With annuity sales rising, Congress provides a ‘safe harbor’ in 401(k)s

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Congress has passed a bill expected to lead to rosier annuity sales in the future — just as structured products are picking up on the macroeconomic slack dragging down fixed products.

Issuers and brokerages are cheering the inclusion of a bipartisan federal retirement bill called the Secure Act in a giant budgetary measure. The legislation aims to expand access to 401(k) plans through incentives for employers, but it includes a revenue provision that has raised concerns among advisors. President Trump is expected to sign the bill into law by the end of the week.

The structured products — also known as buffered or registered index-linked annuities — drove up total sales 8% for the year and fueled a three-year high for variable contracts in the third quarter, according to the LIMRA Secure Retirement Institute.

While there have been concerns about the impact of interest rates on fixed annuities, the Secure Act's safe harbor provision shielding 401(k) sponsors from legal liability in the event an issuer can’t honor a contract will likely expand their distribution. Three interest rate cuts by the Fed have hurt both fixed and fixed-index sales after their record levels in 2018.

Fixed sales ticked down 3% year-over-year to $32.9 billion in the third quarter, while those of FIAs increased 3% to $18.6 billion, LIMRA says. In contrast, structured contracts soared by 62% to $4.8 billion, pushing up variable sales by 6% from the year-ago period to $26.5 billion.

The opposing trends came as RiverSource took top honors for client satisfaction in the annuity category of consumer research firm J.D. Power’s annual survey. AIG, Jackson National Life Insurance and Lincoln Financial Group have generated the highest sales so far in 2019, though.

In the different interest-rate environment, a slowdown among fixed products is expected. But FIAs aren't exactly slumping, according to Sheryl Moore, CEO of insurance research firm Wink. She points out that bullish structured products show similarities to FIAs.

“This was the second strongest quarter ever for indexed annuity sales, despite continued low interest rates and pricing challenges as a result of the market,” Moore said in a statement, adding a guarantee that 2019 will end up being another record year for FIAs.

“Structured annuity sales continue to set records,” Moore continued. “It is no wonder that we continued to see companies enter this line of business each quarter when you consider that this product mirrors indexed annuities when evaluated at the same point in the product life cycle.”

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The guaranteed lifetime benefit riders attached to more structured annuities are also playing a role in rising sales. Nearly 15% of RILA products sold in the third quarter included the rider — compared to just 3% in the second quarter, notes LIMRA research director Todd Giesing.

“Given the low-interest-rate environment and the impact it had on cap rates to accumulation-focused products, we expect to see a greater portion of FIA sales shifting to guaranteed income products in the next several quarters,” Giesing said in a statement.

Across the board, combined sales are ahead of their strong pace in 2018. At $184.2 billion in the first nine months of the year, annuity contracts have jumped 8%, according to LIMRA. FIA sales of $56.6 billion rose 13% year-over-year, and fixed contracts of $109.1 billion are up 14%.

In a move that would open more 401(k) plans to annuities, the federal spending agreement passed the House of Representatives on Dec. 17 and proceeded to pass swiftly in the Senate two days later. The Secure Act includes provisions for disclosure documents explaining the products and portability for lifetime income in 403(b), 457(b), 401(k) plans, pensions and IRAs.

Under the legislation, small-business employers would be eligible for tax credits enabling them to offer 401(k) plans to full and part-time employees. A revenue portion of the statute would restrict “stretch” distributions for IRAs to much shorter time spans for higher income brackets.

With backing from AARP, SIFMA, and ACLI, among others, the House of Representatives voted 417 to 3 in favor of the Secure Act in May. The Senate didn’t pick up the measure until attaching it to the $1.4-trillion omnibus appropriations package to keep the government open until the fall.

In addition to new limits on IRA distributions, the legislation includes other provisions that are “more positive for retirement account owners,” according to Blueprint Wealth Alliance CEO Jeff Levine, who posted a lengthy Twitter thread about the planning and tax implications of the bill.

“Did we just free up plan fiduciaries to adopt lifetime income options that could benefit certain plan participants?,” Levine said of the Act’s annuity sections. “Or did we open Pandora's box for insurance companies? Or both?”

As issuers prepare to ramp up 401(k) distribution, they are lagging other financial services and insurance companies in J.D. Power’s customer satisfaction index. The industry average of 776 is well below that of retail banking (807), auto insurance (831) and wealth management (835).

Life insurance writers fared worse than annuity issuers, with an average score of 761 among individual life providers. This year’s study used criteria based on product design, price, account statements, service and other factors — while including an annuity category for the first time.

RiverSource (814), New York Life Insurance (808) and TIAA (804), American Equity Investment Life Insurance (787) and AXA Equitable (786) had the top marks. Brighthouse Financial (716), Transamerica (742), Athene (744), Allianz (754) and Jackson (764) received the lowest scores.

For individual life insurance, Northwestern Mutual (810), State Farm (808), Mutual of Omaha (795), Principal (789) and Liberty Mutual (788) took top billing. AIG (722), Midland National Life Insurance (723), Brighthouse (729), AXA (730) and Transamerica (732) were at the bottom.

“For many years, life insurance and annuity providers viewed their 'customer' as the producers that sell their products,” J.D. Power senior consultant of insurance intelligence Robert M. Lajdziak said in a statement. He says the firms are now focussing more on end-user clients.

Client satisfaction, he continues, is “directly linked to the value customers perceive, and the more that value equation is reinforced through regular, positive interactions, the more customer satisfaction improves.”

The sales rankings compiled by LIMRA cover a lot of the same companies as the J.D. Power survey. In combined fixed and variable sales, AIG ($15 billion), Jackson ($14.4 billion), Lincoln ($10.9 billion), New York Life ($10.3 billion) and Allianz ($9.6 billion) led the way. Jackson generated the highest variable sales revenue, while AIG has sold the most fixed products.

In terms of specific products, Wink notes that Jackson’s variable Perspective II Flexible Premium had the most sales for the third quarter in a row. Allianz’s indexed 222 Annuity drew the highest sales of any fixed product for the 14th straight quarter. The Brighthouse Shield Level Select 6-Year has amassed the highest sales among structured products for seven quarters.

The outlook for annuity sales of all types looks positive moving forward. The levels will revolve around the balance between “short-term economic conditions versus long-term demographics,” CEO David Levenson said in an interview earlier this year. He says he’s not in a position to predict how interest rates or stock markets move.

“What I do know is that, in 15 years, there will be more people over the age of 65 than under the age of 18 in this country,” Levenson says. “The demand for lifetime income has never been greater. So, long term, I am very bullish about the future of products that have guaranteed lifetime income. Short term, I don't know.”

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Annuities Fixed annuities Variable annuities Insurance LIMRA Wink 401(k) JD Power