Variable Annuity Rules Under New DOL Fiduciary Regulations | American Funds

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Capital Group Policy Spotlight

August 25, 2016

Variable Annuity Rules Under New DOL Fiduciary Regulations

Variable annuities in IRAs were one of the more controversial aspects of the DOL’s initial proposal. The proposed rule would have required that variable annuity contract sales into IRAs comply with the Best Interest Contract exemption — including preexisting variable annuities that are already sitting in IRAs. Instead, the final rule covers variable annuity contracts and IRAs with the grandfather provision.

Video

Featuring

Jason Bortz

Transcript

Jason Bortz: Variable annuities in IRAs have been one of the more controversial aspects of the proposal. The proposal would have required that variable annuity contract sales into IRAs comply with the terms of the Best Interest Contract exemption — including preexisting variable annuities that are already sitting in IRAs. The BIC was not well tailored at all to variable annuity products. They’re just designed in a different way than a mutual fund, and the BIC was very mutual fund-centric, so it became a really controversial issue. In the final rule, some things worked out well for variable annuities and some things didn’t work out quite as well.

Variable annuity contracts and IRAs did get covered by the grandfather rule so that’s a big deal. Investment advisors can continue working with their clients who are invested in VAs. They can help them with sub-account allocation recommendations. They can tell them to hold. They can talk to them about drawdown strategies. The existing block of business is grandfathered.

Going forward variable annuity contract sales are going to have to run through the Best Interest Contract exemption. Even though the insurance industry asked for a special exemption for them, they didn’t get it.

They did really improve the Best Interest Contract exemption for variable annuities. Moving away from these complicated point-of-sale disclosure rules and annual advisor compensation disclosure rules works much better for variable annuity contracts. It’s not a perfect outcome but I think there’s going to be a path forward for VAs and IRAs, whether it’s fee-based variable annuity contracts that don’t need to use the Best Interest Contract exemption or using the Best Interest Contract exemption because it really did get much more workable.


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