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re

Jackson supports a workable uniform best interest fiduciary standard for all account types and urges
DOL to proceed with appropriate regulatory coordination.

This is not to say that there is not room for thoughtful improvement to the current regulation. For
example, Jackson supports the creation of a practical best interest fiduciary standard for broker-dealers
and investment advisers that would be uniformly adopted by the SEC, DOL, FINRA and the states to apply
to all investors and all accounts; one that would not disadvantage a single cohort of investors.

One of the principal flaws of the DOL Proposals is that they create a markedly different, new and overly-
prescriptive fiduciary standard that would apply only when financial advisors are working with a retail
investor’s IRA account. As a result of the application of this new standard, investors could be subject to
up to six different standards of care depending on whether (i) their financial professional is a registered
advisor or a broker dealer, (ii) their money is in an IRA account or not, and (iii) their financial professional
is “conflicted” as defined by the Fiduciary Proposal. The creation of multiple fiduciary standards that apply
to some, but not all, types of accounts and relationships will create significant confusion for investors and
enormous regulatory complexity, risk, and expense for firms that currently offer annuities to investors.
This confusion will likely result IRA account holders being ignored by financial advisors or charged more
than they are currently due to their higher regulatory risk and paper-intensive requirements.

A comparison of the Proposed BIC Exemption to the current securities regulatory framework
demonstrates substantial differences between the two sets of requirements. As a result of these
differences in regulation, separate investors with the identical financial status, risk profile and income
needs would experience different (i) standards of care, (ii) disclosures, (iii) available product sets, and (iv)
potential fees based solely on whether the assets to be invested are or are not in a qualified retirement
account. Similarly, an individual investor with both a qualified retirement account and a non-qualified
account could receive different products and contracts, levels of tailored advice, and disclosures, with
different fee structures, for each of her two accounts to address a single defined financial need.

Another flaw of the DOL Proposals is that they potentially create duplicative regulatory requirements.
For example, some of the disclosures required by the Proposed BIC Exemption are unnecessary in light of
the disclosures currently required under the federal securities laws. The Securities Act of 1933 requires
issuers, like Jackson, to provide each purchaser of its variable annuities, including IRA customers, with a
statutory prospectus that discloses all material features of the annuity, including fees, charges and
conflicts of interests. This prospectus must be updated and delivered to each variable annuity owner
annually. Failure to accurately and completely disclose all material features in the updated product
prospectus exposes the company’s officers and directors to strict liability enforcement actions by federal
regulators and possible civil liability. In a coordinated framework, the DOL could deem delivery of the
statutory prospectus to IRA customers as satisfying the product disclosure requirements in the DOL
Proposals without the need for separate disclosures.

In contrast to these issues, a uniform fiduciary standard that applies to all investors and all account types
would be far more investor friendly and far less complex and expensive for annuity providers and
distributors to implement, with resulting savings and simplicity for investors. The creation of a uniform
standard can be best achieved by coordination among all regulators with recognition of the current robust
regulatory framework.


Q

Alert, the OIEA cautions that while automated investment tools may offer clear benefits—including low
cost, ease of use, and broad access—it is important to understand their risks and limitations before using
them. A small account investor may not fully understand these risks and limitations without the guidance
of a registered representative. Each investor has unique retirement goals and a unique financial situation
and should be able to consult with a financial advisor that can help him or her develop a personal financial
plan. Leaving small account investors with no other options than robo-advisers for obtaining advice on
the management of their retirement assets may seriously undermine the Administration’s goal of
advancing the availability and use of lifetime income products and strategies.”

Robo-advisors are simply an electronic path to deliver standardized advice that already exists in a “do-it
yourself” world including books and online resources. The robo-advisor market has existed, as has the
opportunity to invest directly in funds and stock through discount platforms, for a long time. The use of
these markets by investors, however, remains small and studies show that the majority of investors prefer
individualized advice and dealing with a financial professional.” Similarly, investors are entitled to choices
and should not be subject to regulatory changes that eliminate or restrict those choices.

Investors have been negatively impacted by the elimination of traditional compensation structures in
other countries.

We do not need to speculate to forsee that the DOL Proposals will eliminate access to advice for millions
of Americans. Jackson’s parent company, Prudential plc, had a firsthand view of the negative impact of
UK legislation similar to the DOL Proposals. The UK Financial Services Authority (predecessor to the
current Financial Conduct Authority (“FCA”)) launched the Retail Distribution Review (“RDR”) in 2006
which led to a number of rules that came into effect at the end of 2012 and were designed to make the
retail investment market work better for consumers. A key provision of these rules was the elimination
of commission payments from product providers to advisers and platforms (i.e., third party
payments). The result of the RDR reforms has been the withdrawal of 26% of total FCA registered advisers
from providing financial advice to retail clients of moderate means during the period leading up to and
following the effective date of the new rules.

