Thankfully, variable annuities may fail a new exam that would allow them to be included in retirement accounts. While many investors will be saved from having these noxious investments in their tax deferred accounts, others will not be so lucky.
The Best Interest Contract Exemption or BICE could drive a dagger into the heart of variable annuity sales for retirement accounts. This exemption would require the insurance advisor and company to fulfill certain obligations before an annuity sale could be consummated in a tax deferred account. These would include but not be limited to the following:
- The advisor would need to be a fiduciary and need to look out for the clients best interests.
- The advisor will receive REASONABLE compensation.
- Full financial disclosures must be made and explained before this investment could become part of a retirement portfolio.
Since many variable annuities include off the charts up front sales commissions of 10% or higher, and surrender charges that can last as long as 12 years, the BICE standard should eliminate them from inclusion in an IRA or 401(k) account.
This is not to mention the sales contests that lead to all expense paid trips to Acapulco or other exotic locales. Throw in annual fees that can approach 3% or more and you pretty much disqualify these investments from the key provisions of BICE.
Before we start to “Party On” and say a final good riddance to these inappropriate retirement products, the insurance companies will not go down without a fight. They are already creating a nefarious strategy to adapt. Like a mutant virus, they will try to morph and disguise themselves in order to attack the body of an unsuspecting host.
They already have two ways to counter punch the new requirements. First, they may stretch out their commissions over longer periods of time to make them look less egregious. Salespeople would receive the same amount of money but would receive it in smaller increments instead of an initial lump sum.
In the words of Chris Joline, partner in PwC’s Financial Services Regulatory practice, “That longer trail might be, from an optics and sales perspective, a better presentation,”
Optics in this case means how this looks to the investor. Instead of saying the broker will receive a 10% upfront commission, it might be he is getting 2% for 5 years or something along those lines. The bottom line is the investor will still be paying 10% in fees.
The industry constantly adapts to regulations designed to protect investors. This will most likely be another case where the insurers turn into financial chameleons to hide high fees.
Amy Lynch, president and founder of Frontline Compliance, pinpoints another market where big insurers will turn their attention to in order to avoid the BICE standard.“I think they’ll sell more outside the ERISA purview,” Ms. Lynch said. Insurers will shift into places where the fox is guarding the hen house.
This means teachers 403(b) plans could face even more pressure than they do presently. Even though annuities comprise over 70% of the annuity market, insurers could possibly look to increase fees or increase their already huge market share to offset revenue losses from 401(k) plans.
They could also target non-retirement taxable accounts which would be exempt from this much higher fiduciary standard. Either way, it is a sure bet that the insurers will not stand for this massive revenue decrease.Like the Red Coats in a New England forest, some unsuspecting group is currently walking around with a a large target on their back.
To be fair annuities do have their place in some taxable accounts. This only applies to the lucky few who have maximized their 401(k) limits, along with their individual IRA’s and are looking to stash away even more money in a tax advantaged manner.
Products from companies like Vanguard and Jefferson National provide reasonable low cost options. These products come with no income guarantees but could be an excellent option for these unique individuals looking for more tax deferred growth.
In conclusion, it would make a lot of sense for ALL investment accounts to operate under a fiduciary standard which forces advisors to look out for their clients best interests.
If this is not done, we will continue to see one class of retail investors favored over others. This is not only grossly unfair but further muddies the waters in the already murky world of annuities.
