By Kim O’Brien
Does that headline sound familiar? It should because more than likely it will be the next response to opposition of a soon-to-be-introduced Fiduciary Rule from the Department of Labor.
Make no mistake, this not about protecting consumers, modernizing public policy or anything else. This is about federal regulation of annuities sold in 401(k) plans and other employer-sponsored retirement plans. While there are other financial products used inside these plans, annuities are specifically being targeted.
Not convinced? Here are President Obama’s own words at a Feb. 23 AARP event: "If you are sick you do not want your doctor to tell you what is suitable ... you want what is best." He goes on to tell a story about a couple that “got bad advice to invest in expensive annuities that made it hard for them to access their money.”
Still not convinced? Here is what Lindsay Holst, the director of Digital Content for the Office of Digital Strategy had to say on the White House Blog: “Under our current system, your advisor can accept a back-door payment or hidden fees for directing you toward a retirement plan that's not in your financial best interest. And it's completely legal.”
What she’s talking about is commissions and other non-fee-based compensation. The Blog also gives us some clues that the new Rule will likely sink its claws into IRAs (as did the first rule, which the DOL withdrew in 2011). “On average, these conflicts of interest result in annual losses of about one percentage point for affected investors. One percent a year may seem small -- but you'd be surprised at how quickly it adds up. Let's look at an example: Meet Stella, a 45-year-old worker who is rolling her $100,000 401(k) into an IRA. If she gets conflicted advice from her broker -- exactly the kind of advice that's legal for them to give right now -- she could lose an estimated $37,000 by the time she turns 65.”
On a side note, isn’t it ironic that our industry must disclaim and caveat every assumption used in this example and the White House does not? But I digress…
WHY THIS MATTERS! Because it is not-so-subtly changing the landscape of regulation and oversight from the state insurance departments to a nationalized federal model. It will impact compensation/commissions, distribution systems, and compliance costs. It wouldn’t be surprising if it’s called the “Affordable Retirement Act” to help sell it to the American public.
We have ample evidence that when government says we are “modernizing” something it means it will be become more expensive and less accessible. To the advocates of the Fiduciary Rule who claim or have “research” to suggest this is not true we ask:
1. How can a captive annuity broker justify the fiduciary standard is met when they only have one company’s fixed annuity product to offer?
2. How can an independent broker prove they are putting their client’s interest first when their BD has “approved” only three fixed annuities?
3. How much will the fees need to be to give advice to cover the broker’s cost of a $25,000 rollover?
4. How much will interest payments be reduced because annuity companies must pay for the costs of implementing a second compliance standard and “modernizing” their distribution system?
Simple logic tells us the answers to these questions are that consumers will have fewer and less competitive annuity rollover choices and fewer brokers will be able to serve the fixed annuity IRA marketplace. In addition, middle and lower income customers will have to pay money out of their own wallets to roll their retirement savings from their employer to a fixed annuity.
Rollover costs are most damaging to annuity buyers. Today if you roll your 401(k) into a fixed annuity, you don’t have to pay any money out of your own pocket. How many middle income and lower income savers have extra cash on hand to pay these fees?
Finally, if the sale of a fixed annuity is considered “investment advice” under the rule and therefore subject to the fiduciary standard, how far are they from declaring it a security? And, if the sale of a fixed annuity is considered “investment advice,” will the annuity salesperson also be under the jurisdiction of the SEC and/or the state security department in addition to the state insurance regulator and FINRA? How is a claim adjudicated or arbitrated? Must we enact the rule to see what’s in it?
Our first order of business is to change the mindset that selling a fixed annuity constitutes “investment advice.” The sale of an annuity involves providing insurance advice and we must retain ERISA’s existing exemptions to investment activities. Those exemptions are appropriately selling fixed annuities.
We must work with other opponents that want a “bigger fix,” but we cannot be silent. Our position is simple: fixed annuities are insurance products and the advice given to buy an annuity for income you can’t outlive and guaranteed protection from market losses constitutes sales activity and not investment activity!
We must make sure the existing annuity exemption is retained in any new rule so that those who like their broker can keep their broker… PERIOD.
Kim O’Brien, The Annuity Advocate, was president and CEO of the National Association for Fixed Annuities annuities for 12 years. Before then, she worked in the industry in many capacities, including product development. Contact Kim at firstname.lastname@example.org.
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