These reductions have resulted in an “advice gap” as advisors withdrew from serving segments of the UK
population that are no longer profitable for the advisor. This advice gap means that many small account
investors are now unable to get the financial advice they need. Barclays estimates that UK customers now
require a minimum of GBP 150,000 (USD $230,000) of financial assets in order to receive face-to-face
tailored financial advice.** Separately, Deloitte has estimated that 5.5 million individuals (approximately
11% of the UK adult population) will either cease using financial advisors or lack access to them as a result
of the RDR changes.”

” See, e.g., Department of the Treasury and Department of Labor, Request for Information on Lifetime Income
Options for Participants and Beneficiaries in Retirement Plans,“ 75 Fed. Reg. 5253 (Feb. 2, 2010).

5 Wells Fargo. Wells Fargo/Gallup Survey: Investor Optimism Surges 21 Points in Q1. Wells Fargo, 5 Mar. 2015.
Web. 20 July 2015. <https://www.wellsfargo.com/about/press/2015/investor-optimism-surges_0305>.

* Barclays, “Asset Management/Life Insurance: UK Savings Conference 2015: What We Learnt. Working Paper,”, 9
(June 9, 2015) Web.<https://live.barcap.com/PRC/servlets/dv.search?contentPubID=FC2145798&bcllink=decode>
3 Id,

?6 The Deloitte Report on RDR.

10


re)

owners of variable annuities in IRA accounts, with aggregate assets of over $1 trillion’®, will face the
prospect of ownership of a retirement product for which they will not receive ongoing advice or else face
higher costs to receive that advice.

The Proposed BIC Exemption is unworkable as drafted and contains many requirements that are unclear.’
To rely on the Proposed BIC Exemption, NPH and other broker dealers will need to (i) conduct a review of
their currently-offered products for retirement consumers and make qualitative determinations (“best
interest”) about each product, (ii) assess whether the commission and compensation structure associated
with those products exceeds undefined “reasonable compensation” standards or creates other possible
conflicts of interest, (iii) develop detailed compliance systems for entering into written contracts with IRA
customers in advance of a recommendation, and (iv) develop exhaustive pre-sale, post-sale and web-
based disclosures. Jackson will need to create mechanisms to support broker-dealers — which will mean
the development of expensive software programs, multiple information feeds, different product offerings
and coordination on new contracts as to whether they meet new “good order” requirements prior to
issue. Even with this support, Jackson’s broker-dealer partners, who already operate on thin margins, will
be required to develop systems to aggregate this information to provide the customized individual
retirement investor reports required under the Proposed BIC Exemption.

We have attached as Exhibit A to this comment letter a chart that outlines various concerns with the three
substantive disclosure requirements contained in the Proposed BIC Exemption. Given that a breach of
the exemption’s disclosure requirements will expose broker-dealers to potential DOL regulatory action
and state law causes of action for breach of contract, including potential class action exposure, all firms
and financial professionals will need to assess whether they can technically comply with the Proposed BIC
Exemption, and equally important whether the risk is worth the cost of attempting to comply.

Broker-dealers that are unable to comply with all of the conditions of the Proposed BIC Exemption will be
faced with a decision. For some broker-dealers, the DOL Proposals’ ambiguous requirements and the
unworkability of the Proposed BIC Exemption may force the decision to stop selling variable annuities to
certain IRA customers and retirement plans. In addition, broker-dealers may be unwilling to provide
advice on existing books of business because the requirements to execute an investment advisory
agreement and charge level fee-based compensation are too onerous. If a broker-dealer desires to
continue to sell variable annuities, it will be forced to radically transform its business model in order to
continue to provide services to IRA customers without violating the DOL Proposals. For example, a broker-
dealer could choose to comply with the DOL Proposals by eliminating all third-party compensation for
products and investments offered to an IRA customer, and instead charge the IRA customer a level fee
based on IRA account assets. Asset based fee programs, however, are not a panacea.”° In practice,
discriminating against commission-based arrangements in favor of level compensation fee-based
arrangements will result in a lack of access to advice and retirement planning tools for millions of

18 “Annuities and Insurance 2014: The Evolution to Sustainable Retirement Income Solutions”. (Exhibit 5.01)
Publication. Cerulli Associates. 2014. Print.

*° For further examples of the unworkable and unclear provisions of the DOL Proposals, we refer you to the
comment letters from the Insured Retirement Institute and the Financial Services Institute.

20 Indeed, the very first examination priority mentioned by the SEC Office of Compliance Inspections and
Examinations in its Examination Priorities for 2015 is ensuring that investors saving for retirement are not
inappropriately being offered, or transferred into, fee-based arrangements when commission-based arrangements
may be in their best interest. SEC National Exam Program, Examination Priorities for 2015, January 13, 2015. <
http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2015.pdf>.


re

The DOL Proposals would create regulatory conflicts and significantly increase costs for market
participants which would ultimately be borne by retail investors.

