The Department of Labor’s version of an indexed annuity has arrived
With less than two years to go until the full implementation of the Department of Labor (DOL) fiduciary standards rule, annuity carriers are scrambling to create new products to meet those strict pro-customer guidelines. Annuities are commodities, and the DOL ruling will finally force agents to show all choices and shop for the highest contractual guarantees for every customer. That seems like an adviser “no-brainer,” but too many agents only push their “favorite” incentive-ridden annuity product of choice.
When it comes to the seemingly unregulated promotional world of indexed annuities, the current agent game is getting ready to permanently change with the introduction of new stripped-down versions of this over-hyped category. To that, I say, “it’s about time!”
Back to the 1995 future
When indexed annuities (also known as fixed index annuities) were first introduced in 1995, they were very simple products that competed with and typically beat CD or MYGA (fixed rate annuity) returns. The early indexed annuities offered by long-gone carriers like Keyport were fantastic and are looked upon nostalgically by old annuity curmudgeons like me.
In the current indexed annuity world, there are over 40 index choices (some made up out of thin air) and over 700 index call option versions to choose from. Overkill to say the least. Many agents pushing indexed annuities (or using the fraudulently made up word “hybrid“) can’t fully explain what they are selling or are only just bullet pointing the positives to earn a high commission.
The first round of new indexed annuity designs will be introduced later this month and into the fourth quarter of 2016. These new FIAs (i.e. Fixed Index Annuities) reportedly will be “easier” to understand and will have the typical 6 to 10% hidden marketing and distribution charges stripped out. Hopefully, we will see these hidden expenses built back into the index call option return potential. That’s at least what the carriers are promising.
Game almost over for the indexed annuity gunslingers
For the national TV & radio promoters and advertisers, that knock at your door is going to be the DOL enforcing the rules that the annuity industry has apathetically and inexplicably ignored. Those ‘too good to be true’ and ‘have your cake and eat it too’ sales pitches are going to hopefully disappear forever along with the ‘bad chicken dinner‘ seminar annuity food events my mother loves to attend (and eat for free!) in Florida.
The one trick agent pony that only sells high commission indexed annuities will have no place to ride in the new DOL annuity world, as well as most of the unneeded middleman distribution companies (aka: IMOs & SMOs) that aggressively promote indexed annuities.
The new indexed annuity world will be simpler, easier to understand, and designed for the consumer…not the agent.
Still not too good to be true
The new versions of indexed annuities will be as close to ‘no load’ as you are going to get with this strategy. It will still be based on a fixed annuity chassis and full principal protection, but the call option (typically one year) strategies for potential upside will have a real chance for better than CD returns.
I still caution the ever eager annuity industry to refrain from their “market upside with no downside” sales pitch chorus. Indexed annuities do protect your principal, but you should never look for real stock market returns from this strategy. Even though the new FIA offerings will have higher limits (i.e. caps, spreads, etc.) on the call option returns, they will still have contractual limitations on the upside.
Lock in with no load
The benefit proposition that FIAs offer, and that gets lost in the unregulated sales hype, is the fact that the one-year call option does allow you to contractually and permanently lock in those index option gains on the contract anniversary date. That’s the good news. The bad news is that index call option gain can only be locked in one day a year with most FIA policies.
The other positive news is that if the markets go down, and the index call option expires worthless, you don’t lose any money. You also get to choose the next year’s call option at the lower level, and FIAs with no attached riders have no annual fees.
The sizzle fades, but the steak remains
From what I have been shown by the carriers, the new indexed annuities will not be in the game of the over hyped upfront bonuses used to sell current FIA offerings. In addition, the optional income riders that will be offered on the new FIAs are not that attractive on first glance.
The new FIAs seem to focus solely on the accumulation strategies of the one-year index call options, and the ability to get your money back in a few years if you don’t like the product. That’s sounds like a good thing in my opinion.
Income rider delivery system…for now
For now, and until I read the new FIA policies, I will only utilize FIAs as an efficient delivery system for contractually guaranteed income riders for future income needs. With current FIAs, I totally ignore the accumulation part of the strategy, and literally draw an ‘X’ through that part of the proposal so the focus is solely on the income rider guarantees.
It will be interesting to see the first versions of the new FIAs roll out later this month, and see if the pro-consumer carrier verbiage matches the contractual realities. I’m crossing my fingers that these new FIAs will change the indexed annuity industry for the better..once and for all. Kudos to the DOL ruling for at least getting it to this point. It’s about time.
Originally published 8.23.16 by MarketWatch.com – http://www.marketwatch.com/story/the-department-of-labors-version-of-an-indexed-annuity-has-arrived-2016-08-23