New annuities sparked by fiduciary rule 'disruption'

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The fiduciary rule has helped drive a slump in annuity sales, but products emerging in its wake could reverse the downward trend, experts say.

The space has seen big changes. In the third quarter, sales dropped to their lowest level since 2001, according to the LIMRA Secure Retirement Institute. Fixed sales outpaced those of variable annuities for the sixth straight quarter — the longest streak in 25 years, the industry research organization says.

The new products include structured variable annuities with fixed annuity-like protection of principal, as well as growth in fee-based and fixed index products, according to experts from LIMRA and IRI. The demand for retirement products remains constant, fueled by baby boomers, they say.

“That hasn’t changed,” says Frank O'Connor, IRI’s vice president of research and outreach. “It will be interesting to watch that journey and watch sales evolve as we see things shift around in product types.”

For example, IRI has tracked a “clear rise” in structured variable annuities, which are linked to indices and carry upside and downside limits, O’Connor says. At $1.6 billion for the second quarter, sales of the products expanded to 6.7% of variable annuity sales from 4.5% in the second quarter of last year.

O’Connor also cites fixed index annuities’ climb as a key trend. Sales of $14.9 billion represent a 55.8% share of all fixed sales in the second quarter, which displayed the products’ escalating dominance over traditional fixed products, he says. Purchases of the product first surpassed other fixed offerings in 2014.

Voya Financial in February launched a fixed annuity connected with indices from JPMorgan Chase and Citigroup called the Journey Index Annuity. A structured variable offering called Ascend is slated to hit the market in January, according to Carolyn Johnson, CEO of Voya’s Annuities and Individual Life units.

Johnson calls Ascend a “hybrid” product because Voya plans to provide four different levels of buffer protection for principal starting at 5% and going up to 30%. Clients and advisors would be able to choose among four indices to link with their investment under the new products.

First-half revenue for Voya's annuities segment has dropped by 4% year-over-year to $599.5 million, according to its latest earnings report. Johnson also declined to say how many firms or advisors have agreed to sell the Journey product so far.

The declining sales figures across the industry formed a topic of discussion at IRI’s annual meeting last month, says Johnson, a member of its board of directors. The rule caused “disruption” for qualified annuities’ distribution, compensation, product mix and suitability documentation, she says.

Still, annuities help fulfill a “tremendous need for retirement income,” Johnson says. “These products are definitely going to prevail over time. It’s just going to be a bumpy few quarters as people get used to the rules.”

The rule “scared some people off” from variable products, according to Joe Heider, the founder of Cleveland-based Cirrus Wealth Management. He predicts variable sales to rebound as interest rates increase, particularly in low-cost products with tax deferral and buffers against downside.

With all-in fees running as high as 300 basis points, the newer variable advisory products favored by Heider cost around 125 with low or nonexistent loads and no commission, he says. The structured products give clients and advisors “sleeves” of indices aimed at growth or income protection, he says.

“You can move between them without any cost or tax implications and they’re totally flexible,” Heider says. “Those tend to be attractive to high-net-worth individuals who want some tax deferral and a low tax basis.”

Advisors, he adds, should ensure they know the full bottom-line cost of any products to avoid any “unpleasant surprises” for the client down the road.

Such fee-based variable annuities, including new indexed offerings, will grow even though they don’t make up a big part of the total variable market, according to Todd Giesing, the director of annuity research at the LIMRA Secure Retirement Institute.

Sales of fee-based variable annuities surged to $570 million in the second quarter from $460 million in the first quarter and $375 million in the fourth quarter of last year, Giesing notes. However, they constitute only 2% of total variable annuity sales, he says.

“We are seeing slow and steady growth, and that’s what we anticipate moving forward,” Giesing says.

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Annuities Fixed annuities Insurance Tax planning Retirement income Retirement planning Fiduciary Rule Voya LIMRA IRI