The DOL Proposals not only “go it alone” by creating a new and unnecessarily complicated regulatory
structure, they also conflict with current SEC, FINRA, and state insurance and securities regulatory
frameworks.” For instance, there are significant inconsistencies between some of the Proposed BIC
Exemption’s disclosure requirements and the federal securities laws regarding such critical items as
performance calculations and prospectus disclosures.

For a detailed description of other regulatory conflicts and issues with the DOL Proposals, we refer you to
the comment letters from the Insured Retirement Institute and the Financial Services Institute. Jackson
agrees with the concerns raised in these letters and believes that they accurately summarize the impact
to customers and extreme difficulty in complying with the DOL Proposals.

The types of inconsistencies between the federal securities laws and the Proposed BIC Exemption
described above and in other industry comment letters will have serious consequences for the industry
by exposing companies to dueling regulatory authorities with enforcement power and a corresponding
increase in operational costs that are ultimately borne by investors. For this reason, the DOL Proposals
should not be adopted. Rather, the DOL, the SEC and FINRA should address and resolve these
inconsistencies and propose a uniform best interest standard that would mitigate the risk of the confusion
and costs caused by a bifurcated regulatory regime. The standard should be carefully crafted by all three
regulators to ensure consistency and avoid any implication that the financial professional is
recommending the “best product” (which is a highly subjective standard) or the “cheapest product,”
(which would eliminate higher-cost/higher benefit products, such as annuities that provide guaranteed
lifetime income). Disclosures could be refined to ensure that investors receive a clear and concise
explanation of any potential material conflicts of interest and understand the possible impacts of those
conflicts.

There will be numerous, significant, foreseeable, and adverse consequences to investors if the DOL
Proposals are adopted, including severe limitation on investors’ choice and higher costs.

If adopted, the Proposed BIC Exemption will provide the only means by which financial professionals and
their firms can continue to receive compensation in traditional commission-based arrangements for IRA
accounts. Jackson believes that it will be very difficult, if not impossible, for financial professionals and
firms to comply with the requirements of the Proposed BIC Exemption. Many financial professionals and
their firms will be (i) unable or unwilling to afford the high compliance costs of meeting the Proposed BIC
Exemption, (ii) unwilling to use the more complex, higher cost variable annuity products with living benefit
guarantees that will be offered in a qualified advisory account, or (iii) unwilling to accept the regulatory
and legal liability risks. As a result, investors will face a much narrower selection of financial professionals
as the market consolidates around a few large firms that can bear the cost of compliance and that will
then gain larger market shares and ultimately control the advice market. In addition, millions of current

1” As an example, if registered representatives of broker-dealer firms and the firms themselves are required to
affirmatively state that they are fiduciaries with respect to recommendations made to IRA customers — as will be
the case if they have to rely on the Proposed BIC Exemption — the question is raised regarding whether they will be
able to continue to rely on the broker-dealer exclusion in the Investment Advisers Act of 1940 when
recommending IRA products.


Q

period. The table below documents the annual cost difference to a client and demonstrates
that these costs will have a material impact on the account value overtime.

Variable Annuity Fee Based (fully liquid) vs. Traditional Based Structure (7-year surrender schedule) Comparison

FeeBasedProuduct Fee Calculation ‘Traditional Product* _Fee Calculation
‘Account Size $100,000 $100,000
Average Mortality, Expense & Administration Fees (annual) 0.46%** $460 1.30% $1,300
[Annual Contract Maintence Fee (waived for Accounts > $50,000 $0 $0 $0 $0
Average Advisory Fee (annual) *** 1.25% $1,250 n/a**** $0
Total Annual Fee $1,710 $1,300
[Annual % of Account Value 171% 130%

*B-share variable annuity with 7-year declining surrender charge schedule

** Carriers used to calculate average M&E&A: Prudential Premier Advisor, Nationwide Destination
Architect 2.0

**+ average Advisory Fee (source: Investment News, "The 2014 Financial Performance Study of
Advisory Firms), advisors have discretion to charge from 0.25% to 3.00% annually
****Commission paid by product manufacturer, is not deducted from account value at product issue

Living benefit and death benefit guarantees with a diversified portfolio of investment options are only
available through a variable annuity. Variable annuities with guarantees are perfectly suited for
retirement assets because they transfer risk to a product manufacturer and guarantee an income stream
that an investor cannot outlive. By shifting these products to a fee-based product structure the DOL is
substantially increasing the cost to the investor. This is not good for American savers. Investors should
continue to have a true choice between a traditional product structure with a surrender charge period
and a fee based product structure with full liquidity — not have that choice dictated to them by essentially
eliminating traditional product structures arrangements.

