Annuity behemoth Jackson National Life Insurance Co. is currently developing its first-ever fee-based variable annuity product, offering a hint as to where the annuity market could be headed due to the market shake-up caused by a new Labor Department regulation affecting retirement accounts.
The Department of Labor's fiduciary regulation, which raises investment advice standards in retirement savings vehicles such as 401(k)s and IRAs, is expected to
negatively impact sales of variable annuities sold on a commission basis in qualified plans, due to the
additional compliance and litigation risk associated with such a transaction.
Experts have said fee-based annuity contracts, in which an adviser charges a level “wrap” fee on assets under management, will become more popular as a result, because these products wouldn't share a similar burden as commission products.
“Based on Jackson's ongoing conversations with our broker-dealer partners, we think the legal/compliance costs of managing a commission-based platform under the U.S. Department of Labor (DOL) proposal will result in more demand for fee-based variable annuity (VA) products,” spokeswoman Elizabeth Kosar said in an e-mailed statement.
'THE FUTURE'
Jackson National was the
U.S. variable annuity sales leader last year, bringing in more than $23 billion in individual annuity sales, almost double No. 2 player TIAA-CREF, according to Limra. The insurer's new product,
Perspective Advisory, is anticipated for launch Sept. 19 this year.
Aside from producer compensation being fee-based, the annuity has low contract charges (30 basis points for mortality, expense and administration costs), a range of optional living and death benefit riders, and a relatively short surrender-charge period (three years).
“I think this is the future of the variable annuity space,” said Judson Forner, vice president of investment marketing at ValMark Securities Inc., an independent broker-dealer.
Fee-based variable annuities aren't anything new — registered investment advisers tend to use them primarily for
tax deferral and low contract costs, rather than for any sort of living benefit features readily available in the commission market.
They make up only a small fraction of total VA sales, and as such insurers haven't focused much on product development in the fee-based realm, Mr. Forner said.
The Jackson contract is unique in that, unlike other fee-based products, it offers living-benefit options and could be a sort of pivot product for those advisers and brokers shifting toward a fee arrangement with clients, according to Steven McDonnell, president of Soleares Research, which provides variable annuity market research.
“This product has the full-blown living benefit menu, a lot of death benefits, with the low fees. So I think this might be for advisers who might be migrating toward the fee-based model more recently,” Mr. McDonnell said.
The fairly short surrender period of the contract offers a certain amount of liquidity to contract holders, which makes it investor-friendly when coupled with low contract charges, said John McCarthy, a member of Morningstar's adviser practice management group as well as the firm's DOL task force. Advisers would overlay their advisory fee on top of other contract expenses, he said.
OTHER INSURERS
Although Jackson National is early to the scene with its product, annuity experts expect other insurance companies to follow suit.
“I think it's probably the first of many,” said Samantha Chow, senior life and annuities analyst at Aite Group. “I think carriers will try to figure out the most creative ways to kind of get around this DOL ruling without hurting themselves or the relationship they have with the broker or adviser.”
Mr. McCarthy agreed, saying there will be a big focus on fees and product cost due to the DOL's fiduciary rule, so the market should expect insurers' products to be adjusted accordingly.
“It wouldn't be unreasonable to expect a flurry of filings,” Mr. McCarthy said.
