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Fiduciary Rule Is Squashing Annuity Surrender Charges

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Despite the slowed implementation of the Department of Labor (DOL) fiduciary rule, the new rule has unquestionably had an impact on the market for financial products—and some buyers of annuity products may benefit from the new changes. 

One important trend that has emerged in the wake of the fiduciary rule is the replacement of certain commission-based annuity products with fee-based variable annuities that have either no surrender periods or very short surrender periods (often with reduced surrender charges). Because of this, in some circumstances clients who may have avoided annuities entirely for fears of being “locked in” to the investment for a set period of time may now find that annuities are more attractive than ever. 

Changes in Annuity Surrender Periods

Typically, when an annuity is sold on a commission basis, the insurance carrier that issues the product takes on more risk because it is possible that the client may decide to cash in the product at an earlier than expected date. Surrender periods mitigate this risk by penalizing clients who choose to cash in their annuities during the pre-set period when penalties will apply, allowing the insurance company to recover the amount of commission that it owes to financial advisors early in the annuity contract term.

Under a fee-based annuity product, however, the advisor earns his or her fee regardless of what the client decides to do with the annuity product in the long-term. Because of this, surrender charges are not necessary to protect the insurance carrier against the risk of early surrender. Therefore, carriers that have begun to offer fee-based annuities because of fiduciary rule concerns have been able to reduce surrender charges or even eliminate them entirely.

In products that have retained a surrender period, many carriers have reduced the surrender because of fiduciary rule concerns. In one newly released annuity that offers a three-year surrender charge period,  early surrender charges are limited to two percent in the first two years, and one percent in the third year.

Further, these surrender charges only apply to the contract’s earnings or 10 percent of purchase payments. Many expect that the trend of fee-based annuities with short (or no) surrender periods and low surrender charges will continue as fees must be disclosed and the client’s best interests must be taken into account.

The Fiduciary Rule Rollout

While the applicability date for the DOL fiduciary rule was technically June 9, 2017, only certain portions of the rule went into effect on that date—and although many other provisions are scheduled to become effective beginning January 1, 2018, the DOL has sought to delay the rule’s full effectiveness by another 18 months.

Further, the DOL has released guidance indicating that it will focus on compliance efforts, rather than enforcement, during the transition period (however long that period might eventually be) so that advisors should make reasonable, good faith efforts to comply with the rule’s terms during this period.

Generally, beginning June 9, advisors are now required to (1) make no misleading statements to clients, (2) receive only reasonable compensation and (3) make investment recommendations that are in the client’s best interests.

The DOL has released guidance providing that sales of fixed indexed and variable annuities may continue to be made under the previously existing rules until the January 1, 2018, full effective date (presumably, this guidance would be extended if the full effective date is also extended). Further, during the transition period advisors may rely upon the best interest contract exemption for newly designed compensation structures that have been developed in order to reduce the potential for conflicts (but that may not be perfected by the June 9 deadline).


The reduction or elimination of surrender charges is one sign that the DOL fiduciary rule is already having an impact in the market. For many clients, this particular change may make annuity products an attractive investment for the first time ever.


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