As the trade groups that represent the interests of fixed indexed annuity providers challenge the Department of Labor’s fiduciary rule in three federal courts, at least one insurance company is adjusting its fixed indexed annuity product lineup.
New York City-based Voya Financial Inc. has rolled out the Voya Quest series of fixed indexed annuities, which includes three new products that feature lower surrender fees than previous products and the option to choose from a five-, seven- or 10-year contract surrender schedule.
Like previous fixed indexed annuity product offerings, the new series of annuities is indexed to the Standard and Poor’s 500 and guarantees principal protection. A Guaranteed Living Withdrawal Benefit rider can be purchased at an additional cost for investors seeking a lifetime stream of income.
The Labor Department fiduciary rule shifted the regulation of fixed indexed annuities from the prohibited transaction exemption 84-24 to the new Best Interest Contract Exemption, which requires all advisors to IRAs and 401(k) plans with less than $50 million in assets to act as fiduciaries to investors.
In the proposed version of the rule, fixed indexed annuities were to be regulated under PTE 84-24, along with immediate annuities. By shifting their oversight to the Best Interest Contract Exemption, the Labor Department took the annuity industry by surprise. Each of the five lawsuits against the rule to date addresses the treatment of fixed indexed annuities along with other aspects of the rule, with one suit only involving the claim that regulators usurped their statutory authority in making fixed indexed annuities subject to the Best Interest Contract Exemption.
In the lawsuits, the trade groups, insurance companies, and a consortium of independent marketing groups that distribute fixed indexed annuities allege the final rule’s treatment of fixed indexed annuities is in breach of the Administrative Protection Act, because regulators failed to adequately consider the disruption the rule will have on the fixed indexed annuity market. The Labor Department also failed to give fixed indexed annuity providers and marketers adequate notice to comment on the revised final rule, which also constitutes a breach of the APA, according to court documents.
Central role of FIAs
In an email, Carolyn Johnson, president of annuities at Voya, said the company supports the claims brought by various trade associations, but she underscored the company is not actively involved or providing special funding to the legal efforts.
In 2015, sales of fixed indexed annuities eclipsed $54 billion. About 60 percent of fixed indexed annuities are distributed through independent insurance agents, according to industry groups. Analysts and stakeholders have said the final rule will all but eliminate that channel of distribution, as fixed indexed annuities providers will not be adequately able to oversee independent agents to determine if they are selling in compliance with the Best Interest Contract Exemption.
That will shift the distribution of fixed indexed annuities to broker-dealer and registered advisory channels, which will be better equipped to oversee the marketing and compliance of fixed indexed annuities with the Best Interest Contract Exemption, say insurance industry analysts and stakeholders.
As a result, the livelihoods of “tens of thousands” of independent agents and small insurance businesses will be affected, according to a claim brought by Market Synergy in U.S. District Court in Kansas. Markey Synergy is a network of 11 independent marketing organizations that was responsible for $15 billion of fixed indexed annuity market in 2015.
Johnson said the new Quest series of fixed indexed annuities “was designed to be flexible to make it an attractive product to our distributors” given the new regulatory landscape.
“We reduced the surrender charges — relative to the product series it is replacing — to fit better with new trends, customer preference and the market,” she said.
Johnson did not say specifically that independent insurance agents would be squeezed from the market in light of the Labor Department fiduciary rule.
“Voya has strong relationships with a diversified group of distributors, but predominately registered representatives, including multi-line independent insurance agents, banks, and broker-dealers,” said Johnson.
“We are working with our distribution partners to address their concerns on the DOL’s fiduciary rule and, at this time, it is too early to determine exactly how we will function in each. With that being said, we do plan to adjust our business model as new trends and the regulatory landscape evolves,” she added.
Regardless of the final rule’s impact on distribution channels, or the outcome of legal challenges to the treatment of fixed indexed annuities in it, Johnson is confident that fixed indexed annuities will have a central role in better preparing investors for retirement going forward.
“Data from demographic trends confirm the thinking that more and more people will need to generate guaranteed income in retirement, as fewer will have access to traditional pension plans,” said Johnson.
“This will underscore the demand for retail annuities and, specifically, FIAs, as they provide guaranteed income. The Voya Quest series allows individuals to grow and protect their retirement savings — while generating a steady stream of income in retirement and protecting from market downturns,” she said.