Compliance May 16, 2022

24 States Have Now Adopted the NAIC Annuity Transaction Framework

With South Carolina joining the party, nearly half of all states have now adopted enhanced consumer protections applying to the sale of annuities, as developed by the National Association of Insurance Commissioners.

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This week, South Carolina became the 24th U.S. state to adopt enhanced consumer protections that align with the standards finalized in early 2020 by the National Association of Insurance Commissioners in its Suitability in Annuity Transactions Model Regulation.

The NAIC is the United States’ standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, Washington, D.C., and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer reviews and coordinate their regulatory oversight.

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Under the leadership of Acting Director Michael Wise, the South Carolina Department of Insurance has finalized and adopted a new rule that codifies the NAIC standards in the state. These standards align with those set out by the Securities and Exchange Commission’s Regulation Best Interest. In practice, this means that the annuity transactions standards require best-interest service without mandating that all advisers to such transactions act in a fiduciary capacity.

Among the supporters of the NAIC’s framework and its increasingly widespread adoption is the American Council of Life Insurers. ACLI President and CEO Susan Neely and National Association of Insurance and Financial Advisors South Carolina President Johnny Craven issued a joint statement on Monday commending the South Carolina regulators.

“Unlike a fiduciary-only approach, these measures ensure that all savers, particularly financially vulnerable middle-income Americans, can access information about different choices for long-term security throughout retirement,” Neely and Craven write. “The U.S. Congress reaffirmed the importance of lifetime income when it passed legislation in 2019 that made it easier for employers to include annuities in workplace retirement plans. These protections safeguard consumers while also ensuring that middle- and working-class families retain access to annuities.”

Neely says the ACLI hopes that other states continue the momentum and adopt these “sensible protections,” so that more consumers can benefit from a best-interest standard of care while shopping for annuities.

One matter that could potentially complicate the widening implementation and enforcement of the NAIC’s suitability framework is the fact that the Biden administration could choose to modify, update or even rescind Reg BI, though sources say this is far from a given. While such a move would not entirely derail what the states have done, given that the safe harbors often also cite the Investment Advisers Act or the Department of Labor fiduciary standards, the elimination of Reg BI could cause ambiguity in the different state-based conflict of interest rules.

Data & Research May 16, 2022

Retiree Health Care Costs Jump After Brief Respite

The total projected cost of health care for a healthy couple retiring at age 65 is now well in excess of $300,000.

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Fidelity Investment’s 2022 Retiree Health Care Cost Estimate increased 5% from 2021, and the figure has nearly doubled since the initial $160,000 estimate in 2002.

For 2021, Fidelity’s health care cost estimate was $300,000. Hope Manion, chief health and welfare actuary at Fidelity Investments Benefits Consulting, says that health care costs are likely to continue rising.

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“[T]he costs will continue to go up because of the nature of health-care consumption, where we have so much innovation and technology and improvements in care,” she explains. “We need to be bold and stand up to the reality and get prepared for it.”

For 2022, Fidelity estimates that a 65-year-old couple retiring this year can expect to spend an average of $315,000 on health care costs throughout retirement. The estimates for single retirees are $150,000 for men and $165,000 for women. For single retirees, the 2021 estimate was $157,000 for women and $143,000 for men.

“We did have a little bit of a leveling off, a bit of a break, in the last few years,” Manion adds. “What we’re seeing right now is a return to a as an acknowledgment that that trend is back in health care—there’s a lot of cost [and] inflation pressure that’s going to be happening short-term, [and] we need to be absorbing that into our estimate. Long-term, things should revert to a more normal health care cost trend, or annual increase.”

Fidelity’s estimate assumes that both members of the couple are enrolled in traditional Medicare, which between Medicare Part A and Part B covers expenses such as hospital stays, doctor visits and services, physical therapy and lab tests, and in Medicare Part D, which covers prescription drugs.

The health care cost estimate release also finds that “Americans are generally out of sync with the expected total cost of health care in retirement.” Fidelity’s research shows that, on average, Americans estimate a couple retiring this year will spend just $41,000 on health care expenses in retirement, and 68% expect that associated costs will remain under $25,000.

The nature of for-profit health care in the U.S. is one reason costs have increased, Manion explains. “This number is going to just keep increasing until we get some fundamental change to the U.S. health care system,” she says. “It’s a for-profit system.”

Fidelity promotes health savings accounts as a solution for expected health care costs in retirement. Individuals with access to a high-deductible health plan paired with a health savings account can benefit from the triple-tax advantages of the investment vehicle to save for future medical expenses.  

“There continues to be an opportunity for additional education on the power of a health savings account, especially for younger people who likely have decades to save and invest before they retire,” adds Manion. “Furthermore, HSAs are also a great way to cover current qualified medical expenses.”

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