Conflicting Interests and the Effect of Fiduciary Duty - Evidence from Variable Annuities / Mark L. Egan, Shan Ge, Johnny Tang.

Format:

Book

Author/Creator:

Egan, Mark L.

Contributor:

National Bureau of Economic Research.

Ge, Shan.

Tang, Johnny.

Series:

Working Paper Series (National Bureau of Economic Research) no. w27577.

NBER working paper series no. w27577

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

We examine the drivers of variable annuity sales and the impact of a proposed regulatory change. Variable annuities are popular retirement products with over $2 trillion in assets in the United States. Insurers typically pay brokers a commission for selling variable annuities that ranges from 0% to over 10% of investors' premium payments. Brokers earn higher commissions for selling inferior annuities, in terms of higher expenses and more ex-post complaints. Our results indicate that variable annuity sales are roughly four times as sensitive to brokers' financial interests as to investors'. To help limit conflicts of interest, the Department of Labor proposed a rule in 2016 that would hold brokers to a fiduciary standard when dealing with retirement accounts. We find that after the proposed fiduciary rule, sales of high-expense variable annuities fell by 52% as sales became more sensitive to expenses and insurers increased the relative availability of low-expense products. Based on our structural model estimates, investor welfare improved as a result of the fiduciary rule under conservative assumptions.

Notes:

Print version record

July 2020.