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

58 Pages Posted: 25 Sep 2020

See all articles by Mark Egan

Mark Egan

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

Shan Ge

New York University, Stern School of Business

Johnny Tang

Harvard University, Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 14, 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 five times more sensitive to brokers' financial interests than 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, the 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.

Keywords: Variable Annuity, Brokers, Conflict of Interests, Fiduciary Duty

JEL Classification: G24, G28, D14, D18, G22

Suggested Citation

Egan, Mark and Ge, Shan and Tang, Johnny, Conflicting Interests and the Effect of Fiduciary Duty — Evidence from Variable Annuities (July 14, 2020). Available at SSRN: https://ssrn.com/abstract=3652115 or http://dx.doi.org/10.2139/ssrn.3652115

Mark Egan

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Baker Library 365
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National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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Shan Ge (Contact Author)

New York University, Stern School of Business ( email )

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Suite 9-160
New York, NY 10012
United States

Johnny Tang

Harvard University, Department of Economics ( email )

Cambridge, MA 02138

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