Variable annuities (VAs) with no income guarantees will “probably be eliminated” from individual retirement accounts (IRAs) under the U.S. Department of Labor’s (DOL) proposed conflict of interest rule, a life insurance industry analyst said. In addition, variable annuities with guarantees within qualified retirement plans will “likely be disrupted to some extent,” the analyst continued.
A final version of the rule is expected in the first half of next year.
“While nothing in the DOL proposal explicitly prevents variable annuity sales, the relatively high cost and complexity of the product, disruption to traditional distribution methods, and increased litigation risk could cause headwinds,” Ryan Krueger, head of U.S. life insurance research for Keefe, Bruyette & Woods (KBW), said in a podcast to clients this month.
“We think variable annuity sales with no income guarantees will probably be eliminated from IRAs, although this likely only represents 5 to 10 percent of industry sales,” he said. He also noted that lower variable annuity sales would mean lower asset growth as well.
A 25 percent reduction in variable annuity sales, however, would translate into an estimated negative 2 percent impact on annual incremental earnings per share for Lincoln Financial Group, Krueger said. That same reduction would have a negative 1 percent or less impact on annual incremental earnings for Prudential, Ameriprise and MetLife.
At Ameriprise, where 50 percent of client assets are held in qualified plans and about half of the revenue comes from advisory and financial planning, the greatest impact from the DOL fiduciary proposal would be felt by the company’s advice and wealth management business.
Advice and wealth management generates about one-third of Ameriprise Financial earnings, Krueger added.
The DOL held public hearings earlier this month on its proposal. Many industry representatives used that forum to reiterate their concerns that the rule would restrict investment advice to millions of Main Street investors.
Consumer advocates say the proposal, which has the support of President Barack Obama, is necessary to eliminate conflicts of interest and self-dealing among advisors, a conflict which they say costs investors billions of dollars every year.
The early August hearings, held after the close of the initial written comment period, provided more detail about the DOL’s position. The hearings also have allowed Wall Street analysts to estimate more precisely the economic impact of the rule on life insurance and annuity carriers.
If the DOL proposal makes it more difficult for advisors to do business, it could spur mergers among them or cause many independent advisors to join a larger broker/dealer, some industry leaders said.
“So, I mean, we’re attracting independents back into our franchisee channel for those reasons,” Ameriprise chairman and CEO James M. Cracchiolo said in an earnings call with analysts July 23.
The DOL proposal’s effect on 401(k) plans could also “pose some risk to the proprietary management” of 401(k) assets as brokers would be required to act as fiduciaries on smaller plans with fewer than 100 participants, he said.
A life and retirement services specialist such as Principal Financial Group could find its earnings under more pressure from the DOL’s proposal. Principal Financial manages 57 percent of 401(k) assets in-house and generates 21 percent of 401(k) assets from plans with 100 participants. In a conference call with analysts in July, Principal Financial executives said the company would adapt and adjust.
“We'll take a look at it, we'll adjust, we'll adapt, we'll find a path forward and … I really believe that what's going to continue to happen is market share is going to continue to move from second- and third-tier providers to first-tier providers,” said Larry D. Zimpleman, chairman and CEO of Principal Financial. “And I certainly consider Principal in that top tier.”
Under existing DOL rules, the sale of fixed and variable annuities and compensation received from them are exempt from the Employee Retirement Income Security Act ban on self-dealing, and under the DOL proposal, the exemption for fixed annuities would remain in place.
The sale of variable annuities into IRA accounts, however, would be subject to “reasonable compensation” limits of what the DOL calls a “best interest contract exemption.”
Representatives of the variable annuity industry are fighting hard to have the DOL include variable annuities in the same category as fixed annuities. Brian Gardner, a strategies and public policy analyst with KBW, said “I think there may be some flexibility on keeping variable annuities under the current exemption along with fixed annuities.”
“During the hearings, the industry was critical of the proposal but I think there may be more constructive dialogue going on behind the scenes,” Gardner added.
He predicted that the final rule would be released sometime in the first or second quarter of 2016. However, he indicated that a government shutdown over the 2016 fiscal year budget impasse would make 2016 “a more likely target.”
Congressional critics of the rule could block or delay the rule through budgetary levers, but Gardner said that would be unlikely.
“I think Democrats would be reluctant to vote against the Obama administration and a vote against a ‘best interest’ rule for retirees would be politically unpopular,” Gardner said in the podcast. “It could even fuel a challenge to a Democratic lawmaker in the Democratic primary.”
“Second, I expect Congress will be unable to pass the usual package of funding bills — there are 13 of them — and instead will have to pass a comprehensive funding bill known as a Continuing Resolution, or C.R.,” he also said.
“C.R.s usually do not have the policy rider, such as the one to block the DOL so I don’t expect Congress to intervene in the coming months,” Gardner said.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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