Testimony of Catherine Weatherford. President and CEO, Insured Retirement Institute

Transcription

1 Testimony of Catherine Weatherford President and CEO, Insured Retirement Institute Hearing on Preserving Retirement Security and Investment Choices for All Americans Subcommittees on Capital Markets & Government Sponsored Enterprises and Oversight & Investigations U.S. House of Representatives September 10, 2015

2 On behalf of the Insured Retirement Institute (IRI), I welcome the opportunity to submit written testimony to the members of the Subcommittees on Oversight and Investigations and Capital Markets and Government Sponsored Enterprises for the hearing entitled Preserving Retirement Security and Investment Choices for All Americans. We appreciate the subcommittees examining the U.S. Department of Labor s (DOL s) proposed Fiduciary Rule and the consequences for retail investors, retirement savers and our nation s economy, in addition to H.R. 1090, the Retail Investor Protection Act. IRI is the only national trade association that represents the entire supply chain of the retirement income industry. We have more than 500 member companies, including major life insurance companies, broker-dealers, banks, and asset management companies. Our member companies account for more than 95% of annuity assets in the United States, include the top 10 distributors of annuities ranked by assets under management, and are represented by more than 150,000 financial professionals serving over 22.5 million households in communities across the country. IRI and its members therefore represent not only their own views, but also those of their clients on Main Streets across America. As such, IRI is uniquely positioned to comment on the implications of the proposal for manufacturers, distributors and consumers of annuity products that provide guaranteed lifetime income. We are concerned the DOL s fiduciary rule proposal will have unintended consequences that jeopardize and limit consumers choices and access to beneficial financial products such as annuities. As Americans are living longer and facing greater obstacles to saving for retirement, the role of guaranteed investment products in helping consumers achieve a financially secure retirement has never been more important. Annuities are the only financial products that guarantee lifetime income throughout retirement. When you consider the retirement reality in America defined by the unsure footing of Social Security, the near disappearance of pension plans and the record losses in 401(k) plans it is clear that Americans planning for retirement must have a second form of guaranteed retirement income. IRI submitted a detailed comment letter to constructively help DOL revise its proposal to preserve consumers access to guaranteed lifetime income products and the professional advice needed to understand, purchase, and manage those products. To help DOL achieve its consumer-protection objectives without the negative unintended consequences of the current proposal, IRI and our members identified the following core principles DOL should follow when revising its proposal: 1. Financial professionals should be held to a best interest standard when recommending investments to retirement savers. 2. Consumers are entitled to freedom of access to retirement income guarantees. 2

3 3. In the post-defined benefit plan era, the availability of guaranteed retirement income through IRA rollovers meets a critical consumer need. 4. Rules for annuity products must be specifically crafted to account for their guaranteed lifetime income features. 5. Competitive annuity markets serve consumer interests. 6. Consumers have a right to choose their preferred source of retirement advice, including the option to work with advice providers who are experts on proprietary products, and how their advice provider is compensated. 7. The Administration s public policy position in favor of access to and utilization of guaranteed lifetime income products should be advanced. IRI believes a standard established on these principles will maintain a competitive annuity market that serves consumer interests while preserving consumers access to and utilization of guaranteed lifetime income products. In addition, IRI supports Congresswoman Wagner s Retail Investor Protection Act, which would ensure meaningful regulatory coordination and consultation as part of the DOL rulemaking process by requiring DOL to delay its rulemaking effort until the Securities and Exchange Commission (SEC) issues a final rule establishing a uniform fiduciary standard of care under the Dodd-Frank Act if necessary. This legislation is a prudent step to consider as work continues on establishing a standard based on IRI s core principles. The objective of this process should be to establish a standard that increases consumer protections, prevents investor harm and avoids investor confusion, while preserving access to financial products and avoiding market disruptions. Congresswoman Wagner s legislation seeks to achieve that goal, and we applaud her leadership on this issue. Meeting Consumers Retirement Income Needs Americans today are living longer than ever before, while access to traditional defined benefit pension plans continues to decline and health care costs continue to rise, creating a significant risk that far too many Americans more than 30 million Baby Boomers and nearly half of all Gen Xers will outlive their savings. Middle-income Americans seeking a financially secure retirement are faced with challenges that simply did not exist for their parents and grandparents. Outside of Social Security and private pensions, annuities are the only source of guaranteed lifetime income to help retirees ensure they will not outlive their savings in retirement. Only insurance companies and their distribution partners can provide these products. With proper planning and use, annuities can provide retirees with guaranteed lifetime income and the 3

