Come April 2017, when advisors to 401(k) sponsors and IRAaccounts recommend fixed indexed and variable annuities toretirement savers, they’ll do so under the Best Interest ContractExemption, the provision of the Department of Labor’s finalizedfiduciary rule that will make those advisors legally beholden to dowhat is in savers’ best interests.

In subjecting FIAs and VAs to the BIC exemption, the DOL singledout the products for their “risks and complexities,” according tolanguage in the finalized fiduciary rule.

Read: All coverage on DOL fiduciary rule

Just prior to the rule’s release, analysts at Fitch Ratings saidthe “onerous requirements” of the BIC exemption will negativelyimpact annuity sales for insurers.

And on the day the rule was released, Standard and Poor’sRatings Services also issued a warning for providers of fixedindexed and variable annuities, which combined accounted for $190billion in sales last year.

“We believe this (rule) could meaningfully affectsales of VAs and FIAs in the nearterm,” wrote S&P analysts in an investor brief. “If companiesare unable to adapt quickly and their relative market positionsdeteriorate, we could view their overall competitive positionnegatively.” Neither agency is ready to downgrade insurers as aresult of the rule--yet.

The ability to adapt is likely to hinge on how insurers willprice annuities going forward.

Language in the final rule regarding commission-based sales onall investments is much more forgiving than what was first laid outin the proposed rule. But as fiduciaries under the BIC exemption,providers and advisors will be required to charge “no more thanreasonable compensation” on products, according to the rule.

Factoring exactly what constitutes reasonable compensation onFIAs and VAs is hardly clear-cut, says John Sarich.

“The challenge is how do you determine best interest,” saidSarich, vice president of corporate strategy for Vue Software, aBoca Raton, Florida-based provider of compliance and managementplatforms to insurers and advisors. “Is it price, is itproduct? There is still a lot of grey area.”

Sarich has spent his career delivering tools to help annuityproviders stay compliant with what he says is a “labyrinth” ofstate and federal regulation governing annuities.

From his perspective, the DOL still has work to do specifyingthe reasonable compensation requirement for insurers and theadvisors recommending annuities in the future.

“The fear in the industry is that there will be a bias forfee-based compensation,” said Sarich, who describes himself asagnostic on the DOL’s rule, but acknowledged the new regulationswill create opportunity for his firm and others that designdistribution platforms for annuities.

“Fee-based sounds cleaner, but it opens up a lot of questions,”he added.

One question is how to price the level of service and advicethat will be required after a sale is made, said Sarich. “Theseproducts can be uniquely complex.”

That puts him in agreement with the DOL. Annuities createmultiple levels of compensation by the time a product is sold,explained Sarich. How those layers are disclosed will change withthis rule, he said, but determining exactly how will be hard to dowithout more input from regulators.

“As is, some fees and commissions are disclosed, and some arenot. Between advisors, managers, distributors—there are a lot offingers in the pie. Insurers will need more specifics.”

In the final rule, the DOLdefers to the Employee Retirement Income Security Act’s treatmentof reasonable compensation for questions on compensation on FIAsand VAs.

Section 408(b) (2) of ERISA, which was finalized in 2012—aftermore than four years of rulemaking--addressed reasonablecompensation by creating extensive new disclosure requirements forcovered service providers to ERISA-governed retirement plans.

Direct compensation, indirect compensation, and incentivecompensation all must be clearly defined under 408(b)(2), alongwith termination fees and thorough descriptions of the servicesdelivered.

In its final rule, the DOL noted that “several factors”determine reasonable compensation, including market pricing ofservices and assets, the cost and scope of monitoring, and thecomplexity of the products, according to the rule.

But in deferring questions of reasonable compensation forannuities to ERISA, the DOL may have raised more questions thananswers, thinks Sarich.

“We don’t know everything we need to create add-ons to existingcompliance tools,” said Sarich, who said his firm is fieldinginquiries for insurers and advisors on a daily basis.

Language in the final rule suggests the DOL may be aware ofthat. After referring interested parties to how ERISA definesreasonable compensation, the rule says “the Department will provideadditional guidance if necessary.”

For Sarich, the need for that guidance is not a question of“if.”

“Now all the DOL has to do is issue the final rules to its finalrule,” he said.