Warning to Investors About Variable Annuities

According to a recent Wall Street Journal online article, variable annuities are about to face their toughest opponent yet: The Labor Department. A proposed rule, expected to be finalized as soon as next month, would hold advisers working with retirement savings to a “fiduciary” standard. That means an adviser must work in the best interest of the client, and it generally requires advisers and firms to avoid conflicts of interest, which could include commissions and other sales-based compensation. A variable annuity is a tax-deferred retirement vehicle that allows the investor to choose from a selection of investments, and then pays you a level of income in retirement that is determined by the performance of the investments chosen. This is compared to a fixed annuity, which provides the investor with a guaranteed payout.

If the rule becomes final with minimal changes from its most recent proposal, analysts say variable-annuity issuers might need to shift from paying sellers up front commissions, to a business model based on investors paying lower, ongoing fees. The commissions average around 8%. Some of the issuers of these complex retirement savings vehicles are Lincoln National Corp, MetLife, Prudential Financial Inc. and Jackson National Life Insurance Co. Variable annuity sales totaled almost $98 billion in the first nine months of 2015. These can involve complex annual fees that can go over 3%. Also, consumers pay the seller’s commissions indirectly through the ongoing charges and through surrender charges due if they drop a contract within several years of purchase. These high commissions can lead advisers and insurance agents to sell to some people who may not be best served by such an investment, and regulators have issued advisories. A broker has a duty to determine if an investment is right for a client by taking into account his or her age, net worth and investment objectives. If the broker does not, his firm can be sued in an arbitration forum. Please call our securities law firm to speak to an attorney to determine if you have a claim you may want to bring against the firm. The call is free.