Annuity regulation comes into focus, but more to come

The regulation of annuities is proceeding down two tracks that could come to a head very soon. There is no doubt on which side industry stands.

Several industry trade association groups are big supporters of the "best interest" model created by the National Association of Insurance Commissioners. It has strong momentum in state insurance departments.

Meanwhile, the Department of Labor is expected to unveil its latest attempt at a fiduciary rule by the end of the year.

Jim Szostek is vice president and deputy, retirement security for the American Council of Life Insurers. He will talk about both regulatory efforts today at the LIMRA Life and Annuity Conference in Salt Lake City.

"A best interest standard is better," he said in an email to InsuranceNewsNet prior to the conference. "It protects consumers, without making access to financial products inaccessible for working-class Americans."

Regulation winning converts

Earlier this month, Washington and Wyoming became the 35th and 36th states to adopt the NAIC best interest standard for annuity sales and recommendations. States have swiftly responded to lobbying efforts that ramped up following the 2020 model adoption by insurance commissioners.

It mirrors the best-interest regulation adopted by the Securities and Exchange Commission in 2019 for broker-dealers and registered representatives.

"The SEC rule and NAIC model provide a robust framework that protects Americans planning and saving for the future and managing their retirement nest eggs," Szostek said. "Unlike a fiduciary-only approach, like the one vacated by a federal court in 2018, these measures make certain that all savers, particularly financially vulnerable middle-income Americans, can access information about different choices for long-term security in retirement."

DOL still working

The momentum behind a best-interest standard is nearing coverage across the United States. But the DOL is lurking and a new fiduciary effort is a wild card.

The Trump administration left a surprisingly strong investment advice rule, which the Biden team allowed to take effect. A Florida court struck down a portion of the rule guidance earlier this year. The DOL is appealing that decision.

The Investment Advice Rule has two main parts: a new prohibited transaction exemption allowing advisors to provide conflicted advice for commissions; and a reinstatement of the "five-part test" to determine what constitutes investment advice.

Separately, the Biden DOL is working on a new definition of fiduciary. One expert recently predicted the new rule will be published by the end of the year. It will surely face lawsuits similar to the legal challenges that defeated the 2016 Obama administration fiduciary rule.

"Fiduciary-only advisors generally require account holders to invest at least $100,000 up front, which is more than many working-class Americans have in retirement savings," Szostek said. "It is also worth noting that fiduciaries charge a fee for advice, generally an ongoing basis based on assets under management. This works for those with significant assets. But it doesn’t work for most working-class families who are most likely to benefit from income guarantees in retirement through an annuity."

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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