By Hal M. Bundrick
NEW YORK (
)--The Securities and Exchange Commission is once again putting variable annuities up on the rack for closer inspection, with minimum income benefits getting particular attention.
Norm Champ, SEC Director of the Division of Investment Management, noted the challenges facing the products last week in remarks at the 2013 Insured Retirement Institute Government, Legal and Regulatory Conference in Washington, D.C.
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"A large and growing number of the nation's investors are reaching retirement age and are shifting their focus from the accumulation of retirement assets to the challenge of income management," said Champ. "This translates into a challenge for those of you who issue and sell investment products that provide income solutions, and of course I'm thinking primarily of variable annuities."
Champ says the SEC is particular concerned with VAs containing a guaranteed minimum income stream capped at a specified level. "A key feature of this contract that was not sufficiently explained to investors provided that, once the cap was reached, withdrawals under the contract could potentially deplete the income benefit to zero."
He says the issue is one of communication: by selling firms as well as agents.
"Not only did the prospectus neglect to sufficiently explain this, but a number of the agents selling the contracts did not understand it themselves," Champ said. "In some cases, in fact, the agents understood the exact opposite, mistakenly telling customers they could maximize their income benefit by taking withdrawals after allowing their income benefit values to reach the cap. In fact, that strategy would, under certain circumstances, have resulted in reductions in the benefit value, reducing and potentially eliminating future income payments."
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The Director says the SEC is committed to finding better ways to communicate the limitations, costs and benefits of such investment products in disclosure documents.
"The moral of this story is that your investors' retirement income should not be put at risk because of complexities in your contracts that are not clearly disclosed," he said.
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The Commission is also examining a crop of new annuity products being issued; stating that in the past year the SEC staff has reviewed several filings for index annuities with features similar to structured notes. The contracts generally provide upside return linked to an index, subject to a cap. Investors bear the risk of loss in excess of a specified amount of loss protection offered under the annuity. But these annuities also apply an adjustment to early withdrawals using "often complex formulas" that can result in a loss of principal, even if the reference index has appreciated.
--Written by Hal M. Bundrick