The Leaders Group

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Registered Index-Linked Annuities

The past twenty years have brought many changes to the annuity marketplace. In 2001, indexed annuities paid commissions in the range of 15-25% and had surrender periods averaging 19 years. At that point in time, there were no state suitability rules, and these products were not regulated by FINRA or the SEC (they still do not fall under securities rules). In 2003, the National Association of Insurance Commissioners (NAIC) drafted the Suitability in Annuity Transactions Model Regulation. It required insurers and producers to make a reasonable effort to collect financial details and investment objectives for the purpose of having reasonable grounds for recommending annuity products to clients. In 2005, the National Association of Securities Dealers (NASD, now FINRA) issued Notice To Members 05-50 setting out broker-dealer responsibilities for supervising sales of unregistered equity-indexed annuities. At that point, the tide turned on indexed annuities.

Today, we have a variety of annuities available, and each has advantages and disadvantages. The latest entrant to the market is the registered index linked annuity (RILA), also known as a structured annuity, buffered annuity, variable indexed annuity or indexed variable annuity. These work by setting a floor or a buffer of protection. The RILA floor is the maximum percentage loss a customer is willing to absorb during a down market. Any losses beneath the floor are absorbed by the carrier. A buffer is the percentage loss that a customer does not wish to absorb. A customer is exposed to losses to the extent that the linked index losses exceed the buffer. The upside gain is often capped to the same extent that the downside loss is limited. 

Example: If the floor is 10% and the index declines by 15%, the annuity owner will absorb the first 10% loss, and the insurance company will absorb the remaining 5%.

Example: If the buffer is 10% and the index declines by 15%, the insurance company protects the annuity owner from the first 10%, and the owner absorbs a 5% loss to their annuity.

The upside potential is linked to an index and limited by a growth factor. This allows customers to participate in market growth without the risk of investing directly in the market. The only fees are associated with riders or early surrender or withdrawals. Like other annuities, the customer can select from a variety of payout options, depending on their needs.

Numerous carriers offer RILAs. Some are Brighthouse, Great American, Lincoln, Athene, Nationwide and Lincoln. Micah Hesting has written articles about most of the RILA products that are available, and those may be accessed in our Word on the Street archive.

In the investment risk spectrum, RILAs are higher risk than indexed annuities but lower than variable annuities. Inflation risk and interest rate risk should also be considered in recommending annuities. 

Annuity Types in Ascending Order of Investment Risk

Fixed annuity:

Customers receive a guaranteed interest rate over the time period specified by the payout option.

Fixed-indexed annuity:

Customers receive a guaranteed interest rate as well as additional returns if the linked index increases in value. Payments continue over the time period specified by the payout option.

Registered index-linked annuity:

Returns are not guaranteed, but rather are linked to a stock market index with capped gains and limited losses. Often recommended if the customer has 5-7 years to retirement or is already retired.

Variable annuity:

Gains and losses are tied directly to the underlying investment portfolio, which can be equity and/or fixed-income funds. Customers have no protection from downside loss, no cap on upside gain and no guaranteed return, unless customers purchase a rider, such as a guaranteed minimum income benefit (GMIB) rider.

RILA sales were $8.3 billion in the fourth quarter of 2020, a 68% jump from fourth quarter 2019 and 33% higher than the $6.3 billion recorded in third quarter 2020. In 2020, RILA sales were $24 billion, up 37% from 2019 sales. RILA sales represented nearly a quarter of all VA sales in 2020, according to preliminary results from the Secure Retirement Institute® (SRI®) U.S. Individual Annuity Sales Survey.

According to the same SRI® study, in the fourth quarter, fixed indexed annuity (FIA) sales were $14.3 billion, down 15% compared with fourth quarter 2019 results. After record-breaking sales in 2019, FIA sales fell 24% to $55.7 billion in 2020.

At The Leaders Group, $79 million of RILA premium were sold in 2020. That compares to $85 million of variable annuity premium and $62 million of indexed annuity premium.Remember, all annuities are long-term products. Annuities are complex products, and each type has advantages and disadvantages. Registered index linked annuities and variable annuities have a risk of substantial loss of principal and related earnings. Despite the risks and complexities, annuities may have a place in your customer’s retirement plan.


