Trends in Regulatory Oversight – Part 2
May 15, 2014 by Kim OBrien
I have a passion for musical theater and have directed and/or choreographed over 56 productions for community theater groups. To this day, musical lyrics inspire me, teach me, and often offer up cautionary tales. And, too, many of the shows’ messages remind me that life can and often does imitate art. And just as in life, it is very important to be sure you understand exactly what the message is or you will not learn and grow. There is a life lesson to be learned from a great song called “Sit Down, You’re Rockin’ the Boat.” “Sit Down” is a song written by Frank Loesser in 1950 and introduced in the Broadway musical Guys and Dolls and rollickingly sung by Stubby Kaye in the 1955 movie version.
The song’s lyrics tell you that to stay on a “heavenly trip” and not “scuttle the ship,” you’d better know right from wrong, sit down, and not rock the boat. One of those “wrongs” according to the song is gambling. You may be thinking that this is an article supporting or defaming gambling – it is not. It is an article about “rocking the boat.” The song’s lyrical irony is that it occurs in the story just after Sky, the lead, made the biggest gamble of his life—to secure Sarah’s most important goal and also her love – and WON. So while the lyrics might seem to suggest one thing, it really has a different message: sometimes you have to rock the boat and take a gamble to win your dream.
NAFA’s dream is that we will not have to continually fight battles to protect our product line from unnecessary, duplicative, or overly prescriptive regulation that negatively impacts the competitiveness, insurance guarantees, and/or the ability for consumers to buy fixed annuities. Sadly, this dream is not going to become reality in the near future. Last month on these pages, I discussed the battle over the suitability standard and the Department of Labor’s soon to be re-proposed rule outlining a uniform fiduciary standard for all ERISA plans. However, DOL recently stated the new rule will force a fiduciary standard on IRA sales as well. The number of people in our industry who are not aware of the DOL’s intent to impose a fiduciary standard on IRA sales is surprising, so it is essential that we spread the word to ensure that we do not allow the DOL to kidnap IRAs from the Department of Treasury. IRA rollovers make up almost 60% of all indexed annuity sales. That is at least $25 billion in indexed annuity sales in 2013. We covered in length the negative impact that imposing a fiduciary standard will have in our last issue of NAFA Annuity Outlook Magazine, but, to recap:
1. The additional Fiduciary Standard is incongruous and inappropriate in the fixed annuity sale.
2. The additional Fiduciary Standard will disrupt the fixed annuity marketplace.
3. The additional Fiduciary Standard is unnecessary to protect fixed annuity buyers.
The DOL’s stated reason for drafting the rule is that consumers are “confused” by what standard the advisor is under when working with them. While we have yet to see empirical proof that this is true or that it is widespread, for the sake of argument, let’s accept it. Unfortunately, even if we agree they may be “confused,” the DOL has not demonstrated or even asserted that the confusion mattered. Nor has the DOL proven that consumers didn’t trust their financial professional to serve their best interests regardless of whether they are under the suitability or the fiduciary standard and even if they may be confused with which standard their financial professional must comply. It may matter to the DOL and other regulators who don’t live in our world, but they have not proven that clearing up “the confusion” (and we can argue whether a “uniform” fiduciary standard will even do that) is relevant or would lead to better buying decisions by consumers.
I am confused about how the touch screen technology works on my smartphone, but understanding how it works does not matter to me; I bought the phone because I liked what it did and how it helped me. More to our point, I don’t know or understand how the person working for my wireless company is paid for selling me that phone or how he or she is incentivized to “upgrade” me. Do different wireless companies compensate differently? Probably. Do different wireless companies offer different incentives for sales? Probably. Do I care or want to know? NO! I buy a phone because I like its features, it does what they tell me it will, and it meets my goals and improves my life. I also sign a contract that promises me certain guarantees of price, upgrades, etc. If I leave the contract early, those promises are gone and there will be consequences for me.
