In early April, U.S. Department of Labor Secretary Thomas Perez released his office’s final determination on the extents and limits of the fiduciary standard for retirement products and the professionals who represent them. A key consideration was the handling of annuities.

Reactions were swift and diverse. But in the time since the announcement, many in the industry are still delving into the 1,000-page ruling and trying to decide if they like it or not.

They’d already had plenty of time beforehand to consider and comment. A draft of the regulations to address potential conflicts of interest was proposed a year earlier. Perez says his office received more than 300,000 reactions to that version. The final ruling made significant concessions to the financial industry, some say, while others are sorely disappointed.

Yet perhaps the most important question is what the future holds for annuities in the post-DOL world. How are issuers likely to change their products, if at all? How will brokers and advisors step up to the new standard? Will consumers even notice the difference—and if so, to what extent will demand for annuities and other retirement products be altered?

A Client-Focused Rule

“What we saw primarily from DOL was a focus on the client,” says François Gadenne, chairman and executive director of the Boston-based Retirement Income Industry Association and the president and CEO of Retirement Engineering, an R&D company that designs proprietary insurance and investment products. “Whatever may or may not be in there, we’re just pleased that it’s intended to create a client focus.”

Certainly that’s the idea behind the stricter fiduciary standard—always put the client’s interests first, ahead of the broker’s or firm’s. But will the rules as laid out actually achieve that goal?

“There is a French proverb that says, ‘What goes without saying goes much better when you say it.’ It’s in that perspective that I like this. It goes without saying that we work for the client, but it goes much better when you say it,” says Gadenne.

Not everyone is so pleased. “For nearly a year, we have been actively monitoring the DOL rule’s progress,” says Jerry Lombard, president of the private client group at financial services firm Janney Montgomery Scott in Philadelphia. Corresponding by e-mail, Lombard writes, “We still hold the position that our clients, and all investors, should be free to choose how they wish to receive financial advice for retirement and how they pay for that advice. Today, however, this rule puts into place certain requirements and restrictions that limit choice [and] access, and that may impact the affordability of advice.”

Fixed-Indexed Annuities

For many, a particular bone of contention is the inclusion of fixed-indexed annuities among the products that will now require a signed “best-interest contract” (or BIC) before sale. “Many of the significant changes between the proposed rule to the final [version] were unexpected. Clearly, the most disappointing for the annuity consumer was throwing indexed annuities under the BIC bus,” says Kim O’Brien, CEO and chief advocate at Phoenix-based Americans for Annuity Protection.

O’Brien argues that the ruling will only make indexed annuities “more confusing” and possibly more expensive as companies scramble to meet the new requirements—and unnecessarily so. “The [Labor Department’s] explanation that they moved indexed annuities to the BIC because they were complex is arbitrary and uninformed,” she says. “Not only do they clearly not understand annuities as insurance products—or were informed by those who do not understand—they didn’t even bother to study the impact of their decision on the annuity marketplace and on Americans seeking the certainty and protection of fixed annuities, including fixed-indexed annuities.”

Ultimately, the effect could be catastrophic, she says. “If the DOL rule is allowed to move forward as it is, it will have a devastating impact on the fixed-annuity marketplace,” she says. “The cost of compliance is huge, and the almost certain litigation exposure will send many advisors out of the annuity business.”

Critics of fixed-indexed annuities, however, are pleased to see the product receive tightened scrutiny. Among them is columnist and commentator Jane Bryant Quinn. “What do I have against FIAs? Aside from the fact that they’re neither ‘fixed’ nor ‘indexed?’” she asks. “And that you don’t know what you’re paying for? And that the insurer can change participation rates, etc., if you start earning too much to make the annuity as profitable as the company wants?” 

But in the last few years, sales of fixed indexed annuities, which bear many similarities to structured notes, have surged while variable annuities have lagged. The guarantees and downside protection of these vehicles have appealed to many risk-averse investors, even if many, like Quinn, question their transparency.

Even those who might concede there’s a place for FIAs would agree they are not as simple as they appear. “I’m not surprised that fixed-indexed annuities were lumped in with variable [annuities],” says Joseph A. Tomlinson of Tomlinson Financial Planning in Greenville, Maine, and a former actuary at John Hancock. “Certainly, both of these products are much more complicated than simple single premium immediate annuities.”

Will Clients Be Better Off?

Tomlinson acknowledges, however, that he’s still undecided on the overall ruling. “I’m seeing two different views from those who are consumer advocates—one group is disappointed and feels that DOL caved in to the financial services industry. Another group feels that DOL did a clever job putting teeth in the final rule, but in a way that will thwart industry attempts to fight back,” he says. “I can’t decide which group to side with—will have to wait and see.”

For most observers, that’s the crux of the matter: Is the ruling good or bad for consumers in the long run? “I think consumers will be better served,” says Tomlinson. “I’m certainly a fan of the general principle of advisors being required to act in clients’ best interest. [But] I’d suggest careful monitoring of what happens, then probably make some adjustments.”

Nevertheless, what critics like O’Brien at Americans for Annuity Protection fear is that the complexity of the new standard and its concomitant costs could backfire and actually leave consumers less well protected than they’ve been. “Americans will find that they will have to pay more for advice and will more than likely opt out of getting advice and just stay put,” she says, adding, “There was not one study or any analysis done by the [DOL] to demonstrate that individuals who buy annuities were underserved.”

Barry Stowe, the chairman of Lansing, Mich.-based Jackson National Life Insurance Co., a major annuities provider, is similarly apprehensive. “We are concerned that investors will find it more difficult and expensive to obtain the investment advice and products that they need to plan for, and live comfortably in, retirement,” he says.

Still, Stowe applauds the stated purpose of the more rigorous fiduciary standard. “We support the underlying objective of the new DOL rules,” he says. It’s a case of good in theory, but maybe not so much in practice. His fear: that the new rules will “make it more difficult and expensive for low- and middle-income Americans to get the financial advice and insurance products they so urgently need,” he says.

That’s far from an abstract concept. “Millions of Americans are approaching retirement with inadequate savings and income to meet their needs,” says Stowe. “At the same time, they are living longer and confronted with a complex investing environment, including historically low interest rates. We are concerned that the new rules will add to, and not reduce, the challenges facing consumers who are preparing for their retirement.”

Not Far Enough?

Yet another camp argues that the regulators should have gone further to secure consumer protections. On the other hand, the details about how the new rules will be enforced remain to be seen. Further tightening may yet follow. 

“It’s too early to make that kind of judgment,” says Gadenne. “These things start and then there are always a lot of developments. It’s a little bit like a game of billiards. The balls are in motion, but you don’t necessarily know where they’re going to go.”

For some at least, those possibilities are encouraging. “Anything that makes us look at the client before we look at the product is a positive thing,” Gadenne says. “Perhaps we’ll see more of that now from the other regulatory bodies. Maybe the DOL is showing the way.”