Annuities selling strong, but for how long?

On the surface, everything is A-OK in the life of an annuity producer. Huge numbers of Americans are at or nearing retirement age, annuities are selling like umbrellas at the beach and retirement plan rules are evolving to boost those sales even higher.

But dark clouds are not just lurking — they sit directly overhead and threaten to drop buckets of rain on producers.

The dark clouds, of course, are from the Department of Labor’s Retirement Security Rule. It is the department’s fourth swing at sweeping nearly all annuity producers into a fiduciary standard.

As of press time, the new fiduciary standard is set to take effect on Sept. 23, when annuity producers will need to adhere to the Impartial Conduct Standards. They include the agent gives advice that is in the best interest of the participant, receives no more than reasonable compensation and makes no materially misleading statements.

Compliance with these initial standards is no small ask of independent producers, said Fred Reish, partner at Faegre Drinker and a longtime expert on the Employee Retirement Income Security Act law.

“Insurance companies and intermediaries will need to help independent producers with the initial compliance requirements” of the ICS and fiduciary acknowledgment, Reish said.

Satisfaction of the duty of care and the duty of loyalty for rollover recommendations will be the most problematic [compliance requirements].
Fred Reish, partner at Faegre Drinker

“Of those, satisfaction of the duty of care and the duty of loyalty for rollover recommendations will be the most problematic,” Reish explained. “That is a big change and will require education and information support for independent producers.”

For sure, legal battles are coming. But analysts say the insurance distribution world cannot rely on the courts to stop the fiduciary rule yet again. In its 476-page rule, the DOL takes meticulous care to address every fault found by the U.S. Court of Appeals for the Fifth Circuit in its 2018 decision vacating a previous fiduciary standard.

Yet, “the underlying rule is still probably violative” of the Fifth Circuit ruling, a Midwestern insurance executive said.

Sales unaffected by rules changes

While the rules are changing and stress is high, Americans continue to buy annuities in numbers never seen before. And it’s not merely producers frantically pushing out sales before the rules change; Americans genuinely love annuities.

First-quarter 2024 sales of $113.5 billion were 21% higher than in Q1 2023 and the highest first-quarter results since LIMRA started tracking sales in the 1980s, the organization said.

“Favorable economic conditions and rising investor interest in securing guaranteed retirement income have resulted in double-digit sales growth in every product line,” said Bryan Hodgens, head of LIMRA research.

Fixed-rate deferred annuities led the way, with $48 billion in first-quarter sales, 16% higher than in Q1 2023. FRD annuities remain the primary driver of annuity sales growth, representing more than 42% of the total annuity market in the first quarter.

Favorable economic conditions and rising investor interest in securing guaranteed retirement income have resulted in double-digit sales growth in every product line.
Bryan Hodgens, head of LIMRA research

“Eighty-five percent of FRD sales are short-duration products [less than five years]. Higher interest rates combined with insurers’ ability to offer, on average, better crediting rates have propelled product sales to another level,” Hodgens noted.

But sales were strong across the board, with fixed-indexed annuities ($29.3 billion) and income annuities ($4 billion) setting records. Registered indexed-linked annuity sales rose a whopping 40%, to $14.5 billion.

The Federal Reserve is backing away from interest rate cuts, but Chairman Jerome Powell has not taken the option off the table. But annuity sales are simply too good to stop anytime soon, LIMRA forecasts.

“While there are potential regulatory and economic headwinds in the second half of the year, LIMRA expects annuity sales to continue to perform well,” Hodgens said.

New York rules for all

To get a sense of how unpopular the DOL fiduciary standard is with the insurance industry, consider New York state and its Regulation 187. In 2019, New York amended the rule to add significant liability and training requirements and a stiff best-interest mandate for all insurance product sales.

Regulation 187 is very comparable to the DOL fiduciary rule. In response, many insurers refuse to do business in New York.

But it will be impossible to ignore a nationwide fiduciary standard. Industry opponents say it will result in Americans who most need advice and annuities unable to get help.

That market tightening might already be happening. LPL Financial is reportedly denying some annuity sales if the client already has at least 50% of their portfolio in one or more annuities.

“Similar to other wealth management firms, LPL maintains guidelines with regard to annuity concentration,” LPL said in a statement to InsuranceNewsNet. “However, it is not a one-size-fits-all rule, and we collaborate with agents and advisors in scenarios where a client may have 50% or more of their portfolio in annuities.”

From the DOL perspective, the rule modernizes the long-outdated 1975 ERISA regulatory regime. Lisa Gomez, assistant secretary, Employee Benefits Security Administration, called the five-part test for establishing fiduciary duty ineffective for the retirement plans of today. When the test was created, employee 401(k) plans did not exist, Gomez said.

More than 4.1 million Americans will be turning 65 each year through 2027. Most of them will not have access to traditional pensions and will need options for lifetime income like annuities provide.
Susan Neely, president and CEO of the American Council of Life Insurers

“If you hold yourself out as giving individualized advice that the investor can rely upon to advance their best interest, then that’s what you must do,” she said. “That means your advice should adhere to a professional standard of care.”

