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DOL Fiduciary Rule a ‘Wild Card’ for Annuity Industry

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While new annuity products will help drive growth in the space in the New Year — particularly via a surge in income-oriented annuity sales as interest rates rise — the annuity industry is also bracing for potentially negative repercussions brought on by the Department of Labor’s pending fiduciary rule.

The Insured Retirement Institute, the annuity trade group, warned in a December report that DOL’s rule to amend the definition of fiduciary on retirement accounts, which recently survived an omnibus spending bill rider threat, is “a wild card that all eyes across the industry will be watching.”

The final form of the rule, which is due out likely in early 2016, will determine the “level of disruption to the lifetime income industry and the consumers it serves,” IRI said.

The IRI report notes that annuity providers are “well-positioned” headed into 2016, with strong liquidity and balance sheet fundamentals. In addition to healthy financials, the fact that interest rates may soon begin to rise “should ease macroeconomic headwinds bearing on the lifetime income market.”

If interest rates reach or exceed 3%, IRI said, income-oriented annuity sales will likely “increase significantly.”

New product launches in the New Year include investment-oriented variable annuities (IOVAs), new product designs of fixed indexed annuities, and the introduction of new deferred income annuities that meet the vriteria to be considered Qualifying Longevity Annuity Contracts — deferred income annuities that are available in IRAs and workplace plans.

Cathy Weatherford, president and CEO of IRI, said in releasing the report that the large cohort of retirees “will live longer in retirement than any generation before, and will be more responsible for their financial security,” which presents a “tremendous opportunity for the retirement income industry,” with market participants expanding and filling out “their product shelves to meet this growing need.”

Sales of IOVAs have increased 94% during the past five years and now make up 16% of total variable annuity sales, the report notes.

Fixed indexed annuities are experiencing “strong sales,” IRI’s report says, “as a fixed income substitute and on the attractiveness of optional guaranteed lifetime income benefits.” Sales of FIAs have increased 50% since 2011.

New FIA product innovations that should help boost sales include those that offer “uncapped” growth on the portion of the contract participating in the index.

In the third quarter of 2015, fixed annuity sales reached their highest mark in more than six years, totaling $26.5 billion, according to Beacon Research — a 15.9% increase from $22.8 billion during the previous quarter, and a 22.1% jump from $21.7 billion in the third quarter of 2014. Sales of all types of fixed annuities increased during the quarter, with the biggest gains on a dollar basis coming from fixed indexed annuity sales, which posted their strongest quarter on record, Beacon found.

Weatherford noted that the “attractiveness of fixed annuity products during the third quarter is not surprising given certain macroeconomic factors, including a spike in volatility.”

IRI also reports that the number of companies offering DIAs has doubled since 2012. As of mid-2015, sales of DIAs were tracking near 2014 sales of $2.6 billion. As recently as 2012, sales of DIAs were only $1 billion.

While only one QLAC product was available at this time in 2014, there are now 11 companies offering QLAC products that are available for use in either IRAs or workplace retirement plans, IRI notes.

Because annuity providers continue to generally require the use of volatility managed funds in variable annuity products with guaranteed lifetime income benefits, volatility managed funds now account for approximately $91.4 billion of variable annuity net assets, a 7.3% increase from $85.2 billion at the end of 2014, the IRI report adds.

Meanwhile, the Treasury Department is expected to finalize in 2016 its pending partial annuitization proposal. The plan, released in 2012, would make it easier for pension plan participants – when given the option of a lump sum or an annuity – to receive part of their benefits in the form of an annuity, and will “remove the all-or-nothing choice that plan participants must make when given the option,” IRI says.

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