Because sales of popular fixed indexed annuities will now likely require advisors to comply with the burdensome new best interest contract exemption, many advisors may find themselves scrambling to find attractive annuity products for sale in a post-fiduciary rule world.
Unlike indexed and variable annuity products, fixed annuities do not trigger application of the best interest contract exemption (meaning that the advisor would not be required to declare his or her fiduciary status and execute a written contract to that effect with the client). To make these products more attractive in the current annuity market, however, new income riders have been developed to sweeten the deal for clients who may have previously been interested in an annuity with greater potential for market participation.
Income Riders and Fixed Annuities
Despite the fact that the applicability date of the DOL fiduciary rule has been delayed until June 9, 2017 (and further modifications to the rule may be forthcoming), many advisors expect that some version of the current rule will survive the delay period. For fee-based advisors, offering a fixed annuity with an optional income rider can provide an attractive solution.
Many carriers have begun offering these products, although interest rates on the products are currently relatively low (some are guaranteed at around 1.5 percent for the first seven years of the contract, with the potential for increasing after the first year) and surrender charges typically apply during the first years of the contract.
Further, market value adjustment features can serve to penalize surrenders that are made early in the contract term if interest rates continue to rise. However, these features also serve to transform a typical fixed annuity into a product that more closely resembles the popular indexed annuities, as it allows the client to potentially participate in future market gains.
Income Riders: The Basics
While several types of income riders exist, an annuity income rider essentially guarantees that the client will receive a certain amount of income throughout retirement—regardless of market performance—though there are important differences that set the various product features apart.
Guaranteed lifetime withdrawal benefit riders (GLWBs) guarantee that the client will be able to withdraw a certain percentage of the value of his or her annuity benefit base, which has been growing by a guaranteed amount over the course of the annuity deferral period. Clients looking for larger payouts later in life should be advised that the longer the base account is allowed to grow, the larger the withdrawals will be in the future. Further, it is important that the client understand that any withdrawals must stay within the limits of the guaranteed withdrawals because some contracts provide for termination of the feature if the client takes an excess withdrawal.
A lifetime income benefit rider (LIBR), while similar, is a rider pursuant to which the annuity carrier agrees to pay income over the client’s lifetime in the form of an annuity. The income stream that results once the client annuitizes the contract is also drawn from a benefit base, but the carrier uses the client’s life expectancy to determine the value of the guaranteed income payments. Clients seeking out steady, level annuity payouts that are guaranteed regardless of how long they live are often attracted to this type of feature.
One common ground between these types of riders lies in the fact that the benefit base itself is not available for cash withdrawals. This “account” has no real current cash value to the client—meaning that, unlike the accumulation value of the account, the client cannot access this value through surrendering the contract prior to the end of the deferral period.
The latest round of product developments focusing on fixed annuities demonstrates the impact of the DOL fiduciary rule—advisors and firms are planning for compliance with the rule in some version despite its current delayed status—which, for some, means selling products that avoid its application.