as a long-term income play in retirement, may not make sense for many investors, who pay more for earlier liquidity but buy the product with the long term in mind, analysts say.
The Financial Industry Regulatory Authority Inc., the industry-funded broker-dealer watchdog, announced in early 2015 that variable-annuity sales practices would be a target in its regulatory and exam priorities, particularly those relating to L shares.
“If Finra is paying attention to it, [broker-dealers] don't need that trouble,” Ms. Toland said. “If they can sell something else that will attract less attention from a compliance standpoint, then why not do that?”
Plus, the Department of Labor's fiduciary regulation
could restrict their sales in retirement accounts even more, as brokers and advisers are pressured to ensure investment recommendations are in clients' best interests.
The variable annuity industry has seen
several consecutive years of sales losses in 2015, with $133 billion in total sales, and the industry group Limra is
forecasting another 15% to 20% drop for this year.
“The reality is there will be a lot of different approaches to remaining compliant with DOL, but making the L share work with that is a lot tougher,” Ms. Toland said.
