A new set of guidelines designed (say proponents) to protect retirement savers from high commissions and hidden fees has run into a predictable buzz saw of opposition from the insurance industry. As of now, the industry seems to be winning the battle to keep the new rules from ever being enforced. That’s according to this report in a recent issue of the Wall Street Journal.  (Note that a subscription may be required to access the Journal article.)

Why is this important? It seems to be yet another situation in which consumers – in this case, retirement savers – are at the mercy of financial advisers who may or may not be acting in the saver’s best interests. Before making any big financial decision, we would advise you to do your homework and consider getting a second opinion. Caveat emptor – buyer beware.

In preparing this story for the Blog, we checked out the Wall Street Journal report, written by Jean Eaglesham, as well as a companion article in the Washington Post that appeared at about the same time. Both articles refer to new guidelines which were rolled out last April by the Labor Department. The rules were designed to restrict the insurance industry practice of pushing financial products, especially certain types of annuities, which often come with sky-high commissions and hidden fees.

Fiduciary Rule: Whose Needs Take Priority?

The new guidelines are part of what is often called “the fiduciary rule.” A fiduciary has to act in the client’s best interests, not his or her own.  The Washington Post report frames the issue with this rhetorical question: “Should federal law require more financial professionals to put retirees’ needs above all else — including their own paychecks — when they offer advice about how to invest?”

Industry advocates argue that Uncle Sam has no right to impose the new laws, which (says the industry) will keep consumers from receiving valuable financial information. The industry also argues that the new protection is unnecessary because existing guidelines already establish effective professional standards to protect financial consumers.

Opponents counter that the practice of pushing retirement savers into expensive tools such as high-cost annuities does little more than line the industry’s pockets with fat sales commissions while reducing the average investor’s rate of return. So far, the industry seems to be winning the legal battle and threatening to torpedo the new consumer protections.

We’ll see if we can untangle this tale. The outcome could affect millions of savers and potentially save billions in sales commissions. But is it right for consumers?

Insurance Industry is “Waging War” to Fight New Laws

The Journal article describes the current landscape in battlefield terms. “The insurance industry is waging a legal war against new protections for retirement savers,” writes reporter Jean Eaglesham. “The courtroom offensive appears likely to kill a yearslong effort to curb advice steering people toward products packed with hidden fees.” 

At stake, Eaglesham explains, are commissions and fees in the billions of dollars. “The high-stakes battle centers on a new standard for financial advice affecting the nearly $1 trillion a year rolled over from employer-sponsored 401(k)s to individual retirement accounts,” she writes. “The Labor Department rule would require advisers on IRAs to recommend what is best for the saver and avoid misrepresentations and excessive charges.” 

When workers seek to roll their pre-tax savings into income-producing retirement accounts, the government argues, advisers often push annuities, especially a complicated, expensive variety called fixed-index annuities which come with hefty fees and withdrawal restrictions. On top of that, they also earn sky-high commissions, which is one reason the insurance industry is fighting any limitations on their sale.

Industry Claims Uncle Sam Lacks Authority to Regulate

The legal battle has generated plenty of acrimony, with (says the Journal) “a dozen industry groups suing the government, saying it lacks the legal authority to create the new protections.”  The response against the industry from consumer advocates has been loud and angry.

“Insurers and agents are fighting for their right to keep ripping off clients, with biased advice and sky-high commissions,” said Joseph Peiffer, president of the Public Investors Advocate Bar Association of lawyers who represent investors. “And, right now, they’re winning.” Peiffer was quoted in the Wall Street Journal report.

But, as the article explains, the industry counters that the new rule would limit choice for consumers. “This rule would deprive millions of consumers access to much needed retirement financial guidance,” the American Council of Life Insurers said.

Annuity Sales are Booming as Interest Rates Have Risen

“Scrapping the rule matters for the industry’s bottom line,” the Journal reports. “Annuity sales are booming, in part because high interest rates in recent years have juiced returns. An aging population is swelling the ranks of retirement savers, many of whom want the protection against stock-market declines that some annuities offer.” 

The recent numbers for annuity sales are staggering, says the Journal article. For the first half of 2023, total annuity sales reached $181 billion, a figure which at the time shattered all previous records. But in the same period in 2024, sales have hit $215 billion, a 19 percent jump over 2023, according to Bryan Hodgens, a senior vice president at Limra, an industry-funded research firm.

