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The Fiduciary Rule Was Great for Variable Annuity Buyers: Economists

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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%.

A 1-percentage-point increase in expense ratios was correlated with a 1.61-percentage-point increase in broker commissions.

Because of that correlation, “on average, brokers are incentivized to sell higher-expense products and products with worse investment options, as measured by the variety and performance of the investment options,” the economists contend.

4. The original DOL fiduciary rule effort affect sales mainly of what the economists see as overpriced annuities.

Overall variable annuity sales fell about 19% after the rule was issued, in 2016, but the drop was due mainly to a decrease in sales of high-expense variable annuities, the economists write.

“The results suggest that, in response to the proposal of the rule, brokers began complying with the rule by placing greater weight on investor interests,” the economists write. “We also find that insurers responded to the rule by increasing the relative availability of low-expense products available for sale. Our findings are consistent with anecdotal evidence from annual reports of brokerage firms and insurers, where they reported changing their business practices in anticipation of the rule.”

5. The original DOL fiduciary rule had the effect of increasing variable annuity holders’ risk-adjusted returns.

The economists say that, as early as 2015, when the DOL fiduciary rule was proposed, but not finalized, variable annuity buyers were moving toward buying contracts with higher investment returns and expense levels that were 0.2 percentage points lower.

Variable annuity buyers ended up with risk-adjusted returns that were 0.86 percentage points higher than what the returns would have been without the DOL fiduciary rule effort, the economists say.

The shift also increased the market share of non-variable indexed annuities, to 47%, from 27%, and that also increased consumers’ welfare, because typical consumers prefer non-variable indexed annuities to variable annuities, the economists write.

6. Insurers are already acting as if they expect the Obama-era fiduciary rule to return.

The economists say that, so far, insurers seem to have kept the changes they made in response to the Obama-era fiduciary rule in place, even though the Trump administration let the rule die in court, in 2018.

7. A fiduciary rule that’s enforced might be more powerful than the actual Obama-era rule.

The economists note that the Obama-era fiduciary rule had a powerful, obvious effect even though enforcement of the final rule was limited and short-lived.

— Read Are 7% of Brokers Really Behaving Badly?on ThinkAdvisor.

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