Commentators who have acknowledged the detrimental impacts of the DOL Proposals on investors with
modest-sized accounts have suggested that such investors should use “robo-advisors.” This view is flawed
due to several key reasons, including:

1) Robo-advisors may rely on assumptions that could be incorrect or do not apply to an investor’s
specific situation;

2) Robo-advisors automated output may not be right for an investor’s financial needs. A small
account investor may lose the value that human judgment, education and oversight and more
personalized service can provide; and

3) Robo-advisors cannot manage investor behavior and do not have the ability to prevent
irrational investment decisions such as panic selling, which may result in locked in losses and
missed market gains. Managing investor behavior and avoiding costly market mistakes are
some of the most important services a representative can offer.

The SEC’s Office of Investor Education and Advocacy (“OIEA”) and FINRA have issued an Investor Alert
cautioning investors on the use of automated investment tools, including robo-advice.”* In the Investor

21 U.S. Securities and Exchange Commission, “Investor Alert: Automated Investment Tools,” (May 8, 2015). Web.
(http://www.sec.gov/oiea/investor-alerts-bulletins/autolistingtoolshtm.html).


JACKSON’

1 Corporate Way
Lansing, Mi 48951

Phone: §17/702-2513
James R. Sopha Fax: 517/702-2445
President james sopha@jackson.com

July 21, 2015

Employee Benefits Security Administration Employee Benefits Security Administration
Office of Regulations and Interpretations Office of Exemption Determinations

Conflict of Interest Rule, Room N-5655 U.S. Department of Labor (Attention D-11712)
U.S. Department of Labor 200 Constitution Avenue, NW

200 Constitution Avenue, NW Suite 400

Room N-5655, Washington, DC 20210

Washington, DC 20210

FILED ELECTRONICALLY

Re: Definition of the Term “Fiduciary;” Conflict of Interest Rule (RIN 1210-AB32) (the
“Fiduciary Proposal”);

Proposed Best Interest Contract Exemption (ZRIN 1210-ZA25) (the “Proposed BIC
Exemption”); and

Proposed Amendment to Proposed Partial Revocation of Prohibited Transaction
Exemption (PTE) 84-24 (ZRIN 1210-ZA25) (the “84-24 Amendment”) (collectively, the
“DOL Proposals”)

To Whom It May Concern:

Jackson National Life Insurance Company’ and its affiliates (“Jackson”) appreciate the opportunity to
comment on the DOL Proposals. Like the Department of Labor (”DOL”), Jackson supports and promotes
the welfare of Americans planning for, or in, retirement. We do not, however, support the DOL Proposals.
They are bad for investors and for America. If implemented, the DOL Proposals will significantly reduce,
or eliminate, access to important retirement planning tools, lifetime income guarantees and death
benefits for millions of Americans. Where access remains, it will come at a much higher cost to these
Americans.

+ Jackson National Life Insurance Company is a stock life insurance company organized under the laws of the state
of Michigan since 1961.

Jackson is the marketing name for Jackson National Life Insurance Company (Home Office: Lansing, Michigan)
and Jackson National Life Insurance Company of New York (Home office: Purchase, New York).


Q

the variable annuity market and concentrate on the sale of fixed and fixed indexed annuity products,
which may not meet the needs of the retirement investors as fully as variable annuities. This outcome
significantly limits the investment choices of existing and future investors, and may effectively preclude
investors who currently own variable annuities in IRA accounts from receiving advice needed to fully
optimize the benefits provided by their contracts. These existing investors need and seek advice related
to their subaccount allocations, resetting of benefits, distribution and income choices and other options
available under their contracts. Variable annuities should continue to be eligible for PTE 84-24.

Given the impact on variable annuity contract owners, there is also no rational basis for disparate
treatment of variable annuities, as compared to other annuity products. Variable annuities are subject
to a robust and deliberate state and federal regulatory structure, designed to protect annuity contract
owners. While there are similarities between the characteristics of, and benefits provided to, an investor
by variable and fixed annuities, variable annuities are subject to a regulatory structure that provides
further oversight and protections for investors as compared to fixed annuities. By way of example, sales
of variable annuities are subject to regulation by the SEC and FINRA, while fixed annuities are not within
the purview of self-regulatory organizations or federal regulators. As noted above, it is important that
variable annuity investors continue to benefit from the advice of professionals relative to the options
available under their contracts, including underlying investment portfolios and options relative to their
guarantees. Given the current regulatory protections and the greater need for advice for investors owning
variable annuities, there is no rational basis for excluding variable annuities from PTE 84-24. The current
regulation, and the importance of retaining the current advice model, suggest that PTE 84-24 is even more
appropriate for variable annuities than other product types.

Investors will be harmed if the DOL does not provide a reasonable period for compliance and
meaningful grandfathering of existing IRA products.

