Fixed index annuities are growing in popularity, and financial professionals are watching for future regulatory changes. Currently, state governments regulate them, but the U.S. Securities and Exchange Commission may seek to expand its influence over these regulations.
The U.S. Securities and Exchange Commission has stayed relatively quiet about fixed index annuities, even as the innovative income-driven product has caught the general public’s attention.
FIA sales reportedly set a new record in 2024, marking the third consecutive year of new sales records, according to LIMRA. “FIA sales are on track to surpass $120 billion in 2024. To put this into perspective, that’s nearly double the sales in 2021,” LIMRA reports. “In 2025, LIMRA is projecting FIA sales to drop 5%-10% from the record set in 2024 but remain above $100 billion.”
Yet, outside of establishing communication rules and regulations on index-linked annuities in July 2024 that amend forms used by annuity providers to make them more user-friendly, Uncle Sam has largely been mum on FIAs to date.
However, industry experts say that could change as the FIA market grows more extensive and complex.
“We have not seen the SEC recently under the previous administration or the new administration make any aggressive moves on regulations of fixed indexed annuities,” said John Gilbert, a managing principal at Vanbridge in West Des Moines, Iowa, where he leads the annuity platform. “However, the SEC does continue to increase their advice and regulatory rhetoric around certain areas of the registered annuity world.”
Gilbert said his firm has noticed the SEC commenting on specific legal cases that may involve fixed or registered annuities. “Yet, as far as we’re aware, no new regulations are coming,” he said.
What’s Happened and What’s Coming Down the Pike
If history is any lesson, experts say annuity providers and consumers can expect the federal and state governments to step in and tighten policies and procedures.
“The SEC has already introduced new rules that require clearer information about these products,” says Paul Carlson, certified public accountant and managing partner at Law Firm Velocity in Phoenix, Arizona. “Companies must use a specific form, Form N-4, to make it easier for consumers to understand what they’re getting into.”
Additionally, states are set to adopt new rules that will help make sure fixed index annuities are suitable for consumers. “Plus, the U.S. Department of Labor wants to include fixed index annuities in their rules about financial advice, which means there will be more focus on making sure fees are fair and transparent,” Carlson adds.
Part of the slow roll on fixed index annuities is that states control annuity industry compliance, not the federal government. Even so, the SEC has sought to extend its regulatory authority over FIAs by classifying them as security products.
“That attempt ended through SEC Rule 151A, but the SEC may still try to find a way to regulate the sale of these products through its enforcement powers over SEC-regulated financial advisors,” says Ryan Brown, head of annuity sales and general counsel at M&O Marketing in Southfield, Michigan. “The SEC has recently initiated action over advisors who have sold these products by essentially making the arguments these advisors were wearing their ‘investment advisor’ hats, not their ‘insurance producer’ hats, when they recommended clients purchase these products.”
On the state regulation front, regulators want to ensure that the solicitation and sale of these products suit those who purchase them.
“Suitability provides for disclosure and transparency relating to the terms of the product’s contract as well as making sure the purchase of an FIA cannot be detrimental to the goals and objectives of the client’s overarching financial goals,” Brown notes. “Because most states have exacted the NAIC’s recent best interest regulation, it’s unlikely the SEC will attempt to step in to fill any void left by states insurance regulations.”
State regulators usually focus on three main issues with FIAs: fees, transparency and suitability.
“There’s always a push to ensure consumers fully understand the costs, including surrender charges and caps on returns,” Carlson says. “Suitability is another big one, so people aren’t being sold annuities that don’t fit their financial needs. If new rules come in, advisors and insurance companies may need to adjust how they explain these products and determine whether they fit a client.”
What Consumers Should Know About FIAs
With regulatory actions largely sidelined, at least for now, it’s up to consumers to properly educate themselves about fixed index annuities.
“Consumers should know that fixed annuities provide for principal protection, accumulation potential and the ability to trigger an income stream for several years or even a lifetime,” Brown said. “The main drawback of these products is they’re not fully liquid. Purchasers almost always have penalty-free liquidity of 10% per contract year with the FIA they purchase, and some products even provide for more.”
The most significant FIA issues consumers must cover with their money managers are fees, taxes and liquidity.
“Many people don’t realize that while earnings in an FIA grow tax-deferred, withdrawals are taxed as ordinary income, not capital gains,” Carlson says. “Also, some contracts have long surrender periods, meaning you could face penalties if you need access to your money early.”
If you’re buying an FIA inside an IRA or other tax-advantaged account, check whether that makes sense since you already get tax deferral built in. “Lastly, ask about all the costs involved, like fees and any penalties for withdrawing money early,” Carlson notes.
Editor Norah Layne contributed to this article.
