Mark Egan, Shan Ge and Johnny Tang have gone and poured grain alcohol on the annuity sales standards conflagration.
The fight blazed ferociously in 2016 and 2017, as the supporters and opponents of the U.S. Department of Labor’s original, Obama-era effort battled with policy light sabers.
The fight seems to have cooled to a moderate level this year, with state insurance regulators and Trump’s DOL converging on support for Regulation Best Interest, the work of Trump’s U.S. Securities and Exchange Commission.
But the Democratic Party has included Reg BI repeal in its platform.
Now three economists — Egan, who’s a faculty member at the Harvard Business School; Ge, who’s at New York University’s Kaufman Management Center; and Tang, who’s at Harvard’s Littauer Center — have come out with a working paper saying the original DOL fiduciary rule effort cut sales of high-expense variable annuities by 52%.
- A link to the Egan team’s new paper is available here.
- An article that refers to an earlier broker misconduct paper, by a different Egan team, is available here.
“The DOL fiduciary rule was effective in shifting the incentives of financial brokers and insurers and resulted in a 10% decline in average expenses paid by investors,” the economists write in the working paper, which has been published, behind a paywall, on the website of the National Bureau of Economic Review.
A working paper is a paper that has not yet been through a full peer review process.
Here are seven other things the economists say about the U.S. individual variable annuity market, and the sales standards fight, in their paper.
1. Variable annuities as important retirement savings vehicles.
The economists call variable annuities “one of the most popular retirement products in the United States” and note that, as of 2018, U.S. households had accumulated $2.2 trillion in assets in variable annuity accounts.
2. Variable annuity sales seem to be are more sensitive to incentives for brokers than to incentives for investors.
The economists estimate that, all other things being equal, variable annuities in the top 15% in terms of commissions will have sales that are 17% higher than variable annuities with average commission levels.
3. Variable annuity sales commissions vary widely.
The economists said they saw commissions ranging from 0% to 16% of the principal invested, with a mean of 6.09%.
The contracts in about the top 15% in terms of commissions had a commission of about 8.4%.