4 security of knowing they will not outlive their savings. IRI research has shown that Boomers who own insured retirement products, including all types of annuities, are more confident in their overall retirement expectations and are more likely to engage in positive retirement planning behaviors, with 68 percent having calculated a retirement goal and 63 percent having consulted with a financial adviser. Annuities appeal to Americans of all income levels and consumers who do not have access to other retirement savings vehicles. In fact, annuity owners are overwhelmingly middle-income. Seven in 10 annuity owners have annual household incomes of less than $100,000. Unfortunately, the DOL proposal would significantly limit consumer access to these critical lifetime income guarantees through employer-sponsored retirement plans and IRAs at precisely the point in time when access to them is most needed. Support for a Workable Best Interest Standard As I noted above, IRI and our members support a best interest standard for financial professionals who provide personalized investment advice or recommendations to plans, plan participants and beneficiaries, and IRA holders. We believe the vast majority of financial professionals already act in their clients best interest, and recent IRI research found that nearly all consumers agree. It is critical, however, that the establishment of a best interest standard does not inadvertently limit plan participants and IRA investors access to a broad spectrum of guaranteed lifetime income products, from living benefits to immediate annuities to deferred income annuities and qualifying longevity annuity contracts (QLACs). DOL can easily avoid this outcome by (a) revising the prohibited transaction exemptions (PTEs) in the proposal to provide a clear and workable path for advisers and financial institutions to make these products available to their clients, and (b) clarifying the proposed definition of fiduciary and the proposed carve-outs from that definition to establish a more appropriate threshold for the imposition of fiduciary status. Need for Workable PTEs to Preserve Access to Guaranteed Lifetime Income The proposal includes two PTEs upon which financial institutions and advisers can rely to make annuities available to their clients a new Best Interest Contract Exemption (the BIC Exemption) and a revised version of existing PTE IRI s comment letter identified a number of concerns regarding both of these PTEs and recommended specific changes DOL should make to address those concerns. 4

5 Definition of Best Interest is Needlessly Restrictive Both the BIC Exemption and PTE would require that advisers act in the best interest of their clients. As noted above, IRI and our members support this concept. However, the definition of best interest in the proposal is impractical, unnecessary and unworkable because it would require that advisers act without regard to their own legitimate financial and business interests. IRI suggested this definition be modified to clearly require that advisers and financial institutions always put their clients interests first, without requiring advisers and financial institutions to have no interest at all. Without this change, it will be impossible for any adviser or financial institution to rely on either PTE or the BIC Exemption, meaning millions of Americans would lose access to advice and to products that provide guaranteed lifetime income. Disparate Treatment of Variable Annuities is Unnecessary and Inappropriate The proposal would remove sales of variable annuities to IRA owners from the scope of PTE 84-24, an exemption that has been in place for both variable and fixed annuities for over 30 years. This change would limit choice for retirement savers by strongly discouraging the sale of variable annuities, which offer retirement savers an essential and unique vehicle for accessing guaranteed lifetime income while still retaining some effective control over investments. However, DOL has not provided any evidence to support the need to treat variable annuity sales to IRAs any different than other annuity sales to retirement savers. Rather, this change appears to be based on an inaccurate perception that variable annuities are simply a package or bundle of mutual funds and should therefore be treated as such. In fact, variable annuities are much more like fixed annuities than mutual funds and other securities products. All fixed and variable annuities, whether registered as securities or not, are insurance products that provide guaranteed lifetime income. While variable annuities have investment features, the products benefit base and lifetime income guarantees are the primary attributes that make them attractive to many consumers. In addition, variable annuities commonly include multiple layers of meaningful guarantees, including: one or more fixed investment options, with both periodic and lifetime crediting rate guarantees, alongside a set of variable investment options; living benefits providing lifetime income guarantees; death benefit guarantees; and guarantees of the right to convert all or a portion of the contract to an income for life or for joint lives. IRI has strongly urged DOL to restore variable annuities sales to IRAs to the scope of PTE IRA owners would still receive the protections of a best interest standard (which would be added to this PTE under the proposal) and reasonable compensation requirements (which are already part of PTE 84-24), as well as existing disclosure and sales practice rules under SEC, FINRA and state insurance regulations. 5

