United States of Annuities
Talk about strange bedfellows. The federal government, courtesy of proposed regulations and rulings from the Departments of the Treasury and Labor, has started encouraging Americans to consider using annuities to help create a lifetime retirement income.
That sounds like the makings of a healthy relationship with good feelings flowing from both the government and the industry. But how does it play out for independent agents and advisors who recommend and sell annuities in the individual market? After all, the measures focus on the retirement plan market, so what’s in it for them?
And, not to be overlooked, the moves have a “federal” stamp on them. Things federal don’t exactly sit well with many advisors, especially those who remember the Securities and Exchange Commission (SEC) effort a few years ago that would have prevented non-securities licensed producers from selling fixed indexed annuities. That controversial Rule 151A failed, but advisor distrust of big government still lingers. And it is being stirred up again this year by proposals to impose new taxes on contributions to retirement plans and IRAs and new taxes on life insurance sold to businesses.
So what will the government’s new initiatives on lifetime income options and annuities mean? Should the independent producer embrace the measures or keep them at arm’s length?
To sort this out, let’s review what the Treasury and Labor documents entail first. There are proposed regulations and there are final rules—and the provisions in both are extensive. Some of the key annuity provisions include:
• A Treasury proposal to “encourage” the inclusion of partial annuity options in employer-based retirement plans, making it easier for workers to split funds in their plans between cash and a lifetime income stream from an annuity.
• A Treasury proposal to make it easier for workers to use part of their retirement accounts to buy longevity annuities (deferred income annuities (DIAs) that start their payouts many years after retirement, typically at age 85).
• An Internal Revenue Service (IRS) ruling that clarifies plan rollover rules involving purchase of annuities.
• An IRS ruling that clarifies protection of spousal rights involving purchase of longevity annuities as well as other deferred annuities in 401(k) plans.
• Labor department final rules that provide for increased transparency about costs and fee disclosure in retirement plans.
None of this is mandatory on retirement plan sponsors. Rather, the various provisions are designed as “guidance” that will remove obstacles to including annuities with retirement plans.
Praise, Indifference and Concern
On the very day the government announced those initiatives, two Washington-based insurance trade groups—the Insured Retirement Institute and the American Council of Life Insurers—issued statements lauding the annuity proposals. Other trade groups followed, including the Retirement Income Industry Association, the Defined Contribution Institutional Investment Association and others.
The praise was certainly expected. After all, such organizations include among their members some big insurance carriers, most of whom serve the institutional retirement plan market. The organizations and the carriers themselves had actively supported the need for regulations that will help increase lifetime income options for American workers. This was a good day for them.
On the independent agent and broker side of the fence, however, reaction has been muted. That is partly because the annuity provisions focus mostly on employer retirement plans—not on the individual annuity market which the advisors serve.
Skepticism about the federal government may play a role in the agent’s subdued response as well. So might the fact that industry associations, including leading agent groups, have other issues on their plates. Right now, that includes renewed efforts to derail any federal measures that would reduce tax incentives for consumers to invest in retirement products, including annuities.
But some annuity experts have been studying the Treasury and Labor measures’ possible impact on the individual annuity marketplace. Their collective wisdom: independent producers could benefit from the measures.
The Plus Side
The government actions could create a lot of energy around annuities in terms of renewed credibility and reinvigorated sales—and yes, even in the individual market. Take a look at how the experts reached this conclusion:
Positive image. The actions by Treasury and Labor amount to a “huge endorsement” of annuities and of the message that “you, as a consumer, need to protect yourself” from the risk of outliving your assets, points out Michael Pinkans, senior vice president of marketing at Zenith Marketing Group.
That could be a powerful antidote to all the negatives that critics heaped on annuities a few years back and could sway some consumers to give annuities a second look, experts say.
Annuity analyst Jack Marrion predicts that the institutional side of the market will benefit the most from the government actions because the annuity provisions focus on needs of employer retirement plans. But that doesn’t mean independent agents won’t also benefit, says Marrion, president of Advantage Compendium. In fact, he says, “the proposals are pro-annuity and should be used by agents to point out that ‘even the federal government supports the use of annuities in retirement planning.’ ”
Douglas I. Friedman, principal of the law firm Friedman & Downey, adds that “any discussion of annuities in plan materials is a help to annuity sales.” As for Labor’s disclosure rules about fees and costs, “if it makes information easier to find, as this appears to do, it can only be helpful,” he says.