To the extent that the DOL Proposals are adopted in some form, the DOL must reasonably and
substantially extend the period for compliance. As drafted, the Proposal provides an eight-month
implementation period for thousands of financial intermediaries, insurance companies and other product
providers to come into compliance with a proposal that has unprecedented scope, breadth and
implementation costs. * In addition, as drafted, the DOL Proposals will immediately turn millions of
interactions between financial professionals and their IRA customers into fiduciary relationships with
onerous additional compliance obligations that create the immediate risk of private lawsuits. For these
reasons, Jackson believes the industry will need at least three years to implement these changes, and may
well need more time if some of the requested changes to the DOL Proposals are not made.

In addition, we strongly urge the DOL to fully grandfather IRA accounts existing before the applicability
date of the final regulation. As noted above, the new regulation carries extensive implementation costs
that were not priced into currently outstanding IRA products or those being offered now because
annuities are long-term contracts with prices set at time of sale. In addition, the DOL Proposals when
effective will immediately turn interactions with existing IRA account owners into fiduciary relationships
that create undue compliance burdens on the financial professional. For example, depending on the
reading of the Fiduciary Proposal, the average representative may have difficulty in providing normal
servicing on existing IRA accounts, including even routine advice regarding Required Minimum

?8 The breadth of the implementation impact is evident in the “Overall Summary” discussion in the Proposed BIC
Exemption which states that “in order to meet the conditions of the PTE, 2,800 financial institutions will produce
86 million disclosures and notices during the first year of the PTE ....” 80 Fed. Reg. 21983.

12


Q

The DOL Proposals are even more complex than the UK’s RDR rules. We project that they will have a
similar or more severe impact on the ability of retirement investors with smaller savings and incomes to
obtain retirement advice. This absence of advice will equate to an absence of access to insurance products
with lifetime income guarantees and death benefits. The DOL Proposals will therefore have the
destructive result of denying to many Americans the type of guarantees and security that regulators
around the world aspire to provide to their citizens. Our discussions with regulators in Asia and the UK,
where products similar to variable annuities with guarantees do not exist, indicate that they are looking
for the introduction of such products in their marketplaces. These regulators view such products as a way
to augment private savings development and ultimately the development of large pools of capital to
support economic growth.

In addition to the adoption of a coordinated, uniform fiduciary standard of care, there are other options
available to the DOL that would work better for investors than the DOL Proposals.

The inclusion of variable annuities within the scope of PTE 84-24 would serve investors and provide
them choices in the annuity market.

The 84-24 Amendment would change the current regulatory structure by, among other things, excluding
variable annuities from the scope of PTE 84-24.” Jackson asks that 84-24 Amendment be modified so that
variable annuities remain within the scope of the PTE 84-24 in recognition of the low number of variable
annuity complaints and the expansive existing regulatory framework at both the state and federal level
regarding variable annuities. We believe this modification is warranted given (i) the additional investor
protections in the 84-24 Amendment that would apply to variable annuities, (ii) the detrimental impact
to retirement consumers if variable annuities are removed from PTE 84-24, and (iii) the similarity among
fixed, fixed indexed, and variable annuity product types.

If variable annuities are included within the scope of PTE 84-24, the current regulatory framework
governing variable annuities will be further augmented by new requirements contained in the 84-24
Amendment. The 84-24 Amendment requires that a financial professional recommending a sale must
act in the “best interest” of the customer and cannot make any misleading statements. In addition, the
financial professional must disclose all “material conflicts of interest.” These additional requirements will
provide further protections to retirement consumers purchasing variable annuities.

Excluding variable annuities from PTE 84-24 will have an adverse impact on retirement investors.
Retirement consumers need a straightforward way to purchase variable annuities and to continue to
receive advice on their investment options under existing variable annuities contracts. The continued
inclusion of variable annuities within PTE 84-24 is a workable solution, which will not only benefit the
current owners of variable annuities but also those investors who desire to benefit from the potential
upside of the markets by purchasing a product that can meet their future retirement needs while enjoying
guarantees designed to protect them from market volatility. If variable annuities are excluded from the
scope of PTE 84-24, and the Proposed BIC Exemption is adopted, many advisors may choose to abandon

27 Currently, PTE 84-24 exempts all annuity transactions, whether for variable or fixed annuities, from the
prohibited transaction provision and therefore allows the fiduciary to receive compensation, including
commission-based compensation, from an insurer for all annuity sales. Department of Labor, “Class Exemption for
Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies and
Investment Company Principal Underwriters,” 49 Fed. Reg. 13208 (Apr. 3, 1984), amended at 71 Fed. Reg. 5887
(Feb 3, 2006).

11


Q

Americans of modest means and higher costs to obtain those services for Americans with larger savings

to invest.

