IRAs – What’s Not to Love or Hate?

Commentary

Americans for Annuity Protection gets dozens of calls a month from advisors and agents asking what force is pushing the Department of Labor’s Fiduciary Rule.

There are many theories for the almost blind adherence to a “best interest is best” mentality without any consideration if the rule actually gets us there or if, as we believe, in its biased and uninformed understanding of the annuity marketplace, it actually gets us to the annuity consumer’s worst interest – high cost advice for high risk investments or go it alone without the expertise of an annuity advisor.

According to LIMRA, the IRA rollover market is expected to expand to $515 billion by the year 2018 and approximately $150 billion will be in annuities.

Given the severe impact to annuity consumers - higher costs for advice and shortage of annuity advisors to provide education and recommendations - that will result if the Department of Labor’s Rule is issued as proposed, a clearer understanding of the IRA consumer is warranted.

The Investment Company Institute published a study, The Role of IRAs in U.S. Households’ Saving for Retirement, 2014, prepared by Sarah Holden, senior director of retirement and investor research, and Daniel Schrass, associate economist.

According to the study, there were $7.3 trillion in assets at the end of the third quarter of 2014 and individual retirement accounts (IRAs) represented 30 percent of U.S. total retirement market assets. That compares with 18 percent two decades ago.

The study makes it clear that there is no doubt the IRA market is big and getting bigger, with rollovers from employer-sponsored retirement plans fueling the growth. Among households with rollovers in their traditional IRAs, 81 percent indicated they had rolled over the entire retirement account balance in their most recent rollover, the study found, with more than half making contributions to their traditional IRAs at some point.

Other interesting findings were:

• On-third of U.S. households owned IRAs in 2014.
• Eight in 10 IRA-owning households also had employer-sponsored retirement plan accumulations or had defined benefit plan coverage.
• 63 percent of all U.S. households had retirement plans through work or IRAs.

Importantly, annuities help to fuel the IRA market. According to LIMRA, fixed annuities have risen from 41 percent of the market in 2000 to 59 percent of the market in 2014. While non-qualified fixed annuities have reversed that trend from 59 percent to just a little under 41 percent during that same period. Meanwhile, IRAs with variable annuities rose from 29 percent in 2006 to 62 percent in 2014 with nonqualified variable annuities dropping from 51 to 38 percent.

The research indicates that the two most common reasons for rolling over were to “consolidate assets (24 percent of traditional IRA-owning households with rollovers) and not wanting to leave assets behind at the former employer (24 percent of traditional IRA-owning households with rollovers). Another 17 percent of traditional IRA-owning households with rollovers indicated their primary reason for rolling over was to access more investment options.”

For the annuity consumer, those options are market protection and certainty that they will not outlive their savings. The annuity consumer seeks to move their money from an employer-sponsored retirement plan to an individual annuity IRA that provides these insurance guarantees.

Reading more of the ICI findings, it is fairly apparent why the rule seeks to over-regulate annuity advisors who are subject to the rules-based and highly regulated suitability standard while under-regulating fee-only advisors by holding them to a subjective, principles based fiduciary standard: to pander to the employer-sponsored plan providers and keep money from rolling over.

The study shows that once rolled, savings stay in the IRA until the requirement minimum distribution rule kicks in and that IRA withdrawals were infrequent and mostly retirement related.

“Twenty percent of traditional IRA–owning households took withdrawals in tax year 2013, with about the same in tax year 2012.   Sixty-nine percent of traditional IRA owners who are not making withdrawals indicated they do not plan to tap their IRAs until age 70½ (the required minimum withdrawal age).”

The study cited the most frequently identified future use of IRA withdrawals - to pay for living expenses and cover emergencies.

Today less than 1 percent of all employer-sponsored plans offer annuities. A consumers only choice if they are seeking the security and guaranteed insurance of annuities is to move their employer-sponsored savings into an annuity IRA when they retire or leave the employer. Consumers choose annuity IRAs to protect their savings from the stock market and the promise of guaranteed income they cannot outlive. The study findings confirm what annuity consumers know - an annuity IRA allows them to take control of their savings and savings choices and not have to, perhaps uncomfortably, deal with their previous employer.

In addition, the IRA remains portable regardless of where you work next and multiple employer-sponsored accounts can be combined into one IRA making tax planning and retirement distribution much easier for the consumer.

An annuity consumer’s best interest can only be met by retaining the safe harbor for annuities in the existing PTE 84-24 and taking the best consumer disclosures and protections from the systemic and vigorous insurance regulations and strengthen the retirement space using an already proven regulatory model.

A copy of the study can be found at https://www.ici.org/pdf/per21-01.pdf.

TAKE ACTION and tell your representative to stop the DOL rule from harming consumers. Visit www.aapnow.org and click on Action Center.

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 [email protected].