6 To be clear, IRI believes both PTE and the BIC Exemption (with the changes described below) would provide appropriate levels of consumer protection with respect to annuities, and that both exemptions should therefore be available for sales of all types of annuities so advisers and financial institutions can have the option to choose the path that makes the most sense for their respective businesses and clients. BIC Exemption is Unworkable for Annuity Products IRI believes many of the conditions included in the proposed BIC Exemption will be so onerous or impossible to comply with that lifetime income products and vital sources of annuity product distribution information will no longer be available to consumers. IRI has provided DOL with extensive feedback in its comment letter to address concerns about changes needed to make the BIC Exemption workable, including suggestions with respect to the logistics of the required best interest contract and the disclosure requirements. While this testimony is not intended to restate all of our concerns and recommendations, I do want to highlight two of our other specific issues regarding the BIC Exemption. The first relates to conditions included in the proposed exemption regarding reasonable compensation as it would apply to annuity products. The BIC Exemption would measure reasonable compensation strictly in relation to the value of services provided by the adviser and the financial institution. While that may seem sensible on its face, it fails to account for the costs associated with the guaranteed features of annuity products, which are the main reason most consumers decide to purchase these products as part of their overall retirement income plans. IRI recommended to DOL a simple and straightforward solution to address this issue by which DOL can incorporate the same distinction into the BIC Exemption for purposes of measuring reasonable compensation in the context of annuity transactions that is contained in the proposed amendments to PTE 84-24, which distinguishes between amounts paid for services provided and amounts paid for the annuity contract itself. The second point on the proposed BIC Exemption relates to its impact on proprietary annuity distribution models. Many insurers offer proprietary investment menus under their variable annuity contracts and IRA products. Similarly, a number of insurers have career agents who contractually agree to limit their annuity sales and servicing efforts primarily or exclusively to the insurer s own products. These insurers may sponsor benefit plans to cover qualifying career agents, provide office housing allowances and offer substantial training and education support. The proposed BIC Exemption implies that such arrangements are inherently problematic by imposing additional conditions on advisers and financial institutions that offer only proprietary products. These conditions would create a bias in favor of advisers and firms that offer unlimited product choice and against those that choose to develop more extensive expertise on a smaller universe of products. The benefits of the proprietary distribution business model are 6

7 vital to a healthy marketplace and need to be preserved. IRI recommended that DOL remove these additional conditions on advisers and financial institutions that offer only proprietary products and clarify that merely offering such products would not subject them to any additional requirements in order to satisfy the BIC Exemption. Proposed Definition of Fiduciary is Overly Broad The proposal would significantly expand the circumstances under which a person giving investment advice to a plan, its participants, or an IRA owner would be considered a fiduciary under ERISA and the Internal Revenue Code. In the preamble to the proposal, DOL explains that the goal is to define fiduciary to clearly include relationships that are appropriately regarded as fiduciary in nature and clearly exclude those that are not. However, the proposed definition is so broad that it captures many customary financial marketing and sales activities where no reasonable consumer would expect a financial professional to perform such activity as their fiduciary. By way of example, the definition would include each of the following activities: Giving a mere factual description of the features of an annuity product, such as an immediate fixed annuity or a deferred variable annuity, and explaining how the product can meet certain needs; Answering questions from plan participants about the operation of a specific in-plan guaranteed lifetime income product and its available features; Proprietary product wholesaling activities where representatives of an annuity product manufacturer meet with financial professionals either one-on-one or in group sessions to explain the features of the product and to conduct training; and Counseling a recent retiree about his or her likely income replacement needs and the features available under various annuity products that could help meet those needs. Routine customer service provided by a call center. If the fiduciary definition is not narrowed to clearly exclude activities not fiduciary in nature, millions of Americans with modest means or who are just starting to save will lose access to the information and advice they need to help them plan for a secure and dignified retirement. IRI offered a number of recommended changes to the proposed definition of fiduciary to distinguish between conduct that is properly considered and understood to be fiduciary in nature and clearly non-fiduciary sales and marketing activities. Although DOL has provided a number of so-called carve-outs from the proposed definition that in theory could alleviate these concerns, those carve-outs are too narrowly tailored to do so. 7