Jane Riley
Chief Compliance Officer

Filed Under: Q1 2021

Operations Update Q1 2021

Compensation Reporting

We understand that you might need to access your compensation statements outside of the LEADERSlink platform. We are excited to announce that we have enabled the enhancement to your compensation reporting that now allows you to print and/or save your weekly reports as a PDF. 

Training material is now available to assist you with using this enhancement. Your access to training material has already been sent via email from The Leaders Group trainer@mindflash.com.

Please note, there is the possibility the message might have been delivered to your Spam folder. We suggest you whitelist the trainer@mindflash.com email address to ensure you receive access to the Leaders Group University training material. Contact support@leadersgroup.net if you did not receive this invite.

Important Tax Updates

The federal tax filing deadline has been extended for individual tax returns until May 17th. If you are getting a refund, the IRS encourages you to file now. This extension does not apply to estimated tax deadlines or business tax returns.

The IRS has also reintroduced tax form 1099-NEC as the new way to report self-employment income instead of form 1099-MISC which has traditionally been used. This was done to help clarify the separate filing deadlines with form 1099-MISC and the new 1099-NEC form which will be used starting with the 2020 tax year.

Beginning with the 2020 tax year, the IRS has required business taxpayers to report non-employee compensation on the new 1099-NEC instead of on 1099-MISC. Businesses need to use this form if they have made payments totaling $600 or more to a non-employee, such as independent financial professionals.

The Leaders Group and TLG Advisors sent this new tax form to you back in January if you were paid $600 or more in compensation within the 2020 tax year.

Please contact the Compensation team at compensation@leadersgroup.net if you need a copy of tax form 1099-NEC.

Account Form Updates

You will notice we have made some changes to our account forms, one of the biggest changes is the name of the individual New Account Investment Profile. It has now been named Investment Account Profile, with this change it now allows you to use this not only for any new accounts you open but also for any accounts you plan to submit an update. 

Another change with this form is within the ‘Product Type’ section, we have added a checkbox for Registered Index-Linked Annuity. The Leaders Group has decided on this as the official name of the product where you may have heard it being called a buffer annuity or even a variable indexed annuity. With this new product type, there is now a worksheet specific to the registered index-linked annuity so please be on the lookout for that form also since it is a requirement when submitting new business for this type of product. Lastly with all of our forms we have added a code to the bottom right corner of every page you’ll notice on the Investment Account Profile it’s labeled TLG.ACCT.InvestmentAccountProfile.03032021. Going forward we are including a code like this not only on our account forms but on all documents issued by us. This new code is going to be recognized as documents are loaded into LEADERSlink to catalog them automatically so that we can then pull these documents via on-demand reporting for you and for regulatory inquires. 


David Francis
Principal Operations Officer

Filed Under: Q1 2021

Park the Bus Economy

I’ve used some of my free time during the pandemic to become a bigger fan of European soccer. If you pay attention to it, you’ll see teams with vast resources get beat or held scoreless by teams that spend a small fraction on player wages when compared to their larger counterparts. They use a strategy called parking the bus – where they focus exclusively on defending and work to exploit the few opportunities they get when the opposing team makes a mistake and commits too many people forward. In the case of our economy, the virus has kept us on the defensive, where we’ve limited travel and commerce. Over the past year, the U.S. economy has held off much of the effects of COVID-19 by injecting the economy with money to keep it afloat. We’ve essentially parked the bus on the virus, but now, armed with several vaccines, more knowledge of the virus, and another round of stimulus, we’ll need to see a true recovery to make the vast sums of stimulus worth it.  

Outlook

The Federal Reserve officials upgraded their expectations of the 2021 economic recovery in mid-March. The December mean estimate in GDP growth was 4.2 percent, but the Fed updated that to 6.5 percent in their most recent meeting.[1] Goldman Sachs also recently boosted their economic expectations for 2021.[2] As I write this, vaccine distribution is at a 7-day average of over two million, with more than twenty percent of the population at least partially vaccinated. The CDC recently released newer guidance on what people will be able to do once vaccinated, including small indoor gatherings without masks.[3] This all leads me to think that the general feeling is that people expect everything to look more like 2019 soon, with increasing travel, a boost in the service sector, and restaurants and entertainment venues able to increase capacity again. 

