Stemming the Tide: The Forces Behind the Fiduciary Rule

Commentary

As the industry digests the 1023-page final Department of Labor’s (DOL) rule, let’s take a trip back in time to examine what forces may have been at work behind the rule.

Americans for Annuity Protection is committed to fix this rule because it will severely restrict the retirement saver’s ability to purchase a guaranteed income annuity to protect assets and livelihood in retirement. As Sir Isaac Newton discovered, he who understands force becomes the master.

A Brief History of the Retirement Marketplace

According to Bureau of Labor Statistics data, only 10 percent of private employers offered defined benefit retirement plans in 2011 to cover just 18 percent of America’s private-sector workers. Just 20 years prior, in 1981, more than 80 percent of private workers were covered.

This change is easy to understand given the increasingly high costs of pension plans.  As a result, the private sector transitioned to 401(k) plans for employees and Americans were forced to take charge of their investments as well as the rate of their retirement savings.

IRAs were authorized by ERISA in 1974 and the first 401(k) plan was adopted by Johnson & Johnson after they were authorized by the Revenue Act of 1978.  Despite starting the proximity of starting dates, accumulation of IRA assets has outpaced 401(k) assets by 65%.

Today’s Numbers

The most recent data from an Investment Company Institute study (ICI), show that the total U.S. retirement assets hit $24.9 trillion in March 2015.  Of that, 401 (k) plans held 4.7 trillion – only about 18 percent of all retirement savings.  Mutual fund assets reached $6.8 trillion with about $2.8 trillion in 401(k)s.

Yet, the largest share of America’s retirement savings, $7.6 trillion, is found in IRAs.

Less than 1 percent of employer-sponsored plans even offer annuities.  The ICI Study reports that 64 percent of 401(k) assets are in mutual funds.  According to another study by the Employee Benefit Research Institute and ICI Study, about 88 percent of 401(k) plan assets are in equity securities, target date funds and company stock.

This means the only hope for those who want the guarantees and security only annuities offer is to purchase an annuity IRA from an independent advisor.

Scary Trends

Despite numerous congressional actions and authorizations (salary reductions, 1981, small business safe harbor, 1996; automatic enrollment, 1998; and increasing deferrals) the number of 401(k) plans and participants has slowed to a crawl over the past decade.

More significantly, withdrawals from 401(k) plans are now exceeding new contributions as baby boomers age. This savings shift has serious implications for the 401(k) industry.

According to an analysis of government data provided to The Wall Street Journal by BrightScope, and reported in June 2015, Americans pulled a net $11.4 billion from tax-deferred savings plans in 2013. With this migration expected to accelerate in the coming decade as more baby boomers retire, large money-management firms that rely on fees charged to employers and employees as a chief profit engine will be squeezed out.

A J.P. Morgan Chase analyst, Ken Worthington, who was referenced in the article, believes this will force large money managers to cut fees, offer different products or consolidate operations.  As a presidential candidate would say – YUUUGE changes!

It is no secret where the money is going – IRAs.   According to information from LIMRA and Cerulli Associates, the IRA rollover market is expected to increase to $515 billion by 2018.  Which is an increase of more than two-thirds in five years.

In a recent USA Today article Chris Blunt, president of the Investments Group at New York Life, when discussing the unpopularity of 401(k)s said “Americans never wanted to go to 401(k) plans, but they went there because companies couldn’t afford to offer pensions anymore.  Nobody ever complains about their pension.”

And therein lies the appeal of the annuity. Because annuities promise guaranteed income, insurance protection and interest accumulation, they can and do act like a pension. Also, with an annuity you aren’t forced to stare at your annual 401(k) memo wondering how you should reallocate your 401(k) funds or just go with target date funds. And, last but not least, an IRA annuity can easily handle multiple 401(k)s that most Americans accumulate over a lifetime of working.

A Force to be Reckoned With

It is clear that the Fiduciary Rule was constructed to keep money inside 401(k)s and the biggest force was 401(k) product providers who knew that unless something was done they’d be forced, as Mr. Worthington said, to cut fees (and profit), change products, consolidate or all of the above.

By intentionally imposing more costs and legal exposure, the rule effectively makes it nearly impossible to move money to an IRA.  The rule’s draconian and one-sided restrictions on IRA recommendations (and favorable treatment of 401(k) recommendations) will make it expensive, confusing and difficult for consumers who prefer the portability, ease and consolidation of an individually-owned annuity IRA.

Americans for Annuity Protection believes that a best interest standard can more effectively and efficiently be achieved and vigorously supports efforts to correct the harmful impacts of this rule through legislative and legal action. As history has taught us, the annuity marketplace is its own force to be reckoned with. With consumers and annuity professionals working collectively and cohesively, we will make sure annuities remain accessible and affordable for all Americans.
Follow our efforts at www.aapnow.org

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].

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