Despite the widespread reporting that the final Rule made significant concessions to “industry,” Americans for Annuity Protection maintains the real effect will obstruct Americans ability to move their qualified money easily and cost-effectively to annuities. Access and affordability must be maintained and the final Rule does little to help American annuity savers.
In fact, there are still considerable problems with the Rule that will disrupt the annuity marketplace for consumers seeking the insurance guarantees of annuities and create more costs for consumers with less access to advice.
THE FIVE BETTER
While there are no BEST outcomes, there are some that are better than the proposed Rule.
ONE: Fixed Rate Annuities
Fixed rate annuities (the agents/brokers who sell them) are treated as Insurance Products, but fixed indexed annuities (FIAs) have been carved out and treated like variable annuities.
The DOL says it considers an annuity a fixed annuity under PTE 84-24 only if it offered benefits that “do not vary, in part or in whole, based on the investment experience of a separate account or accounts maintained by the insurer or the investment experience of an index or investment model.”
This determination appears to be contrary to the US District Court of Appeals ruling that stipulated “FIAs are not akin to variable annuities, not securities, and not subject to regulation under SEC proposed regulation 151A.” It also appears to be in conflict with Dodd-Frank and the Harkin amendment definition of a non-security fixed annuity.
TWO: Implementation Period
The Department extended the first phase of implementation to one year after publication of the final rule which means April 10th 2017. That means annuity professionals may sell all existing products until April 9, 2017 and those product sales will be grandfathered - see below.
The full BIC and PTE disclosure provisions, the policies and procedures requirements, and the contract requirement go into full effect on January 1, 2018.
The disclosure requirements in the final Best Interest Contract Exemption are significantly streamlined.
Requirements to include projections (1,5 and 10 year) and the annual disclosure requirement, have been entirely eliminated.
The WEB disclosure requirement was also streamlined and individualized information about advisors is not required.
FOUR: Data Retention
The Department has removed the burdensome and unnecessary record-keeping requirements and the final Rule requires that firms only need to retain the records that show they complied with the BIC or other exemption.
FIVE: Grandfather Relief
New grandfathering provision allows for additional compensation based on recommendations made prior to the Applicability Date.
It includes compensation from recommendations to hold, as well as systematic purchase agreements, but requires that post-Applicability Date, additional advice must satisfy basic best interest and reasonable compensation requirements.
ONE: BIC – Best Interest Contract
Throwing FIAs recommendations under the BIC bus is an extremely capricious move. In doing so, the Department bypassed due process by not allowing Americans to comment and the Administrative Order requiring the agency to complete a cost/benefit analysis on the impact of their Rule. Clearly, the move did not honor the promise of transparency.
This means that FIAs are treated like VAs under ERISA and potentially exposes them to security regulation through re-characterization under ERISA law.
Additionally, the BIC requirement was eliminated for ERISA plans; it only applies to IRAs and other non-ERISA plans. This concession to the 401(k) marketplace creates an un-level playing field between 401(k) advisors and IRA advisors. Favoring the 401(k) advisor at the expense of the private insurance market, limits consumer’s ability to move to portable, aggregated and self-owned IRAs.
While, the contract must provide for a private course of action (aka a lawsuit), it must not require arbitration. This creates a boon for lawyers, uncertainty for industry and extreme liability exposure for insurance companies. It is a suckers bet if you believe that the uncertainty of class action lawsuits and litigation exposure won’t translate to higher costs and/or less savings benefits for consumers.
TWO: Reasonable Compensation & Prohibited Compensation
Reasonable compensation is still not defined or clarified, leaving any determination to court actions on individual players.
Prohibited compensation does not appear to be any more clarified. Given the fact that prohibited compensation makes the entire transaction prohibited, creates enormous uncertainty and exposure to lawsuits as well as excise taxation.
Both areas need more clarification to help firms comply with the Rule and not be exposed inadvertently and, in all likelihood, without intent to a prohibited transaction.
THREE: Fiduciary definition
Under ERISA law, which is different than the Uniform Security law, the definition of a fiduciary is he or she must act in the prudent and SOLE INTEREST OF THE CLIENT. This seems to conflict directly with the annuity insurance sale because the annuity advisor and carrier must operate under the laws of Agency, requiring the annuity professional to owe a contractual duty to the insurance company. How can an agent act in someone’s SOLE interest if they are also legally bound by contract to serve another party? As our good friend Jim Mumford, former Iowa Deputy Commissioner often quoted, the law can’t serve two masters.
FOUR: The Excise Tax
A prohibited transaction – one that involves unreasonable compensation, prohibited compensation or does not materially disclose a conflict(s) of interest – would be subject to a separate excise tax by the IRS. This can be up to 100% of the “prohibited transaction,” which in the annuity world probably means the annuity account value. So, a $100,000 annuity that is deemed a prohibited transaction, can mean the advisor has to pay out of his or her own pocket $100,000 in excise tax; which is in addition to returning the annuity value amount to the customer.
The Department also revised the final rule to allow asset allocation models and interactive investment materials to identify specific investment alternatives under ERISA-covered and other plans if certain conditions are met.
However, references to specific investment alternatives for IRAs are not treated as education under the education provision in the final rule.
So ERISA plans is exempt but IRAs are not. Not allowing agents and advisors to explain the different benefits and aspects of an IRA choice without forcing them into a complicated contract relationship isn’t helpful to consumers who are trying to learn about annuities, weigh their options with other financial choices and consider where they want to save.
We had hoped for so much more from the Department in terms of understanding the insurance nature of annuities and the harmful impact to retirement savers under this Rule. However, there is a rainbow to be found. In other words, the Sun WILL Come Out Tomorrow. With the FIA decision the Department made a substantive and irrevocable change to the proposed Rule without any impact analysis or due process for comment on that change.
There has been much reporting about the potential of interested parties litigating this Rule. Americans for Annuity Protection supports and is actively engaged in litigation efforts. While the Department appears to have made concessions around the margins, the devastation to the IRA annuity marketplace is still a clear and present danger to the very consumers it has declared to help.
With lifetime income guarantees and protection from market losses, while at the same time maintaining access to your annuity funds -three benefits not available in other financial products - fixed indexed annuities may be the only opportunity Americans have to save for retirement. So stay tuned in, stay engaged and subscribe to Americans for Annuity Protection and make sure you do your part to protect your clients’ opportunities for annuities.
Kim O’Brien is the vice chairman and CEO of Americans for Annuity Protection. She has 35 years of experience in the insurance industry. O’Brien served The National Association for Fixed Annuities (NAFA) for almost 12 years and led the organization to defeat the SEC’s Rule 151A.
Contact Kim at firstname.lastname@example.org.
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