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Big Flaws in DOL Rule Will Impact Fixed Indexed Annuity Industry

Many annuity organizations are unhappy with the DOL fiduciary rule and the BIC exemption in particular. Americans for Annuity Awareness’ Kim O’Brien wrote an article published for Insurance News Net listing “Three Reasons Why the BIC Exemption is Flawed.” The Best Interest Contract Exemption, also known as BICE, is a bone of contention for many in the annuity industry. MSG, a group of independent marketing organizations, filed a detailed lawsuit specifically related to the inclusion of fixed indexed annuities in the DOL rule. Fixed indexed annuity products were added to the rule at the last minute in a surprise decision by the DOL. The article says that people looking for guaranteed income and protection of their assets with indexed annuity products are going to run into big problems now. There will be an increase in paperwork, fees, complexity and confusion related to fixed indexed annuity products.

The first big flaw related to the BIC exemption is that the Department of Labor essentially ignored important evidence showing that the rule is harmful to consumers. Their so-called cost-benefit analysis was based on unreliable and inaccurate information and does not justify the use of BICE guidelines for selling variable and indexed annuities. There is also no accounting for dealing with the fact that lawsuits related to the rule are being filed all over the country in different states and courthouses. The interpretations and rulings will make the already unclear rule even harder to follow.

Secondly, the rule separates fixed annuity and fixed indexed annuity products in a confusing and unnecessary way. Both types of fixed annuity products offer principal protection, guaranteed interest rate growth, and the transfer of market risk to an insurance company. Traditional fixed annuities differ from indexed annuity products in the way that the interest is calculated. While indexed annuity interest is based upon the performance of a particular market index, the money is not directly tied to the markets. Both types of fixed annuities offer death benefits, are covered by state guarantees, are regulated by insurance regulators because they are not classified as securities, and only charge fees for options that consumers choose to add on with full disclosure. By treating traditional fixed and fixed indexed annuity products differently, the DOL is creating a competitive advantage for traditional fixed products. This is the exact outcome they said they were avoiding between indexed and variable annuity products by including indexed annuities in the BICE guidelines.

Prejudice against commission-based annuity compensation is the third major flaw listed in O’Brien’s article. She says that the rule misunderstands commissions and points out that a fee-based advisor can have conflicts of interest just the same as a commission-based advisor. Advisors who sell fee-based annuities can charge for more hours than they should or make money off a client when they are under-performing just as commission-based advisors can push a product that earns them more commission when a lower commission product is better for the consumer. Unethical advisors come in all forms. But O’Brien points out that commissions are only paid on the premium and are usually less expensive over time. Most often, their pricing correlates with the surrender period.

The article concludes that the DOL simply did not perform due diligence in their creation of this fiduciary rule. More regulation does not necessarily mean a better situation for consumers, especially when it creates legal issues and increased procedures and compliance issues for advisors and insurers. Unfortunately, this could make annuities inaccessible for the millions of Americans who need a way to create an income stream from their retirement savings. The DOL did not show that the current regulations are ineffective and lack consumer protection. The major flaws in the DOL fiduciary rule should be fixed before the variable and fixed indexed annuity industries are forever impacted in a negative way.

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