The Wall Street Journal (August 7, 2024) - By Jean Eaglesham - Advisers are promoting annuities with big commissions that eat into returns
The insurance industry is waging a legal war against new protections for retirement savers. The courtroom offensive appears likely to kill a yearslong effort to curb advice steering people toward products packed with hidden fees.
The high-stakes battle centers on a new standard for financial advice affecting the nearly $1 trillion a year rolled over from employer-sponsored 401(k)s to individual retirement accounts. The Labor Department rule would require advisers on IRAs to recommend what is best for the saver and avoid misrepresentations and excessive charges.
The rule is forecast to curb commissions on annuities sharply. These products are sold as a way to convert retirement savings including an IRA into an often-guaranteed income stream. While annuities have surged in popularity in recent years, they can carry hefty charges and lock in savers.
A dozen industry groups are suing the government, saying it lacks the legal authority to create the new protections.
“Insurers and agents are fighting for their right to keep ripping off clients, with biased advice and sky-high commissions,” said Joseph Peiffer, president of the Public Investors Advocate Bar Association of lawyers who represent investors. “And, right now, they’re winning.”
Insurers counter that the new rule would limit choice for consumers. “This rule would deprive millions of consumers access to much needed retirement financial guidance,” the American Council of Life Insurers said.
Scrapping the rule matters for the industry’s bottom line. Annuity sales are booming, in part because high interest rates in recent years have juiced returns. An aging population is swelling the ranks of retirement savers, many of whom want the protection against stock-market declines that some annuities offer.
For the first six months of this year, sales hit $215 billion—beating the “record-shattering” $181 billion logged over the same time last year, according to Bryan Hodgens, a senior vice president at Limra, an industry-funded research firm.
The flood of cash is fueling concerns about whether people are receiving the best advice. Financial advisers typically get upfront commissions for the sale of annuities, giving them an incentive to promote the products to clients. Products with the biggest commissions have accounted for much of the recent sales growth.
One type of annuity that has drawn particular fire: fixed indexed products, which tie their performance to a market index. These annuities generally put a floor on losses while also capping returns. The protection is attractive to many savers, but can come with a steep price tag.
Commissions on fixed indexed annuities are typically around 8%, but can range up to 14% or 15% on “really bad” products, according to David Lau, whose firm, DPL Financial Partners, develops no-commission annuities. High commissions are often baked into the product’s costs, hitting the performance of what can otherwise be a good product. Such costs are often built into the annuity in ways that can be hard to figure out.
“Products have gotten increasingly complicated, with added bells and whistles,” Lau said. “That complexity makes it easier to hide fees, and more difficult for savers to compare and contrast.”
Consider a Nationwide fixed indexed annuity that lets savers choose between six indexes. In a Q&A, the company explains, “There are no annual contract or administration fees.” But the fine print reveals many costs.
One of the indexes, for example, carries a 0.5% annual “deduction rate,” as well as unspecified “servicing and rebalancing costs,” according to a footnote. Then there are “strategy spreads,” such as the 1.95% a year deducted from the return for one option tied to the S&P 500. That option also caps gains to 55% of the index’s rise.
A Nationwide spokesman said the charges let providers offer “100% protection for the principal” and cover overhead costs.
High commissions go hand in hand with tougher withdrawal penalties, since providers want to earn back the money paid to advisers. Fixed indexed annuities can lock in savers for a decade or more, with surrender charges of more than 10% of the amount withdrawn.
More than half the money held in annuities last year carried a withdrawal penalty or ban, according to an analysis for The Wall Street Journal by the ratings firm AM Best.
The new Labor Department rule also says advisers can only get “reasonable” compensation. That could have a huge impact on costs for savers. Retirement investors would save around $3.25 billion a year in reduced commissions on rollovers into fixed indexed annuities alone, according to an estimate from the data firm Morningstar.
Advisers who sell annuities aren’t shy about their own concerns.
“The net effect of this will be that my income will decline,” said James Holloway, whose Texas insurance agency last year sold around $11 million of annuities.