Risks

Outside of the obvious health risks that have been present in the U.S. for a bit over a year now, I think there are a handful of threats to think about concerning the 2021 economic outlook. For starters, there are new strains of COVID that have spread through other parts of the world, namely the United Kingdom. Although the U.S.’s aggressive fiscal stimulus helped widen the COVID economic gap between the U.S. and U.K.,[4] there are questions of how this spending can hurt us going forward. Inflation is one potential consequence of pumping trillions into the economy. In 2020, the Federal Reserve changed from a 2% target rate to an average target of 2% – meaning they would be okay with slightly higher inflation to offset lower years.[5] In their March meeting, after the new spending package had been approved, Federal Reserve officials increased their estimate of 2021 core inflation up to 2.2%, compared with a 1.8% estimate in December[1]. Tax hikes are another possible long-term outcome of increased government spending that some expect in the coming years. 

Unknowns

The biggest wildcard for 2021 is the course of the virus, whether there will be new strains that run through the population, whether we’ll have enough vaccinated to reach herd immunity, and whether vaccines will be able to adapt to new variants. Another wildcard is how the U.S. consumer will react once the economy gets the green light to get back to the pre-pandemic normal. It’s possible that consumer behavior has been completely altered due to the pandemic, in how much we eat out, travel, go to big events, etc. It appears some countries and corporations will require a vaccine passport of sorts.[6] I question the American appetite for a vaccine passport requirement to do certain things. I imagine there would be a legal and ethical pushback to anything resembling that.

Costs

While I write from economy’s perspective, the human costs of the virus still weigh heavy on most of us. News media outlets like to keep a statistic reminding us of the amount of death we’ve suffered during the pandemic. That is only part of the human costs – the fear, sickness, unemployment, and loneliness have affected many of us. While I’m glad the economic outlook is improving, I’m ecstatic that we may be able to resume our lives and see more of the people that mean the most to us. Stay safe and have a great 2nd quarter!


Ben Tiller
Principal Financial Officer


[1] Smith, Colby, and James Politi . “Fed Signals No Rate Rise until at Least 2024 despite Growth Upgrade.” Financial Times, Financial Times, 17 Mar. 2021, www.ft.com/content/3d7704d3-a312-4294-95bc-90233f469ccd. 

[2] Nagarajan, Shalini. “Goldman Sachs Boosts US GDP Forecast to 6.8% in 2021 and Now Expects $1.5 Trillion in COVID-19 Stimulus.” Business Insider, Business Insider, 2 Feb. 2021, markets.businessinsider.com/news/stocks/economic-outlook-us-gdp-2021-forecast-coronavirus-stimulus-goldman-sachs-2021-2-1030059281#:~:text=Goldman%20Sachs%20upgraded%20its%20outlook,%25%20from%204.3%25%20in%202022.

[3] “When You’ve Been Fully Vaccinated.” Centers for Disease Control and Prevention, Centers for Disease Control and Prevention, 9 Mar. 2021, www.cdc.gov/coronavirus/2019-ncov/vaccines/fully-vaccinated.html. 

[4] Politi, James. “Mind the Economic Gap: Europe and the US Are Drifting Further Apart.” Financial Times, Financial Times, 16 Mar. 2021, www.ft.com/content/0e9396cf-13b2-4034-ab09-c2366c264f91. 

[5] Cox, Jeff. “From Inflation Targeting to Average Inflation Targeting.” CNBC, 27 Aug. 2020, www.cnbc.com/2020/08/27/powell-announces-new-fed-approach-to-inflation-that-could-keep-rates-lower-for-longer.html.

[6] Mzezewa, Tariro. “Coming Soon: The ‘Vaccine Passport’.” The New York Times, The New York Times, 4 Feb. 2021, www.nytimes.com/2021/02/04/travel/coronavirus-vaccine-passports.html. 

Filed Under: Q1 2021

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