Conflicting Interests and the Effect of Fiduciary Duty — Evidence from Variable Annuities

107 Pages Posted: 28 Jul 2020 Last revised: 15 May 2023

See all articles by Mark Egan

Mark Egan

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER)

Shan Ge

New York University (NYU) - Department of Finance

Johnny Tang

Harvard University, Department of Economics

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Date Written: July 2020

Abstract

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.

Suggested Citation

Egan, Mark and Ge, Shan and Tang, Johnny, Conflicting Interests and the Effect of Fiduciary Duty — Evidence from Variable Annuities (July 2020). NBER Working Paper No. w27577, Available at SSRN: https://ssrn.com/abstract=3661069

Mark Egan (Contact Author)

Harvard University - Business School (HBS) ( email )

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Baker Library 365
Boston, MA 02163
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National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Shan Ge

New York University (NYU) - Department of Finance ( email )

New York, NY
United States

Johnny Tang

Harvard University, Department of Economics ( email )

Cambridge, MA 02138

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