Driving the industry to only fee-based account arrangements will have three primary detrimental impacts
on IRA customers with modest-sized accounts:

1)

2)

Lack of Access to Financial Advice: Due to the higher minimum account requirements
(generally above $25,000) associated with fee-based advisory accounts, many smaller account
holders will not be able to obtain individualized financial advice. Jackson currently has a
minimum account size of $5,000 for IRA accounts which is significantly lower than fee-based
account minimums at most broker dealers and investment advisors. As of year-end 2014, over
75% of qualified accounts at our affiliated broker-dealer network, NPH, have assets under
$100,000. These smaller account investors are the very individuals who should be encouraged
to plan for retirement. These investors often need assistance in understanding their
retirement needs and risk profiles, periodic in-person meetings to update their investment
plan and advice during periods of market uncertainty. If such advice becomes available only
on a fee basis, these investors will be able to find only a limited number of advisors willing to
provide customized investment plans and ongoing advice given the costs and risks associated
with serving the accounts.

Limited Product Options: These same investors may face limited choices of retirement
investment products or find that only low fee products are considered in their best interest,
regardless of their personal financial status and goals. Retirement products that provide
guaranteed living benefits, such as variable annuities, will typically have higher fee structures
than most other investment products that lack downside protection or guarantees because of
their sophistication and the state-required insurance reserves that must be retained to assure
that the annuity’s guarantees are honored. The DOL Proposals favor products with lower
overall fees and thus may eliminate or limit solutions such as annuities for retirement accounts.

Higher Cost to the Investor: Annuity products are long-term investments, especially given the
presence of a living and/or death benefit guarantee. As long term investments, most annuity
products include a declining surrender charge schedule. The surrender charge functions to
reduce the mortality and expense charge to the investor. On the other hand, annuity products
with no surrender fees typically charge a higher mortality and expense charge compared to a
product that does include surrender charges. This is often referred to as the “cost of liquidity”.
For a long-term investor, the lower mortality and expense charges associated with traditional
commission-based variable annuities result in lower overall costs to the client.

One outcome of the DOL Proposals for those firms and financial professionals that elect not to
use the Proposed BIC Exemption is a move to level-compensation fee-based products. Similar
to annuity products that do not have a surrender charge schedule, fee-based products have a
“cost of liquidity’, meaning that the structure of a fee-based product offers full access to the
account value at any time without penalty. As a result, the fee-based products have higher
annual fees (when considering platform fees and investment advisory fee). When an investor
has a long-term investment horizon, fee-based product fees will accumulate to a much larger
amount over time when compared to a traditional annuity structure with a surrender charge


re

making variable annuities inaccessible to, or more expensive for, investors, the DOL is hurting the very
investors it is attempting to protect through the DOL Proposals.

Variable Annuities are responsibly manufactured and distributed to retirement investors under the
current robust regulatory framework.

Variable annuity issuers and distributors are currently heavily and effectively regulated under broad and
complex regulatory structures that have evolved over decades at both the state and federal levels.
Variable annuities are subject to substantial financial and market conduct oversight, as well as stringent
reserve and suitability requirements, by a variety of regulators, including the Securities and Exchange
Commission (“SEC”), FINRA, the DOL, and state insurance regulators.

Regulatory complaint statistics show that the current regulatory framework works well and that annuity
owners are overwhelmingly satisfied with the annuities they purchase. State regulators, FINRA and the
SEC each provide mechanisms that allow consumers to file complaints directly with the regulators. The
statistics generated by the states and FINRA reflect a very low level of complaints related to variable
annuities.* From this low level of complaints, one can fairly infer a high degree of overall satisfaction
with annuities and the advice and services provided by financial professionals with respect to annuity
sales. For example, the National Association of Insurance Commissioners (“NAIC”) reported 540
complaints related to the sale of variable annuities in 2014.13 The LIMRA Secure Retirement Institute
(“LIMRA”) reports that industry-wide variable annuity sales totaled $140.1 billion in 2014. “ This means
that the NAIC confirmed only one complaint for every $259 million in variable annuity sales.

FINRA’s dispute resolution statistics tell the same story. Consumers filed 3,822 arbitration cases with
FINRA in 2014 of which 120, or only 3%, involved variable annuities.** Using the same industry-wide
annuity sales figures from LIMRA, these cases represent one arbitration for every $1.1 billion in variable
annuity sales. Mutual funds, on the other hand, accounted for approximately 10% of the FINRA arbitration
cases.‘® Neither the FINRA nor the NAIC statistics suggest a wide-spread problem in the distribution of
variable annuities or a pervasive problem regarding undisclosed conflicts of interest at financial firms
selling these products. In sum, there is no evidence of abuse that justifies the dramatic upheaval in the
regulatory framework that the DOL Proposals represent.

41 The reserve requirements adopted by the states provide assurance that the long-term contractual commitments
insurers make to their variable annuity contract holders are appropriately funded and will be honored in the future
— that is, that the benefits will be paid.