With that much money flowing, the opportunity for abuse is rampant. “The flood of cash is fueling concerns about whether people are receiving the best advice,” writes Journal reporter Eaglesham. “Financial advisers typically get upfront commissions for the sale of annuities, giving them an incentive to promote the products to clients. Products with the biggest commissions have accounted for much of the recent sales growth.”

Fixed-Index Annuities Have Generated Major Criticism

All annuities are not created equal, say the experts – but some types have really come under the microscope and drawn the ire of consumer groups. “One type of annuity that has drawn particular fire: fixed indexed products, which tie their performance to a market index,” Eaglesham explains. “These annuities generally put a floor on losses while also capping returns. The protection is attractive to many savers, but can come with a steep price tag.”

Just how “steep” is that cost? The Wall Street Journal article tells us that commissions on fixed indexed annuities are typically pegged at about 8 percent. However, some commission rates can approach twice that amount, up to 15 percent in some cases. According to annuity expert David Lau who spoke with the Journal, many of these fixed index annuities could be good products but the high commissions “are often baked into the product’s costs,” causing a drag on overall returns.

Product Complexity Makes it Easy to Mask the True Cost

“Such costs are often built into the annuity in ways that can be hard to figure out,” the Journal article warns. As Lau explains, “Products have gotten increasingly complicated, with added bells and whistles. That complexity makes it easier to hide fees, and more difficult for savers to compare and contrast.” 

High commissions are only part of the problem, the Journal reports. These products also come with a major loss in fluidity. Like most annuities, they require savers to tie up their funds for years, with a hefty surrender charge of more than 10 percent if they want to make a withdrawal. According to a Wall Street Journal analysis done in cooperation with A.M. Best, more than half the money held in annuities last year carried a withdrawal penalty or ban.

“Reasonable” versus “Unreasonable” Compensation for Advisers

By seeking to make sales commissions more reasonable, says the Journal, the new Labor Department rule could have “a huge impact on costs for savers” – as much as $3.25 billion a year in reduced commissions on rollovers into fixed indexed annuities alone. That’s according to an estimate from the data firm Morningstar. 

But what one person calls “reasonable,” someone else might consider unacceptable.

“Advisers who sell annuities aren’t shy about their own concerns,” the article reports. One agent who spoke to the Journal for the article, James Holloway of Texas, put his opposition bluntly: “The net effect of this will be that my income will decline,” he said. Holloway’s insurance agency last year sold around $11 million of annuities. 

In their fight against the fiduciary rule, most of the industry is steering clear of the self-interest argument. Instead, they claim the new regulation would “stifle competition amongst insurers” and limit consumer choice. Some in the industry worry that the new rule would leave them exposed to legal action if a client were dissatisfied with the financial product they purchased, even if the agent followed all the new guidelines scrupulously.

Legal Battle May End Up with the Supreme Court

What’s next? We think the Washington Post article does a good, succinct job of answering that question.

“In July,” Post reporter Tony Romm writes, “the industries scored a string of critical early victories: Congress took the first step toward invalidating the new rules, while judges in two federal courts blocked the government from implementing the proposal nationwide in September, as planned, potentially setting the stage for the regulations to be scrapped.”

Romm spoke with Micah Hauptman at the Consumer Federation of America. Hauptman “predicted additional delays as the fight winds its way to the Supreme Court,” Romm reports. Meanwhile, Americans will continue to face “confusing choices about what to do with their retirement money.”

“Conflicted advice is very costly to retirement savers,” Hauptman told Romm. “It can mean the difference between tens if not hundreds of thousands of dollars in lost savings over time.”

Meanwhile – predictably – the American Council of Life Insurers (ACLI), which was among the groups filing suit to block the fiduciary rule, issued an unsigned statement on the group’s website expressing gratitude to the U.S. District Court of Northern Texas for its decision to delay the new law’s implementation.

“If allowed to take effect, this rule would deprive millions of consumers access to much needed retirement financial guidance and protected lifetime income products,” the ACLI states. “The stay of the effective date provides consumers with a needed reprieve from these devastating consequences as the court considers the substantial legal issues we have raised regarding this ill-advised rule.”

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(originally reported at www.wsj.com)