So, in addition to reduced consumer accessibility, marketplace disruption, and decreased product competitiveness and offerings, the DOL has not demonstrated or proven how a uniform fiduciary standard applied to fixed annuities actually does “clear up confusion” and if it does, how does it improve the sales process, and at what is the cost/benefit to the consumer.
In addition to the Department of Labor, we are closely watching the Securities and Exchange Commission (SEC). At a recent industry conference, I heard an SEC Commissioner state that three of the five commissioners were NOT interested in pursuing a uniform fiduciary standard.” But that doesn’t mean we can rest. During a recent visit to the Hill, many congressional staffers told us that the SEC staff has often pushed forward a rule or an issue because they, the staff, felt it was necessary and then proceeded to convince a majority of commissioners—for example, this is what happened with 151A.
Finally, the most recent battleground for the promotion and protection of IRAs using fixed annuities is found in the current tax reform proposal authored by the Chairman of the House Ways and Means Committee, Congressman Dave Camp of Michigan. The Congressman is proposing some tax ‘reforms’ that will negatively impact the fixed annuity IRA marketplace. We have summarized them here.
Changes to Annuity Tax Deferral
Chairman Camp’s draft legislation would limit savings by undercutting the importance of tax deferral through a 50% cut in pretax contributions and a 10-year COLA freeze, along with adding a surtax for certain savers. NAFA argues that this will severely impact Americans’ ability to accumulate retirement savings. We all understand the power of tax deferral and its impact on the growth potential of a fixed annuity. It is critical to our future, that we make sure members of Congress understand this concept and the proposal’s negative impact, especially to modest-income Americans.
Roth-Only IRAs
Another harmful tax proposal contained in the draft bill would require all IRAs be ROTH-IRAs. Forcing all retirement savers to pay taxes on their savings today will significantly reduce the amount of each savings payment, which will obviously impact the growth potential of the savings. Almost $300 (that number seems small?) million dollars are held in individual annuity IRAs1, and requiring that all qualified money is taxed before it is placed in an IRA will radically change the amount Americans are able to save after they leave their qualified employer-sponsor plan.
In addition, Roth IRA contributions are not tax deductible, and the current tax deduction on other IRAs is a strong incentive to save. Removing it will fundamentally change the behavior of those planning and saving for retirement. Roth IRAs can be a valuable financial planning and retirement income tool, but they don’t make sense for everyone or every situation.
Elimination of Stretch IRAs
The Camp tax reform draft bill proposes to eliminate Stretch IRAs. However, Stretch IRAs are utilized because of their effective planning capabilities that span generations. Eliminating them undercuts family retirement planning security and small business succession planning. The ability for individuals and families to responsibly plan for their retirement, while having the choice to extend their savings to provide financial security for their heirs and dependents, is a worthy policy goal and one that should be encouraged.
NAFA is a member of Americans to Protect Family Security, a partnership of associations representing America’s life insurance companies, agents, and financial advisors dedicated to educating policymakers about the role annuities and other life company products play in the financial lives of 75 million American families. Families turn to life insurance companies and trusted agents and advisors to protect their financial futures with life insurance, annuities, long-term care insurance, and disability income insurance. The goal of Americans to Protect Family Securities (www.SecureFamily.org) is to highlight facts about life insurance and annuity company products and their importance to the financial and retirement security of American families. See more at: www.securefamily.org.
NOW is the time to STAND UP and ROCK THE BOAT! Numerous studies have shown that huge retirement savings gaps exist for millions of average Americans. We need to promote policies that encourage savings to manage longevity risk with guaranteed lifetime income, ensure protection from Wall Street’s ups and downs, and provide a safe retirement for all Americans. We must get active on the Hill and our June Annuity Leadership Forum on Regulation, Legislation and Innovation will be the perfect opportunity to get in front of your federal representatives and educate them on the importance of the Suitability Standard to ensure consumer protection and retirement security and the negative impact proposed tax reform will have on fixed annuities and your clients. During June – National Annuity Awareness Month, look to NAFA for opportunities to participate and engage in our battles to ensure fixed annuities will secure today’s retirees and their future.