22 We were not able to locate comparable statistics published by the SEC.

13 This number represents closed confirmed complaints where a state insurance department has determined that a
regulatory violation or insurance company error has occurred. National Association of Insurance Commissioners,
“Closed Confirmed Consumer Complaints by Coverage Type,” (May 25, 2015) Web.
<https://eapps.naic.org/documents/cis_aggregate_complaints_by_coverage_types.pdf>.

14LIMRA Secure Retirement Institute, “U.S. Individual Annuity Sales 2014 Results." (June 27, 2015), Web.
<http://www.limra.com/uploadedFiles/limra.com/LIMRA_Root/Posts/PR/Data_Bank/_PDF/2014_year-
end_AnnuityCompanyRankings.pdf>.

4 Financial Industry Regulatory Authority, "Dispute Resolution Statistic." (May 2015) Web.
<https://www.finra.org/arbitration-and-mediation/dispute-resolution-statistics>.

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re

Variable annuities are an important tool for retirement investors.

America has a growing retirement gap. The shift away from defined pension plans in the United States
means that more and more Americans are depending on their personal savings to sustain them during
their retirement years. Research has found the current efforts are inadequate and that over half of
American households do not currently have savings sufficient for retirement. ® It is critical that retirement
investors have readily available access to time-tested planning tools, including variable annuities.

American investors, planning for retirement, have complex savings and income needs that require
individualized solutions. Variable annuities offer investors a unique retirement product that provides a
diversified portfolio of investments that grows on a tax-deferred basis and also provides both guaranteed
lifetime income and death benefits. Annuities are the only financial product that provides financial safety
and security to retirees in the form of guaranteed lifetime income. Annuities are especially important to,
and primarily used by, investors with modest savings. Individuals with annual income under $100,000
purchase the majority of the variable annuities sold within the industry’ and purchase the annuities
primarily to obtain guaranteed monthly income in retirement.? As the Executive Office of the President
has recognized, annuities are an important tool that Americans can use to mitigate one of (if not the) most
important risks they face in retirement: outliving their assets.°

Annuities offer unique benefits that allow investors to transfer risk from themselves to an insurance
company’s balance sheet. This risk transfer involves the insurance company accumulating and combining
the risk of all of its investors and then employing sophisticated hedging strategies to mitigate the risk of
stock market declines and interest rate movements in providing guarantees to those investors. Such a
sophisticated solution is something an individual investor could never execute or afford on his or her own.
Variable annuities also provide investors with the ability to diversify their assets among numerous asset
classes, including fixed account options with minimum guaranteed returns. Of all annuity types, only
variable annuities provide investors with a pass-through of the investment performance of the underlying
funds in which the subaccount invests, net of administrative contract and benefit fees,’° while also
providing lifetime income guarantees and death benefits. Therefore, variable annuities are uniquely
situated to meet the complex and varied needs of retirement consumers.

The DOL Proposals threaten to separate variable annuities with these unique product solutions, including
the lifetime guarantees of variable annuities, from the retirement investors who need the products. By

© Alicia H. Munnell, Wenliang Hou, and Anthony Webb, “NRRI Update Shows Half Still Falling Short” (Chestnut Hill,
MA: Center for Retirement Research at Boston College, Dec 2014) <http://crr.bc.edu/wp-
content/uploads/2014/12/IB_14-20.pdf>.

7 “Chapter 8: Consumer Use and Attitudes Toward Annuities” 2015 IRI Factbook: A Guide to Information, Trends,
and Data in the Retirement Income Industry. Washington, D.C.: Insured Retirement Institute. 2015. 95. Print.

® Generating guaranteed monthly income is the primary reason nearly half of all households (48%) gave for
purchasing an annuity. “Chapter 8: Consumer Use and Attitudes Toward Annuities” 2015 IRI Factbook: A Guide to
Information, Trends, and Data in the Retirement Income Industry. Washington, D.C.: Insured Retirement Institute.
2015. 100. Print.

° “Annuities can help to mitigate some of the risk faced by retirees. In particular, annuities protect retirees against
the risk of outliving assets.” Executive Office of the President, Council of Economic Advisers, “Supporting
Retirement for American Families,” at 4 (Feb.2, 2012)

1° In comparison, Fixed Indexed Annuities (or Equity Indexed Annuities) provide potential returns corresponding to
the applicable index or indices, but cap the up-side return based upon the applicable participation rate.


re)

Jackson is well-positioned to offer informed insight.

