Data & Research December 14, 2016

403(b)s Rethinking Adviser Choices Due to DOL Fiduciary Rule

A new survey by the PSCA also found that more than half of 403(b) plan sponsors expect to make no change in light of the fiduciary rule scheduled to go in effect this April.
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Even though 70% of 403(b) plan sponsors are aware of the Department of Labor’s Conflict of Interest rule, which takes effect in April 2017, less than half of small sponsors are aware of this major regulatory shift in the industry, according to a survey by the Plan Sponsor Council of America (PSCA).

In addition, more than half of respondents (59%) plan to make no change in light of the new rule, which extends fiduciary responsibility as defined by Employee Retirement Income Security Act (ERISA) to virtually anyone providing advice to a retirement plan.

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The survey also highlighted strategies some plan sponsors are taking to comply with the DOL rule including hiring a fiduciary adviser or switching to one (24%), changing investment lineup (19%), and reevaluating plan governance structure (15%).

“Though the impending Department of Labor fiduciary regulatory package has certainly raised awareness of fiduciary responsibilities, plan sponsors who are unsure of their role—especially those small organizations—should review their plan governance processes with their service providers and advisers,” suggests Hattie Greenan, PSCA’s director of research and communications.

In addition, the study found that 40% of all plan sponsors feel their plan service providers act in a fiduciary capacity, while 50% say their plan adviser is not a fiduciary.

And even though the Trump administration with an outspoken regulatory critic as DOL secretary casts some uncertainty on the future of the fiduciary rule, many industry experts argue any pushback will likely not take place by the time the rule is implemented. They urge plan sponsors and advisers to proceed with strategies for compliance.

“This environment strongly suggests that all plan sponsors work with advisers to understand the various fiduciary roles and how responsibilities are fulfilled,” says Aaron Friedman, tax-exempt national practice leader at Principal Financial Group. “It will be a collaborative industry effort among advisers, plan sponsors and service providers.”

The 403(b) Snapshot Survey by the PSCA was sponsored by the Principal Financial Group. It reflects responses from 281 not-for-profit organizations that currently sponsor a 403(b) plan. For more research, analysis and insights from Principal, visit the Principal Knowledge Center.

The Markets December 14, 2016

Fiduciary Rule Drives Reconsideration of Fee-Based Annuities

Nearly half of insurers feel the DOL conflict of interest rule would positively impact sales of fee-based annuities, according to Cerulli Associates; less certain is how to effectively package and price such products. 
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U.S. variable annuity (VA) and fixed-index annuity (FIA) sales are expected to decline by at least 10% through 2018 as the industry struggles to adapt to upcoming fiduciary reform regulations put forth by the Department of Labor (DOL), according to data shared by Cerulli Associates.

There can be little doubt that annuity providers, many of them at least, would like to see the significant reforms halted or dialed back under the pending Trump administration. They argue they will never be able to make the new fiduciary standard’s “best-interest contract exemption” or “BIC” provisions workable, given the commission-based distribution arrangements traditionally used for fixed-index annuities.

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Annuity providers would much prefer to be allowed to use the distinct “84-24 exemption” to continue to use commission-based sales structures—which had been initially proposed by the DOL but subsequently reversed in the final version of the rulemaking published last year and slated to start taking effect in April 2017. Utilizing this exemption would still likely require some changes that are in the best interest of the end investors purchasing annuity products, but many insurers believe 84-24 is an easier compliance hurdle to jump over. 

Polling conducted in this evolving environment by Cerulli Associates suggests that insurers feel the biggest challenge they are facing for the foreseeable future is the DOL rule—even as concerns about lasting low rates and stagnant global economic growth add additional headwinds.

“Insurers’ responses to new the regulatory landscape will significantly impact the future of VA and FIA sales,” argues Donnie Ethier, associate director at Cerulli. “In order to ensure future relevance, insurers must examine both the pricing and positioning of their products.”

NEXT: Growth in either direction 

Cerulli predicts investor interest in all sorts of fee-based products will grow as the DOL rule is implemented—and even if it is not.  

“This interest has been slowly growing within the industry over the past few years, as most insurers and distributors think they will be needed to comply with the DOL rule,” says Ethier. “Adoption of the fee-based model has been mostly overlooked by the industry … However, what was once considered an opportunity is now a necessity.”

The Cerulli research shows nearly half of insurers surveyed said that sales through fee-based platforms would be positively impacted as a result of the rule.

“They could also be a source of future innovation, given that few versions currently offer guarantee lifetime benefits,” Ethier says. “This may be an opportunity for developing new benefit ideas for this contract class. Insurers will need to focus on coming up with new ideas to provide the guarantees that investors want while minimizing risk to the company.”

If insurers can develop creative products that focus on how advisers do business, they can aid their cause in the years ahead, Ethier concludes. "It's also important that insurers remain sensitive to cost and compliance considerations and that most broker/dealers want to control the messaging regarding the Conflict of Interest Rule to their adviser networks."

Information on how to obtain Cerulli's latest annual report, U.S. Annuities and Insurance 2016: Adapting to the Fiduciary Reality, is available at www.Cerulli.com. 

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