A whole new market. The initiatives have opened up another opportunity for making a sale as well as opportunities to do some planning, Pinkans says. For instance, although independent advisors could always offer workers partial and full rollover IRA annuities, now they have the government’s endorsement of annuities to help them, he says. They will also have the government regulations to give more support to partial annuities than previously was the case, he adds.
A reason to educate and advise. Retirement plans have routinely provided information about the monthly payments for the options they provide, allows Friedman in an email. “But I would be surprised if they would want to do the testing needed to help a participant determine what the monthly payout would be—for example, if a participant takes his 401(k) as a 30 percent annuity versus a 60 percent annuity, or an annuity at 30 percent for life versus one at 40 percent that is joint-and-survivor.”
Someone has to help the customer evaluate the alternatives, he continues, and that someone could be the agent. “More complexity means more need for explanation,” Friedman explains. “Here, I would expect that an agent could help estimate the monthly payments from the various alternatives, consider a participant’s income needs at various points during retirement, and then illustrate the numbers to help the participant make a decision.”
Some analysts have suggested that the federal initiatives could, if implemented by the plan sponsor, make decision-making easier for workers, so they won’t even need independent advisory services. However, Pinkans thinks certain workers will indeed want to obtain independent expertise. “People don’t know where to turn when they enter retirement,” he explains. “But independent advisors can weave all the pieces together for the worker. Advisors can also use annuity calculators available in the industry to help find guaranteed income values for clients.”
In addition, independent advisors can review all the options available to the client, not just the ones offered by the employer, he says.
Innovation potential. The overall market will benefit from greater innovation, predicts Keith Newcomb, principal and certified financial planner with Full Life Financial. That’s because the initiatives will reduce government restrictions on what employers and plan participants can do with their retirement plans, he says.
“That makes for a more free market, and free markets support innovation—and that’s good for business and for consumers.”
Cost and fee transparency. The Labor department’s rules to increase cost and fee transparency will be good for advisors as well as customers, Newcomb maintains. That’s because objective information will be available to plans and plan participants and, by extension, to the advisors who serve them. This information will put the advisor in a better position to help clients decide, say, whether the in-plan annuity option is good for the client or not, Newcomb predicts.
No Bed of Roses
As positive as all that sounds, the Treasury and Labor initiatives won’t necessarily create a bed of roses for independent agents. That’s because several thorns may lie among the petals:
Level playing field. One area of concern has to do with whether there will be a level playing field for annuities that are sold inside a retirement plan (in-plan annuities) with those sold when a participant rolls money from a 401(k) into an IRA annuity outside the plan, Newcomb says.
He points to the Treasury proposal involving longevity annuities. The proposal says that workers who buy a longevity annuity inside their 401(k) plans would be exempt from making required minimum distributions (RMDs) on the money put into that annuity. This proposal caps the amount available for RMD relief to 25 percent of the retirement account value, not to exceed $100,000. RMDs are the distributions that retirees must start taking from their defined contribution plans after reaching age 70.5.
The proposed regulations say that workers who choose to roll 401(k) money into an IRA and buy a longevity annuity of their choice within the IRA will also be able to benefit from the RMD relief, Newcomb points out. “But agents will need to work diligently to be sure that the final version of the regulations keeps that provision in place, so that the playing field will be level. That will preserve flexibility for the client and enhance competition.”
Licensing issues. Agents who want to talk with customers about rolling money out of 401(k)s and into rollover IRA annuities or partial IRA annuities or any insurance product will need to do so within the boundaries of the licenses they hold, cautions Pinkans.
That has always been the case. Agents, however, who are not securities licensed but want to take advantage of some of the new opportunities should partner with someone who does have a securities license, he says. “Either that, or just don’t have the conversation.”
The only other option for these agents would be to become dual licensed as both an insurance agent and a securities rep. But that will take time and money—and some agents won’t want to expend either—a decision that Pinkans says could limit their options in this market.
Know the available income solutions. Advisors who are already dual licensed can discuss a variety of income strategies and solutions with workers. But that means the advisor needs to keep abreast of the options as they come out.
