Posted on: Thursday, June 10, 2004

New rules proposed for variable annuities

By John Waggoner
USA Today

Regulators proposed new rules on variable annuities yesterday in response to complaints about sales practices — including brokers who urged customers to take out second mortgages to buy them.

A report by the Securities and Exchange Commission and the National Association of Securities Dealers says investors often didn't understand what they bought or bought variable annuities that didn't suit their investment needs.

Variable annuities are insurance contracts that let investors manage their money through mutual fundlike subaccounts. Gains are tax-deferred until withdrawal. If you die before you start taking regular monthly payments — the annuity feature — your beneficiaries get at least as much as you invested in the annuity, less withdrawals.

Recent estimates indicate significant growth in variable annuities by Americans: Assets rose by more than 20 percent in the last year to about $985 billion.

Variable annuities often pay broker commissions of 5 percent or more, which makes selling them lucrative. They also charge high ongoing fees. A typical variable annuity charges 2.3 percent a year, versus 1.4 percent for mutual funds.

Among the worst sales abuses:

• Selling to the elderly, particularly those who need immediate income. Variable annuities have surrender charges of 6 percent to 8 percent of the amount invested the first year. These decline to zero over time.

An investor who needed income immediately would get smacked with surrender charges.

Mississippi state securities regulator James Nelson says his office had a case of a disabled couple who were sold a variable annuity even though they needed the money for medicine.

• Asking investors to mortgage homes to buy variable annuities.

• Recommending frequent switching between variable annuity policies, which racks up sales charges.

The NASD is proposing new rules that would require greater disclosure about variable annuities, as well as tighter supervision of sales. Brokers would have to get approval from a firm's principal before selling an annuity and would have to disclose commissions, fees and tax treatment to investors.