More than 1.5 million investors have entrusted Jackson to provide (i) an opportunity to grow their assets,
(ii) a guaranteed income stream for the remainder of their lives and, (iii) in some cases, money to sustain
their spouses and families after their deaths. Jackson has paid more than $50 billion in annuity payments
and other benefits to its contract holders since the financial crisis. Jackson manages more than $163
billion in fixed and variable annuities for investors across our country, including approximately $98 billion
in annuities held in accounts that qualify as Section 408 Individual Retirement Annuities (“IRA accounts”).
To support its investors and contract holders, Jackson employs more than 4,500 people.

For years, Jackson has been conservatively and responsibly managed to enable it to keep the promises it
makes to investors. Jackson has maintained its financial strength ratings for more than 12 years —
including during the financial crisis.”

We believe that our knowledge of the industry uniquely qualifies us to provide input and comments on
the DOL Proposals. Jackson’s insurance products are offered by more than 38,000 financial advisors
affiliated with more than 625 independent broker-dealers, wirehouses, financial institutions and
independent insurance agents. We educate and train these financial professionals about our products
and how to customize them to meet the specific retirement needs of the investors they serve. Four retail
broker-dealers, and 3,600 financial advisors, are affiliated with Jackson and deal directly with investors
seeking advice. These affiliates give Jackson a unique perspective as both a manufacturer and a retail
distributor of retirement savings and income products.?

Jackson is also a wholly owned subsidiary of Prudential plc, a financial services firm located in the United
Kingdom (UK).‘ Prudential has first-hand experience with the adverse consequences of comparable
regulation adopted in the UK that eliminated commission payments from product providers to advisers
and platforms and resulted in a loss of access to professional investment advice for millions of UK citizens.

? As of July 20, 2015, Jackson had the following ratings:

A+ (superior) — A.M. Best financial strength rating, the second-highest of 16 rating categories;

* AA (very strong) — Standard & Poor's insurer financial strength rating, the third-highest of 21 rating
categories;

¢ AA (very strong) — Fitch Ratings insurer financial strength rating, the third-highest of 19 rating categories; and
* Aa2 (excellent) — Moody's Investors Service, Inc. insurance financial strength rating, the third-highest of 21
rating categories.

3 Jackson National Life Distributors LLC (“JNLD”) and National Planning Holdings, Inc. (“NPH”) are affiliates of
Jackson. JNLD serves as the wholesale distributor of Jackson’s variable annuity products, and is registered as a
broker-dealer with the SEC under the Securities Exchange Act of 1934, and is a member of the Financial Industry
Regulatory Authority, Inc. (“FINRA”). NPH is a FINRA member broker-dealer holding company, providing retail
distribution of a broad variety of products and services, including IRAs.

* Prudential plc (NYSE: PUK) is a company incorporated in England and Wales. Prudential plc is not affiliated in any
manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of
America.

5 Deloitte, “Bridging the Advice Gap: Delivering Investment Products in a Post-RDR World.” A Deloitte Insights
Report. (2012) Web. <http://www2.deloitte.com/uk/en/pages/financial-services/articles/delivering-investment-
products-in-a-post-rdr-world.html> (the “Deloitte Report on RDR”).


Q

Distributions. If a current IRA customer asks a representative for assistance in identifying an asset for
liquidation, this assistance could trigger fiduciary status and compliance with all Proposed BIC Exemption
disclosure and contract requirements. Unless existing IRA accounts are grandfathered, registered
representatives may be forced to abandon IRA account owners rather than trigger additional disclosure
and liability risks. Broker-dealers may also have to abandon existing IRA customers because the
compensation arrangements for their existing IRA accounts — which were established when the
investments for the IRA account were first purchased — cannot be modified to conform to the new
business model.”?

The adoption of the DOL Proposals will harm the retirement planning of millions of Americans.

Millions of Americans caught in the shift from traditional pension plans to individual retirement plans are
facing the fact that their current income and savings will not sustain them in retirement. We are deeply
concerned about the many adverse, foreseeable consequences that will result if the DOL Proposals are
adopted as currently drafted. The material adverse effect on American investors of modest means needs
serious consideration. Variable annuities provide a unique product for these investors by providing
lifetime guarantees. Investors have recognized the value of variable annuities by purchasing over $719
billion of variable annuities in the last 5 years.°° The adoption of the DOL Proposals will potentially push
under saved investors and products outside of the traditional advice channels and significantly reduce the
choices retirements investors have available.

We appreciate the opportunity to respond to the DOL Proposals. If we can be of any further assistance
to the DOL as it considers these comments, please contact me.

Sincerely,

JamesR-Sopha
President
Jackson National Life Insurance Company

*° Financial professionals will be unable to provide “education” relative to existing products due to the proposed
modifications to Interpretative Bulletin 96-1, which will functionally prohibit financial professionals from
mentioning the product without triggering fiduciary status.

3° “Chapter 3: State of Industry” 2015 IRI Factbook: A Guide to Information, Trends, and Data in the Retirement
Income Industry. Washington, D.C.: Insured Retirement Institute. 2015. 58. Print.

13


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