New retirement savings rule ripples through Des Moines
April 19, 2016 by Matthew Pattane
A new federal rule aimed at saving retirement investors money is rippling through Des Moines, as investment advisers and companies work to figure out the full effect of the regulation.
The Department of Labor recently approved a new rule for those who give retirement investment advice. Instead of just having to provide “suitable” advice to customers, the new regulation holds advisers to a “fiduciary” standard, meaning they have to work in the best interest of their clients.
The new rule will go into effect in April 2017.
“Today’s rule ensures that putting clients first is no longer simply a marketing slogan. It’s now the law,” Labor Secretary Thomas Perez said when unveiling the rule last week.
The “best-interest” standard covers advisers working with clients on their retirement accounts, such as 401(k)s and individual retirement accounts, and products that can contribute to those plans, such as variable annuities.
It also now covers indexed annuities, a hotbed industry for the Des Moines area. Since those annuities were previously exempted, some companies and industry experts said the move caught them by surprise.
Principal Financial Group, American Equity Investment Life, Athene USA, Voya Financial, and Fidelity & Guaranty Life are some companies in Des Moines that offer retirement advice or sell services such as annuities.
“This is workable, but it is huge. It will cause a shift,” said Steve Parrish, an adjunct instructor of business law at Drake University.
While company officials said they are reviewing the new rule, they said it will likely cause them to shift how they do business. Customers might see more paperwork, advisers may choose who they work with differently or how they get paid, and most are looking out for potential legal pitfalls.
“I think you could probably characterize this as the biggest regulatory or legislative change that will influence the industry, but most importantly, who the industry serves as customers,” said Greg Burrows, senior vice president of retirement and income solutions at Principal.
Proponents of the rule change, such as Perez, said it will help save investors money by limiting advice that may fit a client’s needs but also gives advisers a bigger paycheck.
The White House estimates that reducing those conflicts of interest could save retirement investors $17 billion a year.
The rule will require increased disclosures from advisers on how they are paid, Parrish said.
“You have to tell them how much you’re making out of this, which usually means a better-informed client,” Parrish said. “That should really provide more information, more trust, and perhaps it might clean out some of the people who, like in any kind of intangible product, abuse it.”
POn the other hand, Parrish said more paperwork does not always equal better service.
The rule, he and others said, will likely increase the cost it takes for advisers to do business. Inevitably, that cost will be pushed along to consumers, or some advisers may decide not to work with clients who earn less money, they said.
American Equity CEO John Matovina called the rule “very frustrating.”
“We sell a product of fixed indexed annuity that we have strong feelings about that are right for American retirees,” he said. “The rule as passed, as finalized, is going to make it more difficult for people to get that product.”
Matovina also said parts of the rule are too vague or ambiguous, increasing the risk of lawsuits against advisers. If advisers are worried about their legal risk, they may not offer certain advice or services to clients, he said.
“Quite frankly, there is very much an unknown legal exposure for failure to comply with the new rules,” he said.
Burrows, from Principal, said the education that investors receive may be less personalized.
“In the new world, it’s going to be a more simplified conversation,” Burrows said. “It’s going to be more fact-based in that case, and probably not be able to provide the same kind of help the individuals are receiving today.”
Annuity sales are huge for Des Moines
The sale of annuities has exploded in recent years, hitting record highs. Annuities pay out a steady stream of cash after an initial period of investment.
Last year, the sale of indexed annuity sales reached more than $53 billion, according to Wink’s Sales & Market Report.
About 34 percent of all indexed annuity sales came from insurance companies based in Iowa, according to Moore Market Intelligence, a Pleasant Hill research firm that compiles the Wink report.
Moore CEO Sheryl Moore said she expects to see annuity sales drop slightly before rebounding as the rule comes into effect.
“I think we’re going to see a drop after implementation, and then it’ll be going back up again,” Moore said.
