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No one plans on outliving their retirement savings. But millions of Americans suffer this fate every year, stranded late in life with insufficient assets and mounting debts. A generation of baby boomers is transitioning into retirement with increased life expectancy and diminishing financial security. That’s why it is alarming that rules proposed by the Department of Labor (DOL) will “harm the people it is intended to protect” according to the agency’s former Assistant Secretary for Employee Benefits at a recent hearing on Capitol Hill. We share the Assistant Secretary’s concern, specifically because the rules will actually make it more challenging for low- and middle-income workers to purchase annuities – the only financial product guaranteed to provide income for life no matter what happens in the financial markets.
Americans could once plan a financially secure retirement by relying on a stable three-pillared foundation composed of Social Security, company pensions and personal savings. The viability of Social Security is strained by the looming influx of boomer beneficiaries with longer life spans. At the same time, employer pensions in the private sector are disappearing. The result is that most Americans are now left to fend for themselves, and need professional investment guidance to help them prepare for a secure retirement.
The DOL’s proposal has a laudable goal, which has long been supported by life insurers: assuring consumers that the advice they receive from financial professionals is in their best interest. However, the approach taken by the DOL is overly broad and would effectively force many Americans – particularly those with low or moderate incomes – to pay more for financial products. Many could lose access to valuable products and services in the ways they have come to rely on.
For example, fee-based financial professionals typically require minimum balances upwards of $100,000 yet three-quarters of individual retirement accounts hold less than this amount and in fact, half hold less than $25,000. The increased compliance and legal liability cost associated with the new Labor Department rule “could cause the full service wealth managers to let go of those accounts” according to a recent Morningstar report. Put simply, middle class Americans who don’t carry high balances may no longer have access to the financial assistance they have enjoyed in years past. And it is difficult to overstate the detrimental impact of losing personalized, relationship-based professional help when planning for retirement.
At the heart of our concerns is the potentially devastating impact the DOL proposal would have on the ability of hardworking Americans to turn their accumulated savings into an annuity. This concern has been echoed by many Members of Congress from both political parties and, notably, a majority of those who sit on relevant oversight committees. In a letter to the Labor Department, nearly 100 Democrats in Congress stated, “the guarantee offered by the annuity is a value to consumers not offered by other, lower cost options. Additionally, the costs associated with setting up the annuity amortized over the life of the annuity may, in fact, bring the costs in line with options that initially appeared cheaper. The Department should, therefore, take steps to clarify that the Rule does not disadvantage lifetime income options.”
We hope Labor Department officials heed this caution from Congress, recognizing that the rule, as proposed, fails to accommodate the unique insurance elements of variable annuities. With an annuity, the insurer assumes the risk of promising a retirement check for life. It’s the kind of guarantee that is impossible for consumers to replicate on their own. It’s also the kind of guarantee that millions of Americans will need as they prepare to finance increasingly lengthy retirements. If the DOL proposal is implemented, the cost of variable annuities will rise and the important income streams they provide would be out of reach for millions of Americans.
This is no exercise in story telling; Morningstar’s analysis of the proposed rule warns that “clients will have less access to professional financial services and much-needed investment education.”
Insurance companies are in the business of managing the risks associated with delivering on a contractually-guaranteed stream of income. This is not a side business; it goes to the core of what we do. While these long-term protections come at a cost, they are critically important to many retirees who do not wish to face an uncertain future.
Policy makers should do everything in their power to promote retirement income guarantees, and changes to the DOL proposal are an important place to start.
About the Authors: The authors, listed below, are leaders at nine of America’s largest insurance companies. Together, they represent a significant share of the industry marketplace whose insurance products are relied upon by more than 75 million Americans for their financial and retirement security.