New Regulation Inhibits Use of Annuities in Retirement

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The Obama administration has recently instructed the Department of Labor to establish a fiduciary standard for financial professionals advising people about their retirement accounts, including their options for rolling over their 401(k) funds into IRAs. There is a broad belief by those who do not understand how to convert retirement assets into retirement income that 401(k) rollovers can be detrimental to the client. This is partially due to the negative press preceding the proposed regulation.

While there are certainly cases of hidden fees and back-door payments that ought to be addressed, by indiscriminately targeting retirement accounts and 401(k) rollovers, regulators may be eliminating opportunities for clients to purchase products which could greatly improve their emotional and financial well-being in their retirement.

The federal government should be applying a scalpel rather than a sledgehammer. Forcing a narrow definition of what constitutes a client’s best interest will actually hurt many clients planning for retirement. Properly advising a client on their retirement income involves much more than assessing the literal financial return on assets. Planning for retirement is as much an emotional issue as a financial one.

Generally speaking, there is typically no client who places a higher value on security and predictability than one who is on the verge of retirement. In the past, defined benefit plans were relied on to provide this peace-of-mind. Today, they have all but disappeared. Instead retirees are left with defined contribution plans like 401(k)s that, without strategic planning, provide no more assurance than the average mutual fund. We witnessed many of these plans decline dramatically during the stock market chaos of 2008-2009.

The good news for retirement investors is that there are insurance-based retirement income products which can be used to turn a defined contribution nest egg into a stable, pension-like stream of secure and predictable income. These products contractually guarantee* that a retiree will have income that cannot be destroyed or outlived. Income annuities such as SPIAs (single premium income annuities) and DIAs (deferred income annuities) can provide powerful, additional benefits. These additional benefits include income guarantees on a single or joint-life basis, principal protection guarantees with installment and cash refund options, inflation protection with COLA (cost of living adjustment) riders and some liquidity features through “commutation riders.” On top of this, income annuities, unlike other traditional investments, and guaranteed withdrawal benefits of deferred annuities, have no ongoing fee drag.

The power of annuities often times has just as much to do with the emotional benefits, as they do financial. There are many risks in retirement that can be devastating, from inflation risk to market risk to withdrawal rate risk. However, at the center of these risks lies the greatest fear of today’s retirees, which is outliving their money. How do you plan your retirement income over an uncertain lifespan? Annuities are unique in that they not only reduce these risks and fears, but in some cases they can completely eliminate them. No other investment pays a person more for living longer. This is a powerful benefit of this risk-management tool that has to be taken into consideration when considering the products total value.

Since annuity investments require a product allocation rollover to the insurance product, these transactions would be subject to fiduciary standard scrutiny under the proposed regulation. This wouldn’t be a problem if the formulas involved in assessing fiduciary standard compliance were capable of fully weighing the benefits received by the consumer from an annuity strategy. However, the narrow language and considerations of the new regulations could still infer a fiduciary standard violation from the sale of these products. Commission based tools would be taboo. With an estimated $2 trillion in Baby Boomer’s 401(k) accounts, this has serious implications for the future of retirees and advisors alike.

Furthermore, government policy in the guaranteed income area is proving schizophrenic. While the fiduciary standard makes annuity strategies less likely for advisors to recommend, there are other signs the federal government is beginning to appreciate the immense potential insurance products have for the future of retirement income planning. A recent step forward was a new regulation called the QLAC (Qualified Longevity Annuity Contract), which went into effect in July 2014. This new rule allows a portion of a retiree’s pre-tax assets to be funneled into a QLAC, which is a form of a deferred income annuity. It allows a delay of required minimum distributions on that money up to age 85. The Treasury Department also recently issued guidance for using deferred annuities within target date funds (TDFs). Yet, at the same time, the administration wants to make it more difficult to provide this type of advice to clients.

401(k) rollovers to IRA are an important retirement planning process that allows brokers and advisors to create retirement income solutions for clients. It is also allows advisors to help reduce the biggest financial risks that their clients will face in retirement, namely outliving their money. It is understandable that the government is looking to protect Baby Boomers as they move into retirement. However, regulators must realize when they are providing real benefit to the consumer, with plans such as the QLAC, and when their laws may actually restrict advisors from doing what’s right for their clients.  It is my hope that Congress can work with leaders from our industry so that the proper balance can be put in to place, instead of applying indiscriminate scrutiny to all 401(k) rollovers.

*Subject to the claims paying ability of the insurance carrier.

© 2015 Curtis Cloke. All Rights Reserved.

Curtis Cloke, CLTC, LUTCF, award-winning financial professional, speaker, and author, is an early pioneer and advocate for deferred income annuities (DIA). His contribution toward the discovery, development, and delivery of the power of the DIA has been widely acknowledged and embraced as part of the retirement income puzzle by the financial industry. Curtis is the founder and developer of Thrive Income Distribution System launched in 2009, which helps advisors and clients create more income utilizing less of the client’s portfolio. To learn more, visit or

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