In today’s market, for instance, it may look as if rolling some of the 401(k) money into a fixed indexed annuity in a rollover IRA would be the best bet for clients with a long term horizon, Pinkans says. “In fact, for some clients, that may be the best thing to do right now, and well before the client retires.” And a dual-licensed advisor could do that for the client.
The advisor should, however, keep an open mind, Pinkans stresses. “It could be that a traditional fixed annuity, a variable annuity or some other option would be better. And if the person already has an in-plan annuity, the advisor should check the payout and compare it to the other options.”
In addition, advisors will need to be ready to address criticism over using annuities in qualified plans. The complaint continues to be that this strategy puts a tax-deferred product into a tax-deferred wrapper and there are costs associated with that, says Friedman, the attorney. His suggestion is that agents prepare themselves to offer the counter-argument, that “annuities have features such as lifetime income provisions that cannot be duplicated anywhere.”
Competency issues. There is no way around it. Agents, advisors and planners will need to develop greater competencies in order to provide advice to consumers who will be affected by the Treasury and Labor initiatives, says Newcomb.
For example, the availability of more choices along with more cost and fee information means that advisors who work with plan participants may need to develop greater quantitative competencies than they now have.
Annuity companies that develop products to compete against the in-plan annuity options will probably develop calculators and applications to help the agents compete in this manner, he allows. But the agents will still need to know how to apply those applications to the client’s situation.
Fiduciary issues. The Department of Labor’s rulemaking efforts to expand the scope of fiduciary responsibilities to more advisors who give advice will give shape to the competency issue, Newcomb predicts. The rulemaking activities are not part of the new Treasury and Labor initiatives, he allows, but he predicts that the fiduciary issues will impact independent agents and advisors who provide advice related to in-plan annuities, rollover IRA annuities and related matters.
Efforts exist to keep fiduciary issues out of the world of IRAs, Newcomb allows. But the issue could still trickle over to agents in the IRA rollover market, especially if the goal is to offer a level competitive playing field between providing advice on in-plan annuities and rollover annuities, he says. It may be that the independent agents who want to compete in this market will need to accept the same fiduciary responsibility to IRA owners as registered investment advisers have.
“Advisors who don’t want to accept that responsibility will find their world getting smaller and smaller,” Newcomb predicts.
Brace for greater competition. Agents may face greater competition as the Treasury and Labor initiatives begin to take effect, cautions Marrion. For instance, managed money advisors who advise on clients’ plan assets as well as individual holdings could decide it’s time to strengthen their position with clients who have 401(k) plans.
Instead of watching their assets being sold by dual-licensed annuity agents and then turned into IRA annuities, “the managed money mavens may decide to wrap lifetime payout annuities around their client’s funds,” he says. “That way, both they and the consumer can receive lifetime income—and the agent will be left out in the cold.”
Putting It Together
Putting the pros and cons together, it looks as if the Treasury and Labor initiatives could be a mixed bag for independent agents and brokers in the individual market. Advisors will have increased opportunities—but they may also come to view their annuity bedfellow with a guarded eye.
As Pinkans puts it, “some government body might decide to launch new efforts to regulate indexed annuities. Or efforts could be made to put certain annuities under the Employee Retirement Income Security Act (ERISA), and say ‘now you are regulated under ERISA’.”
Then again, he says, “those things might never happen, because annuities today are more heavily regulated than even two years ago, for suitability, disclosure, product training and more.” Since the jury is still out, his suggestion for now is to think of the annuity initiatives as measures that will open up new market opportunities for those producers who choose to take advantage of them.
How Annuity Initiatives Affect Independents
- The measures amount to a federal endorsement of annuities and their lifetime income features.
- The measures will create a new reason to educate and advise workers who have retirement plans.
- The measures will open up a whole new market
- for advisors.
- The measures will probably spark more innovation in annuity products.
- The measures’ cost/fee information can help
- advisors advise clients
- on their options.
- Advisors will need an increased ability to quantify alternative strategies.
- Work to ensure that the final version of the regulations foster
- a level playing field.
- The type of license the advisor holds will impact what the advisor can say and do.
- Advisors will have a greater need to stay abreast of existing and new retirement income options.
- Keep watch for efforts to
- apply fiduciary standards to
- advisors who do rollover IRAs using annuities.
- Brace for greater competition from other advisors such as money managers.
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