Analyst: VAs Likely to Escape Punitive Aspects of DOL Rule

U.S. Department of Labor (DOL) regulators are likely to soften regulations on variable annuities (VA) with income guarantees in its proposed conflict of interest rule, according to one analyst.

Blake Mock, a life insurance industry analyst with Keefe, Bruyette & Woods, said regulators are receptive to the important differences between mutual funds and variable annuities, and the latter’s ability to generate guaranteed income.

Thursday’s midnight deadline wrapped up a two-week comment period, the second of two written comment periods that began in the spring. The DOL released its fiduciary only rule in April, a proposal designed to quash conflicts of interests regarding advice to retirement investors.

With the written comment period now closed, the next time advisors lay eyes on the conflict of interest rule proposal will come when the final rule is released. Experts say that will come in January or February.

Meanwhile, the House Ways and Means Oversight Subcommittee, chaired by Rep. Peter Roskam, R-Illinois, plans another hearing on the DOL proposal at 10 a.m. Wednesday.

Lincoln Financial, the Radnor, Pa.-based life and annuity giant, has participated in two “productive meetings” with DOL regulators in the wake of hours of public hearings early last month on the proposal, Mock said.

Lincoln’s meetings “were focused on the difference between mutual funds and VAs and the importance of guaranteed income,” Mock said in a Sept. 22 podcast to clients.

“It sounds like the guaranteed income aspect of VAs is resonating with the DOL and changes could be made to the proposal to cause less disruption than we originally expected,” said Mock, an assistant vice president for the life insurance sector at KBW.

Industry proponents have spent the past few days preparing their last comment letters as well, with the Insured Retirement Institute, the main trade group representing the variable annuity industry, working overtime.

“We have met with the DOL throughout this process — most recently as this week — to provide constructive input on how to ensure the final rule does not negatively impact millions of Americans who are trying to build their own pensions for retirement,” said IRI President and CEO Cathy Weatherford in a statement late Thursday.

IRI is looking for the DOL to restore variable annuities under the DOL’s Prohibited Transaction Exemption 84-24. The organization also wants the DOL to change the Best Interest Contract exemption to ensure it does not impede the availability of lifetime income products to savers.

Primerica Inc., the Duluth, Ga.-based distributor of financial services to the middle market, spoke about “a level fee option” under the Employee Retirement Income Security Act (ERISA) 408 G exemption, Mock said.

Such an option, he added, “would allow distributor compensation outside the best interest contract,” one of the industry’s major sticking points with the DOL proposal.

Regulators, public interest groups and labor unions support the DOL proposal, which experts predict will affect variable annuity sales to a greater degree than fixed annuity sales.

Thousands of advisors, however, many of whom already follow a fiduciary standard of care, in addition to thousands of industry proponents, insist the rules are unworkable and will raise costs.

Advisors will leave smaller unprofitable accounts and stick with wealthier clients that allow advisors to make a better living, opponents of the rule say.

Republican lawmakers oppose the proposal and a number House Democrats — as many as 90 Democratic lawmakers at last count — are calling on the DOL to make “improvements” to the draft rule.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at cyril.tuohy@innfeedback.com.