Rollovers have meant significant business for Bob Quinlan since he first hung his shingle in 2001. As accounts boomed, so has his business.
The DOL rule turned that around and attached a fiduciary standard to that advice. New rules require the advisor to either avoid rollover recommendations, or seek one of two new “exemptions” provided by the rule.
Entering 2017, the DOL rule was expected to have a major impact on the future of IRA rollovers — and it still might. But things changed dramatically once President Trump became a surprise Election Day winner.
Even though Team Trump was solidly opposed to the fiduciary rule, the administration’s delay in actively opposing it gave the life insurance and financial industries plenty of angst.
As a result, the initial phase of the rule went into effect June 9.
That part of the rule requires advisors and agents to act as fiduciaries, make no misleading statements and accept only “reasonable” compensation. Those are known as Impartial Conduct Standards and are already cutting off access to financial advice for small savers who need it most, industry executives say.
The second phase of the fiduciary rule, which establishes restrictive exemptions to sell annuities and other products, along with a class action right to sue, is delayed until July 1, 2019.
Companies Changing Processes
The remaining DOL rule requirements would change the way agents and advisors sell many of the annuity and life insurance products they say are key components of responsible rollover planning.
In particular, variable and fixed indexed annuities will require a Best Interest Contract Exemption in mid-2019. That means a contract signed by a financial institution with the client and legal liability that must be assumed.
Hopkins is among the skeptics who doubt the rule will go into effect as currently written.
“I think what we have today is pretty much what we’re going to get,” he said. “I think everything is going to be backed out and watered down by the time we get there in a year and a half.”
Still, if you’re in the industry, you cannot base future operations on what might happen, or on what is even likely to happen. Even after Trump was elected, the original Jan. 1, 2018, date of full compliance with the DOL rule was too close to ignore.
So they made significant changes to their processes, Hopkins noted, in order to be prepared to serve rollover clients no matter what happened.
“A lot of companies have new forms that they never had before that actually document the process of the rollover, why you’re doing the rollover, where the money is coming from and where it’s going,” he said. “They’ve added a lot of information that wasn’t there before. The process is definitely different.”
There are some companies and some advisors who aren’t doing rollovers from certain accounts, Hopkins said.
“I talked to a company who, right now, is not allowing people to do rollovers from defined benefit pension plans,” he said. “They’re saying, ‘We want to hold on that.’ They’re still trying to build a process for that right now.”
Documenting why and understanding the process a little bit better “seems to be one outcome now of the rule change,” Hopkins added.
Lifetime Income Needs
The two most common reasons for rolling traditional retirement plan assets into an IRA are not wanting to leave assets behind at the former employer (24 percent) and wanting to preserve the tax treatment of the savings (18 percent), according to an Investment Company Institute survey published in December.
Another 17 percent of traditional IRA-owning households with rollovers indicated their primary reason for rolling over was to consolidate assets.
Clearly, 401(k)s and IRAs have taken over as the primary retirement vehicle — one that lacks lifetime income unless annuities are a part of the rollover plan.
One of the first questions David Buckwald asks a prospective new client is “Do you have a written retirement income plan?”
The idea is a written plan that accounts for longevity, income, inflation and spending for a person’s entire retirement time frame, said Buckwald, senior partner with Atlas Advisory Group in Cranford, N.J.
“Less than 5 percent say they have,” he said. “That tells me people are out there all about gathering money and selling products as opposed to designing plans for the clients.”
Buckwald recently met a woman who “loves” her financial planner, has a written retirement income plan and was able to produce it.
“Most people say they have a plan and then they can’t produce it. But she did,” he recalled. “And I said, ‘Well, this is great but do you know it only has you living to age 90?’ And she said ‘No.’ And I’m like, ‘You’re 68 years old and in perfect health. You’ve got a 25 percent chance you’re going to make it past age 90. At age 91, you’re broke.’”
The 401(k) Influence
The 401(k) was created almost by accident, the byproduct of a clause inserted in the tax code in 1978 to address the tax status of profit-sharing plans. Then it morphed into a savings plan when companies decided to get out of the defined pension business.
Its strange origins give 401(k)s an arcane structure requiring legal consultation, fiduciary obligations by the plan sponsor, paperwork, filings with the IRS, recordkeeping and loan provisions for participants.
Since the 401(k) plan has become the dominant retirement savings tool available to workers, many employers who previously couldn’t afford to offer a plan can now do so. But the 401(k) is different from the defined-benefit pension plans that dominated in the past.
Employers hired professionals to manage those pension plans and determine savings rates to meet guaranteed benefits. With the 401(k), that responsibility is now on workers.
Unfortunately, instead of guaranteeing payouts like fixed annuities and life insurance do, 401(k) plans can and do expose retirement savings to steep fees and major swings in the stock market, depending on the investment. While some workers may enjoy the added flexibility offered by a 401(k), many have a hard time getting ongoing advice and avoiding investment pitfalls.
Sadly, regulators struggle to discern between “education” and “advice,” putting agents/advisors in the crosshairs if they stray too far during conversations with clients.
“When I hear from advisors what they’re doing with education instead of advice, it makes me really uneasy,” Hopkins said. “You have to be very careful about your wording and how you phrase things and how you address things. That’s really what’s going to count.”
With the DOL rule partially enacted and uncertainty about the rest of it, advisors have backed off annuity sales. Ironically, annuity products can be the answer to a lot of questions in a rollover retirement income plan.
“We’ve seen a decline of rollovers into annuity sales,” Hopkins said. “I’m of the opinion that we’ll kind of see that work its way back up next year. I think it will trickle up a little, but maybe not all the way back to where [sales] were before the rule.”
Manufacturers responded to those advisors who are playing it safe with fee-based products.
Third-quarter sales of fee-based indexed annuities were estimated at $48 million compared with only $2.2 million in the year-ago period, LIMRA reported. Even with the big increase, fee-based indexed sales represent 0.4 percent of total indexed sales.
Overall, LIMRA forecast sales of indexed annuities to drop by 5 percent to 10 percent in 2017 from the $61 billion in 2016 sales.
Third-quarter sales of fee-based variable annuities, meanwhile, rose 52 percent to $550 million compared with the year-ago quarter. However, fee-based VAs represent only 2.5 percent of total VA sales.
Nevertheless, fee-based sales offered encouraging signs in a gloomy year during which VA sales are forecast to drop by 10 to 15 percent from the $104.7 billion in VA sales in 2016.
Like many advisors, Quinlan relies on annuities for lifetime income. An insurance man in a commission world, he added fee-based products and services in order to be prepared to offer rollover clients anything they might need.
“A lot of times, I might split it up,” he said of a typical rollover strategy. “We take this part and put it in an annuity and this is your income guarantee for you and your wife. I tell them that’s your pension, and a check will come every month. The other part we’ll put in a mixture of mutual funds or whatever for emergencies and growth and income needed down the road.”