US Insurance Industry Fights Regulation To Scrap Agent Commissions, Boosting Retirement Savings By $3B Annually

The US Labor Department's new proposed standard to protect retirement savers who roll over money from their 401(k)s to individual retirement accounts (IRA) is facing massive backlash from the insurance industry. The rule will ensure insurance agents transition from selling products for high commissions to recommending investments that benefit clients during rollovers. The move will save retirement investors north of $3 billion yearly on reduced commissions when rolling over funds into fixed-indexed annuities alone. Savers are transferring almost $1 trillion annually from their 401(k) accounts to IRAs as baby-boomer retirements peak, offering more incentive for financial firms to earn from the products and services they recommend.

While rolling over 401(k) funds into IRAs can offer more personalised investment choices at lower fees, they lack the protections provided by employee-sponsored plans under the Employee Retirement Income Security Act (ERISA). The law mandates workplace retirement plan advisers to offer financial advice and recommend products in the best interest of the investors. The Labor Department's new rules would extend fiduciary laws under ERISA to advisers, brokers, and insurance agents offering financial advice on IRAs and rollovers. When you roll over money into an IRA, the money sits as cash unless actively invested. Agents and advisers may steer investors into buying products that might not be in their best interests for higher commissions. New regulations will slash hefty commissions on products like annuities, which often carry hidden and excessive charges. The White House estimated the new standard would potentially boost retirement savings by up to 20% over a lifetime.

Insurance Industry Groups Wage Legal War Against The US Government's New Rule

The rules are expected to impact insurance agents the most. A dozen industry groups are suing the US government's new rule, arguing that the administration has no legal authority to enforce these protections for retirement savers. They also highlighted that the new rule would deprive millions of much-needed financial advice in retirement and discourage advisers from working on smaller retirement accounts. The insurance industry's legal standing is working in their favour, as they secured national stay orders from two federal district courts in Texas, which indefinitely postponed the initial rule implementation date of September 23 as courts carry out an in-depth analysis of the lawsuits.

Insurance agents follow state insurance laws, which have relatively weaker standards than those imposed by the US Securities and Exchange Commission on brokers and investment advisers selling products like mutual funds in rollovers. A stricter fiduciary standard could lead insurers to lower annuity costs and commissions and reduce lock-in periods and sales incentives for agents recommending annuities during rollovers. While the ERISA standard prohibits sales commissions, the Labor Department rule enables brokers and insurance agents to earn "reasonable" compensation on their IRA recommendations, given those products are in the best interest of their clients. However, some institutions believe the new rule is redundant because state laws already require agents to act in the client's best interests.

Annuities Sales Reach Record Levels This Year

Annuity sales reached a record $215 billion in the first half of 2024, up from $181 billion in the same period last year. The strong surge could be attributed to the high interest rate environment and an ageing population seeking protection against stock-market volatility through fixed-income instruments like annuities. Advisers usually receive upfront commissions for annuity sales, and the massive cash pile is all the more reason why eradicating the new rule matters for the industry's bottom line. The record sales were driven by costly products like fixed-indexed annuities that track a market index. While these products limit potential market losses, they eat away at gains with the highest sales commissions of up to 15%.

Experts think the products are becoming more complex with time, which makes it easy to bake commissions and various costs, such as annual deduction rates, rebalancing fees, and strategy spreads, into product price tags. They justify this with 100% protection of the deposit. The lock-in period can become a costly affair, given that it can reach over a decade for fixed-indexed annuities, with a surrender penalty over 10% of the amount withdrawn. The stringent withdrawal penalties likely help annuity providers recoup money they paid to advisers for selling their products. While agents are concerned that the rule would expose them to legal action if clients think they were sold products that weren't in their best interest, the industry remains confident it will prevail.