Industry speculation has been rife for months that the U.S. Department of Labor’s new fiduciary rule would reduce sales of retirement products. Among them: individual retirement accounts, fixed indexed annuities and variable annuities.
In respect to the last, a new report from Cerulli Associates lends credence to the gloomy forecast. The November 2016 edition of “The Cerulli Edge: U.S. Monthly Products Trends,” forecasts “declining sales” owing to the conflict of interest rule’s myriad requirements, including point-of-sale disclosures.
Variable annuities are particularly vulnerable because so many of the products are subject to the Labor Department’s purview. More 6 in 10 (61 percent) of variable annuity transactions 2015 were qualified plan product sales.
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The drop-off is already underway. Variable annuity sales in the second quarter of 2016 reached $44.6 billion. Accounting for seasonal fluctuations, annualized sales for the year are off by 20 percent compared to 2015, when variable annuity sales totaled $114.3 billion.
Cerulli forecasts that variable annuity sales will continue to decline at an annualized rate of nearly 10 percent through 2017 and 2018. The Labor Department will be phasing in the fiduciary rule through April of 2018.
As sales fall off, more variable annuity transactions will shift to the nonqualified plan arena. But whether the migration will be enough to compensate the dip in qualified plans sales is an open question.
Why so? To support variable annuities’ living benefit guarantees, variable annuity product manufacturers invest in managed volatility funds. These assets — equities, fixed income products, money market funds, derivatives and other hedging securities — seek equity-like returns while minimizing downside risk.
The problem, notes Cerulli, is that the funds have not been performing up to expectations. A continuing erosion in performance of managed volatility strategies for variable annuity products, which totaled $250 billion in the second quarter of 2016, could portend a further decline in variable annuity sales with traditional guarantees.
“Simply having these strategies does not guarantee flows and assets for managers,” the Cerulli report states. “A number of asset managers that have thrived in this space cite employing highly specialized salespeople who understand and can address how their products fit in an actuarial-hedging framework.
“However, there have been rumbles that perceived performance of managed volatility products has been weak and potentially contributory to low VA sales in the first half of 2016,” the report adds.