Summer is about over, the signs are all there: the back-to-school advertisements, preseason football games, leaves on the trees starting to dry out, if not change color ever so slightly. I like autumn but don’t want to hasten its arrival. So, think of this post as my way of gently coaxing industry folks back to their desks, and to more weighty matters.
My topic this time? It has to do with how, historically, certain annuity product initiatives have been motivated more by outside forces (oftentimes regulators) than organic customer needs or preferences.
I’ll start with the phenomenon of variable managed-volatility portfolios, which entered the VA space in 2011, not due to requests from advisors or investors, but primarily to help insurers with the costs of hedging guaranteed benefit risks. In the early years, insurers employed basic approaches such as vanilla index hedges; later they learned they needed to cover “vols” as well, and to do so was expensive. Thus, MVPs tamped down on vols at the fund level (and not without some complaints from advisors, who lamented the corresponding reduction in fund upside due to the vol controls). In time the number of variable MVPs grew substantially, then waned when insurers began to de-risk, and discontinue, their living benefits. In recent years we have seen many MVPs liquidated or otherwise merged out of existence.
In my view the best example of manufactured demand in our industry was when insurers rushed to prepare fee-based annuities in response to the Department of Labor’s fiduciary rule, first introduced in 2015, which – had it not been vacated – would have limited traditional commissions in sales to ERISA plans and IRAs unless strict exemptions were met. By my count (and documented on this web site’s Featured Research section), 27 out of a total of 51 new traditional VA share classes filed in 2016 were I-shares, or low-cost, no-CDSC products. That was a huge spike. In ensuing years, the number of I-share registrations dropped considerably, then off the map.
And a few years back there was an uptick in the number of Environmental Social and Governance (ESG) funds and index options in the annuity space, again not so much the result of investors requesting them, but rather government pushing for social screens to be employed in employer-sponsored plans, with that activity spreading out to the retail side. To put it subtly, with “a change in administration” the pressure for plans and products to offer ESG was released. Recently numerous ESG portfolios, and a climate-oriented index for the RILA market, have been discontinued.
Of course, there have been cases when manufactured demand has worked out. Case in point is the prevalence of target-date portfolios in 401(k) and 403(b) plans. Because such portfolios were eventually designated as Qualified Default Investment Alternatives (QDIAs), in a significant number of plans, participants who do not make any fund selections at time of enrollment are automatically directed to TDFs. That makes for certain growth of TDF assets over time.
Bringing us up to the present, and the growth of in-plan annuity solutions – thanks to two generations of the SECURE Act – there remain questions as to whether participants will elect such options and indeed use them. That’s why a social media post by an influencer caught my notice: he argued that annuities should become plan default options too, the logic being that a plan without them would be failing to act responsibly in a fiduciary sense. It’s an interesting argument, and I will be curious to see if it gets traction in the future. If annuities achieve default status that could be a boon to the industry.
In closing, perhaps my term “manufactured demand” is a bit pejorative because, in fairness, it is often the result of good intentions on the part of elected officials, regulators, watchdogs, who want to ensure Americans save for retirement. But for it to succeed in our industry it needs the right follow through, and sometimes – let’s face it – the right political climate.
