The future of fixed indexed annuity sales is up in the air after the Department of Labor added an unexpected wrinkle to its fiduciary rule. And a Washington attorney said he believes the rule should be re-issued as a result.
FIAs have always been afforded the 84-24 Prohibited Transaction Exemption, which classified them as an insurance product subjected to suitability standards of sale.
In the final version of the rule, the DOL peeled away FIAs' PTE exemption and classified them with variable annuities, which are considered securities. VAs and mutual funds, which are currently also included in PTE 84-24, will be subjected to the tougher Best Interest Contract (BIC) exemption in the new rule.
In order to sell VAs with commissions, financial professionals must adhere to the BIC, which includes a signed contract with the client, as well as disclosures on the product and any compensation received.
Washington attorney James F. Jorden, shareholder of Carlton Fields Jorden Burt, said he cannot find any reasoning for adding FIAs to the BIC.
"They don't make a very good case for why they have done this other than their own view and it's really not supported that I can find," he said, adding the accompanying Rand Study does not provide any basis for the move.
Jorden went so far as to say the DOL should have re-issued the rule since a major change was added after the substantial comment period had ended. He would not comment on whether the refusal to re-issue the rule is a legitimate basis for litigation.
While the DOL "did make some helpful refinements," the rule remains a bad one for the industry, Jorden said. He noted the press release accompanying the rule is 117 pages long, evidence of the extent of the changes.
The movement on FIAs remains a confusing one, he added. The PTE 84-24 exemption has worked well for 32 years. Many in the annuity industry say they were caught off guard by the rule.
"There's no body of evidence that there's anything wrong with the operation of that exemption," Jorden said. "They really do not make a valid case for distinguishing between fixed annuities and fixed indexed annuities other than the argument that one is possibly more complex than the other."
“While many changes were made that, at least in part, were constructive responses to public comments, the DOL was tone-deaf and just plain wrong in failing to provide FIAs the same treatment as fixed annuities, seemingly merely because of the supposed “greater complexity” of the product," he continued. "That distinction, whether or not accurate, has no basis in ERISA or the state regulation of insurance.”
Industry analysts say the decision robs small savers of a crucial vehicle for accumulating retirement income.
“I am disappointed to hear that the DOL has lumped indexed annuities in with VAs under BICE,” said Sheryl J. Moore, an authority on FIAs and president of Moore Market Intelligence and Wink, Inc.
“Indexed annuities were a ‘back up plan’ for many variable annuity carriers. It appears that those plans may be changing,” she said.
In fact, FIA sales skyrocketed in recent months as carriers shied away from VAs. FIAs booked record fourth quarter gains and sales of more than $53 billion last year, according to Wink’s Sales & Market Report.
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].
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