Insurers, and their trade groups in general, appear to be adopting a wait-and-see approach to the Department of Labor’s publication of its new fiduciary standard rule. However, unlike previous comments about the potential impact of the rule, none used the word “sue” to describe their reaction.
At the same time, officials of the indexed annuity industry — which analysts say will be the industry product most affected by the rule — discounted a long-term impact on annuity sales.
Specifically, Keefe, Bruyette & Woods analysts pointed out that the “one notable negative” for insurers in the rule is that indexed annuities lose their status as a solely state-regulated product through language in the bill that removes the PTE 84-24 insurance exemption and moved the product line into the Best Interest Contract alongside variable annuities.
“We expect indexed annuity sales to be negatively impacted as result,” KBW said, adding that “this is also a modest negative for retail advisors that sell the product.”
But Sheryl J. Moore, president & CEO of Wink, Inc., an indexed annuity consulting and research firm, said that while she believes “there is a possibility” for an initial decline in indexed annuity sales as a result of the BICE, she believes it will be temporary.
“Once the industry has had time to adjust to the ‘new normal,’ sales will pick up again,” she said. “The bottom line is that consumers want indexed annuities’ guarantees; they want protection from market volatility and the ability to outpace CDs as well.”
Rule under review
The American Council of Life Insurers, the National Association of Insurance and Financial Advisors, the Insured Retirement Institute and the Financial Services Roundtable all said they are reviewing the rule for its potential impact on their members and their business.
The harshest trade group comment was from the U.S. Chamber of Commerce. It said it will review the rule to determine if it disadvantages small businesses, limits access and choice to investment advice, or makes saving for retirement “more expensive.”
However, David Hirschmann, president and CEO of the Chamber’s Center for Capital Markets Competitiveness, said, “Unless we see fundamental changes, this rule will remain unworkable and we will consider every approach to address our concerns.”
AIG, MetLife, Prudential Financial and Jackson National all said they were studying the rule and would not comment pending an analysis of it.
Most typical of the industry was the reaction of Jules O. Gaudreau, Jr., ChFC, CIC, president of the National Association of Insurance and Financial Advisors.
“We remain cautious, and it remains to be seen how the practical application of the rule will affect middle-market consumers who need retirement planning advice and services,” Gaudreau said. He did note that NAIFA was pleased to see that the DOL incorporated its suggestions on the effective date of the rule, grandfathering of existing clients, and timing of when signatures are required on best interest contracts.
“NAIFA is in the process of completing an in-depth analysis of the rule and will continue to provide training and education to help our members deal with the rule’s new requirements and restrictions,” he added, stating, too, that NAIFA will still try to pass legislation amending the rule more to its liking.
However, as noted by Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, the committee’s repeated efforts to get legislation through Congress, either killing the rule or crafting one to the industry’s liking, have failed.
Hensarling called the DOL rule, “Obamacare for your IRA and 401(k), and, just like Obamacare, this complex rule will likely raise your costs and potentially limit your choices.”
He said the “rule will hurt those Americans with low and middle incomes — ultimately jeopardizing their financial independence and retirement security.”
He also said that, “At a time when there is, regrettably, little that both parties agree on, many Republicans and Democrats in Congress have been vocal in their opposition and concerns about this rule,” while acknowledging that the committee’s approach to have the SEC fashion a rule has failed to produce legislation able to get through Congress.
In his comments, Dirk Kempthorne, ACLI president and CEO, said the trade group will determine, after “careful review,” if necessary revisions have been made to avoid adverse unintended consequences for America’s savers.”
Hopefully, Kempthorne said, the DOL “will have taken into account many of the 3,000 comments from members of Congress from both sides of the aisle, regulators, employers, retirement plan sponsors and others who warned of the proposed rule’s potential negative impact to America’s savers.”
Voicing strong support for the rule was the Investment Advisory Association. President & CEO Karen Barr said the IAA was “pleased to see” that the DOL appears to have taken many of its “most significant concerns” with the proposal into account.
For example, she said, the IAA and others commented that the proposal appeared to favor low-fee and low-cost — typically passively managed — investments over all else, ignoring returns, quality, and other factors that may be important to investors.
“The DOL expressly acknowledges that it did not adopt the low-fee, streamlined option considered in the proposal because of that concern, and further clarified that the advisor is not required to recommend the lowest fee option if another investment is better for the client,” Barr said, noting that “these are welcome changes.”
Barr also voiced support for the DOL’s clarifications on the timing of fiduciary status,” as it appears that the final rule makes it clear that ‘hire me’ discussions that do not include investment recommendations are not fiduciary recommendations.
The strongest negative reaction came from Knut Rostad, president of the Institute for the Fiduciary Standard.
He said the final rule is a “significant disappointment” that “falls short” of the proposal, and, “perhaps more importantly, falls short of ERISA, trust law and common law.
“I was genuinely hoping for a stronger rule based on the proposal, with only minor changes around the edges.” He noted that all of the changes have been responsive to industry claims. “I don’t see any changes based on investor requests.”
A win for consumers?
The Consumer Federation of America called it “historic.” Barbara Roper, CFA director of investor protection said that, “For too long … loopholes in the regulations governing advice to retirement investors have denied workers and retirees that basic protection at a cost of billions in diminished retirement savings.
“We applaud the DOL for persisting in the face of relentless and well-funded opposition to deliver this much-needed market reform,” she added.
Micah Hauptman, CFA financial services counsel, said that CFA’s initial review “indicates that the rule is a huge win for consumers.”
He said the rule “properly closes the loopholes in the current rule” so that financial professionals “can no longer evade their obligation to serve their customers’ best interest, appropriately applies to recommendations to roll over to an IRA, which is often the time at which retirement savers have the most money at stake and are most vulnerable to being preyed upon.” He said it also has a “strong, legally enforceable best interest standard backed by requirements for firms to rein in toxic and often perverse compensation practices that reward financial professionals for working against their customers’ best interests.”
Melissa Hernandez, a spokesman for Jackson National Insurance Co., in Denver, said the firm “is assessing the rule independently and in consultation with our business partners. As such, we cannot comment in detail at this time.”
MetLife spokesman Chris Stern added that, “We are conducting a thorough analysis of the DOL’s more than 1,000 page rule and will not be able to comment until that review is complete.”
AIG spokesman Matt Gallagher said that AIG is reviewing the rule while at the same time, continuing to prepare for implementation, stating that, “AIG is committed to ensuring that Americans have access to retirement education, planning and advice.” Gallagher said also that AIG “remains committed to providing products that help retirement savers accumulate assets and generate guaranteed income that can help them avoid outliving their resources in retirement.”
Scot E. Hoffman, vice president and head of corporate communications at Prudential Financial, said the firm “welcomes appropriate regulation.” He said Prudential is “evaluating the rule carefully and determining what adjustments we will need to make to respond effectively to its requirements.
“Fundamentally, we believe the strength of Prudential’s business mix, franchise and proven business models will help us to effectively manage any necessary changes,” he added.
Judith Shaw, North American Securities Administrator Association (NASAA) president and Maine Securities Administrator, added that, “While supporting the DOL’s goal of enhancing the standard of care applicable to retirement investors, NASAA recognizes that the rule requires industry members to make changes to processes and systems.
She said, “These changes will require regulators and industry members to work cooperatively toward the effective implementation of the rule, including the continued servicing of smaller accounts.
“Less prosperous investors need not be abandoned if we work together toward a solution,” she said, adding that, “As we closely review the final rule, NASAA will continue to advocate for additional regulatory initiatives to raise the standard of care for investors in general.”