IRI Conference: SEC Official Sees Possible Living Benefits Conflicts
June 30, 2011 by Allison Bell
She said the SEC is paying close attention to the disclosure filings because living benefit riders in variable annuity contracts have proliferated, especially since the market decline of 2008.
Living benefits riders has been one of the dominant factors driving VA sales in recent years, Rominger said.
Since 2008, when many living benefits riders were “in the money” because of the financial crisis, “the [SEC] staff has seen many filings reflecting increased fees charged for these benefits,” Rominger said.
In many cases, Rominger said, buyers of living benefits are facing more limits on investment choices, reflecting an effort by insurers to limit volatility of the investments that are subject to the benefits.
Variable annuity contracts often prohibit allocations to the more volatile funds, or require participation in a conservative asset allocation model that is designed and maintained with reference to the insurer’s exposure under its living benefit riders, Rominger said.
“I believe an investor purchasing a living benefit rider should be fully informed of any aspect of the arrangement that could limit the market participation reasonably expected by the investor,” she said.
The SEC believes that it is vitally important that investors in these type of arrangements understand the trade-offs inherent in an investment of this type, Rominger said.
“While living benefit riders do provide a measure of protection from a down market, it should be clear to those purchasing the riders that these investment restrictions minimize the likelihood that the riders will ever be ‘in the money’ and actually provide a benefit to the investor, and that such restrictions also may limit the upside potential of the investment.,” Rominger said.
VA sellers also should disclose when they can unilaterally change account allocations, Rominger said.
“It should also explain the effects of such changes, such as the possibility of missing a market uptick during a period of fixed income allocations,” Rominger said.
Structured ProductsSome new indexed annuities resemble structured notes with principal protection, and the SEC has some concerns about those products, Eileen Rominger told IRI conference attendees. The products have reassuring names but are not risk-free, Rominger said, citing an investor alert issued by the SEC along with the Financial Industry Regulatory Authority (FINRA). Some of the products could return as little as 10% of principal, and some have complicated pay-out structures that make assessing their risk and growth potential difficult, Rominger said. “In addition, the products have fees, whether implicit or explicit, even if the sales materials suggest otherwise, which of course will limit returns,” Rominger said. “I believe it is important that anyone working towards future filings regarding similar products should do all that you can to prepare disclosure aimed at ensuring that investors are not confused or misled, Rominger said. “And I would caution you, as well, that you will be well served by exercising vigilance with respect to the suitability of sales of these products.” – Allison Bell |