8 First, the proposal includes a counterparty carve-out designed to allow advisers and financial institutions to engage in basic sales activities without becoming a fiduciary (commonly referred to as a seller s exception). Unfortunately, this carve-out is not available for most retail transactions, such as those involving small 401(k) plans or individual participants, beneficiaries or IRA owners. The proposal justifies the limited availability of this carve out based on the view that, as a rule, recommendations to small plans and individual customers do not fit the arm s length characteristics the carve-out is intended to preserve. IRI disagrees with this premise, and therefore urged DOL to provide a carve-out from fiduciary status for a person who: provides advice or recommendations... under facts and circumstances where there can be no reasonable expectation on the part of the advice recipient that the advice provider is undertaking to provide unbiased and impartial advice. Absent such change, tens of thousands of small businesses will either not open retirement plans for their employees or will not maintain their current plan, and millions of Americans with low and moderate savings will not receive information and advice to help them plan for a secure and dignified retirement. Another important carve-out in the proposal relates to investment education. While DOL expanded investment education to include education about distribution options, the proposal nevertheless impairs the ability of advisers and financial institutions to provide meaningful investment education because it excludes discussions of specific investment alternatives from the definition of investment education. IRI believes the existing guidance under Interpretive Bulletin 96-1 allowing discussions about investment alternatives in connection with asset allocation education is very important for savers, thus IRI urged DOL to revert back to that definition. Otherwise, savers will not be able to know which specific investments match their preferred asset allocation, and they risk choosing investments that do not meet their risk tolerance and needs. Implementation Period is Impractical and Must be Extended IRI believes the proposed eight-month implementation period provided by DOL in the rule is simply not feasible. This belief was confirmed by a study recently completed for IRI by Deloitte & Touche on the operational impact of the proposal on the insured retirement industry. The study showed that, given the complex requirements and conditions in the proposal, IRI members would have to undertake massive information technology re-design and build outs that would likely take several years to complete. The DOL and the financial services industry have recent experience with adoption of a new, more limited disclosure regime in the form of the DOL s regulations under ERISA Section 408(b)(2) in The implementation date for those regulations, which are much narrower in scope than those contained in the proposed rule, was delayed on several occasions, and 8

9 ultimately extended by more than two years. This was largely in response to logistical issues experienced by the industry in developing new technology and processes to comply with the regulations, and DOL correctly concluded that a longer implementation period was necessary. The changes that required by this proposed rule are far more extensive and complex. To avoid significant and harmful disruptions in the availability of annuity products and their guaranteed lifetime income features to millions of retirement savers, and advice about whether these products fit their needs, the implementation period should be extended to at least three years. Regulatory Impact Analysis Omitted Benefits of Annuities, Impact on Capital Markets While the proposal was accompanied by a lengthy regulatory impact analysis (RIA), numerous commenters have identified serious flaws and raised serious questions about the RIA. IRI would like to highlight two areas in which the RIA was particularly deficient. The first relates to the lack of any consideration in the RIA of the value of annuities. While the proposal expressly applies to annuities, the RIA fails to consider either the cost to consumers of losing access to annuities and advice about how to use annuities to plan for a financially secure retirement, or the cost to financial institutions and advisers to develop and implement the systems needed to comply with the proposal s extensive conditions and requirements. Before DOL moves forward with the rule, it must carefully study and consider these costs and determine that the benefits afforded by the rule would outweigh those costs. Second, the RIA did not adequately consider the impact of the proposal on the capital markets and the national economy. Many commenters, including IRI, believe the proposal would ultimately drive the majority of retirement savers to put their money in passively managed indexed funds. DOL and other regulators with responsibility for oversight of the American economy (such as FSOC, Treasury and the SEC) should consider whether an excessive concentration of assets in passive investments would adversely impact capital formation, market liquidity, and the overall functioning of the equity markets. * * * * * Thank you for the opportunity to share our views on this proposal. IRI would be pleased to provide any additional information or assistance, or to further discuss these issues with members of the subcommittees. 9