The DOL noted the number of indexes available in the market has grown from a dozen to at least 150 since 2005.

“Many of these indexes are hybrids, including a mix of one or more indexes as well as a cash or bond component,” the rule states. “More than 60% of premium allocations for new fixed indexed annuity sales in mid-2022 involved hybrid designs.”

Compensation in the crosshairs

The most relevant rule changes are to compensation and the exemptions producers would use to continue receiving commissions. Two exemptions allow annuity sellers to collect a commission: Prohibited Transaction Exemption 84-24, which dates to 1977, and PTE 2020-02, an alternative created by the Trump administration.

Amended several times over the years, PTE 84-24 allows producers to receive commissions when retirement plans and IRAs purchase insurance and annuity contracts. Under PTE 2020-02, if an “investment professional” gives fiduciary advice to a retirement investor, the “financial institution” is also considered a fiduciary.

ERISA’s fiduciary responsibility rules mandate that ERISA plans pay no more than “reasonable compensation” to service providers, which include advisors. The definition of reasonable compensation isn’t fully known yet.

The DOL eased up in some areas with the final rule. For example, some differential compensation will be permitted, and new language allows reps and agents to make sales pitches and conduct investor education without triggering fiduciary status.

“DOL has recognized that a variety of sales activity does not give rise to fiduciary status,” Groom Law Group wrote in its analysis. “This opens up a range of possibilities for interactions amongst sophisticated parties to remain non-fiduciary in nature in a way that may not have been possible under the Proposal.”

The final amendment allows both cash and noncash compensation from any and all sources, subject to compliance with the exemption’s Impartial Conduct Standards and other applicable conditions, Groom added.

Perhaps most importantly, the rule does not create a private right of action — that is, lawsuit exposure — a difference from the 2016 fiduciary rule.

Still, industry opponents are not impressed with the concessions the DOL offered in its final rule.

“The DOL is conducting an ideological campaign to ban commissions, as evidenced by their inflammatory and offensive framing of this rule when they initially proposed it, the un-American and absolute disgrace of the lightning pace at which they have pushed this rule through, and the lack of questions or even spirited debate on the substantive issues within this rule,” said Marc Cadin, CEO of Finseca.

In its economic analysis, the DOL estimated that 1,577 career insurance agents, 86,410 independent agents and brokers, and 16,398 registered investment advisors will be affected by the new rule. The industrywide revenue hit could be about $325 million to $530 million per year over the next 10 years, the department concluded.

The DOL estimated that 442 life insurance companies underwrite annuities and will be affected by the amendments. The DOL based its figures on separate impact analyses provided by Morningstar and an academic paper prepared by a team of researchers led by Vivek Bhattacharya.

Retirement investors rolling over retirement funds into fixed indexed annuities would save over $32.5 billion in the first 10 years and over $32.5 billion in the subsequent 10 years, in undiscounted and nominal dollars “due to decreased pricing spreads,” Morningstar said in a comment letter.

IMOs in the clear

The big winners, if anyone can be labeled with such a term, in the new DOL proposal are independent marketing organizations. IMOs (and the related field marketing organizations) escaped significant regulatory burdens in the rule. In fact, the DOL suggests marketing firms could be part of the solution to troublesome conflicts of interest.

“These entities do not have supervisory obligations over independent insurance producers under State or Federal law that are comparable to those of the other entities, such as insurance companies, banks, and broker-dealers, nor do they have a history of exercising such supervision in practice,” the rule states of IMOs, FMOs and BGAs. “They are generally described as wholesaling and marketing and support organizations that are not tasked with ensuring compliance with regulatory standards.”

The decision to leave marketing organizations alone is significant and a major change from the DOL’s 2016 fiduciary philosophy. With that rule, marketing organizations were deemed a “financial institution” with substantial responsibilities and liabilities for annuities sold by their associated producers.

That rule, along with subsequent regulation efforts, is cited for driving merger and acquisition activity among marketing organizations. Smaller IMOs are viewed as not having the muscle to provide the watertight record-keeping, up-to-the-minute compliance, education, professional training and legal services for producers with whom they do business.

A major challenge

The DOL Retirement Savings Rule might take effect, but the end result likely won’t be known for a year or two. Many analysts say the department is playing the long game. The 2016 rule spurred much change in how the industry sold annuities.

Many of those changes remained even after the Fifth Circuit tossed out the rule two years later. Meanwhile, industry lobbyists continue to press for positive legislation for annuity sellers — specifically, a third version of the SECURE Act.

Many of the provisions of the SECURE Act of 2019 and its successor, SECURE 2.0, passed in 2023, are taking effect on staggered timelines and are removing the barriers to annuity sales in retirement plans.

That is the kind of legislation the annuity industry wants to see.

“More than 4.1 million Americans will be turning 65 each year through 2027,” said Susan Neely, president and CEO of the American Council of Life Insurers. “Most of them will not have access to traditional pensions and will need options for lifetime income like annuities provide. Now more than ever, public policy should expand and not limit people’s options for retirement.”

InsuranceNewsNet Senior Editor John Hilton has 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.