IRI VISION: PEAK CONSUMER PROTECTION MEETS PEAK 65

Annuity sales continue to reach new record highs year after year. With 10,000+ Americans turning 65 every day, there has never been a more widespread need for annuities, the only financial product that can provide lifetime income to help Americans enjoy a secure and dignified retirement.

Surprisingly, annuities continue to have many detractors. They claim annuities benefit those who sell them more than those who buy them. Yet, according to New York Life research, annuity owners are more confident they will be able to retire when they expect to – 96 percent of annuity owners versus 68 percent of non-owners. [1]

Over the years, negative assertions about annuities have led to needless, redundant rulemaking efforts, especially by the Department of Labor (DOL), which has sought to impose fiduciary status – and the extensive, stringent, and burdensome legal requirements and restrictions that come with such status – on nearly every financial professional who recommends annuities to retirement savers.

This would effectively allow annuities to only be purchased within an ongoing fee-based account, depriving most retirement savers of the opportunity to decide for themselves whether and how to buy an annuity as a stand-alone transaction and resulting in a loss of access to advice.

Over the past fifteen years, the DOL has tried on several occasions to significantly and improperly expand the circumstances under which a financial professional would be considered a fiduciary.

The DOL adopted rule changes to that effect in 2016, but the U.S. Court of Appeals for the Fifth Circuit vacated those rules in 2018. A Deloitte study of the 2016 rule found that before it was vacated, more than 10 million retirement account owners, with over $900 billion in retirement savings, lost access to their preferred financial professionals. More recently, the DOL adopted substantially similar rule changes in 2024 that are currently being challenged in federal court and have been put on hold until the litigation is resolved.

After the Fifth Circuit vacated the 2016 DOL rules, the U.S. Securities and Exchange (SEC) developed and issued Regulation Best Interest (“Reg BI”), which became effective on June 30, 2020. Reg BI establishes a standard of conduct under which a broker-dealer and its associated persons are barred from putting their financial interests ahead of the interests of their clients.

In addition, the National Association of Insurance Commissioners (NAIC) established a corresponding best interest standard for insurance agents in 2020, which has now been implemented in 49 states.

IRI and Greenwald & Associates recently completed an extensive study of some of the largest insurers and distributors in the annuity industry to catalog the changes firms had made since 2015 when the DOL initially proposed the 2016 rule changes. This study found that 100 percent of the participating firms:

• Have implemented more robust policies and procedures to monitor, disclose, and mitigate conflicts of interest, evaluate and document investment alternatives, and train representatives and agents.
• Have eliminated differential compensation for proprietary products.
• Require representatives and agents to consider multiple factors, including fees, before recommending an IRI rollover.
• Require representatives and agents to discuss the pros and cons of products with customers, document recommendation rationales, and disclose compensation.

When purchasing an annuity, consumers are provided with detailed information about the product, the reasons for the recommendation, and a breakdown of all fees involved. Under the enhanced federal-state consumer protection framework described above, financial professionals recommending an annuity to clients are subject to a best interest standard and robust regulations and oversight.

In summary, consumer protections in the annuity industry have become far more robust and consistent over the past decade as firms have aligned their policies and procedures with the requirements of Reg BI and the NAIC best interest model.

[1]  New York Life, “Annuity owners report spending more, staying invested, and feeling happier in retirement.” – June 21, 2023

Contact: Dan Zielinski