Can Annuities Pass Muster?
Having won some big market-conduct settlements over life insurance sales practices, class-action attorneys now are targeting annuities sold in tax-qualified plans.
Allegations that insurers inappropriately marketed life insurance policies led to multibillion-dollar settlements in the past decade. Now, class-action attorneys are setting their sights on a new target: variable annuities Variable annuities
Investment contracts whose issuer pays a periodic amount linked to the investment performance of an underlying portfolio. .
The suits target annuities sold within such tax-qualified plans as individual retirement accounts, Keoghs, 403(b)s, 401(k)s and 457s. Because they are a type of insurance product, annuities offer tax deferral tax deferral
The delay of a tax liability until a future date. For example, an IRA may result in a tax deferral on the amount contributed to the IRA and on any income earned on funds in the IRA until withdrawals are made. . Critics say placing them inside a tax-deferred vehicle is redundant, unnecessary and costly to consumers, because of fees that are higher in variable annuities than alternatives such as mutual funds.
"We view the deferred-annuities cases as addressing a legal, financial and moral wrong that is equivalent to the industry's misconduct in the 'vanishing premiums' cases," said Michael C. Spencer, a partner in the New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of law firm Milberg Weiss Founded in 1965 by attorneys Larry Milberg and Melvyn I. Weiss, Milberg Weiss (formerly known as Milberg Weiss & Bershad LLP) is a U.S. plaintiffs' law firm. Based in New York City, it is widely known for representing investors in securities class actions. Bershad Hynes & Lerach. "The annuities cases have great prospects despite the fact that some novel legal issues are raised in them." The novel legal issues concern jurisdiction of cases involving securities.
The life insurance industry defends the use of annuities in tax-qualified retirement plans, pointing to a section of the tax code that allows for their use. Investors might want to include annuities in a tax-qualified retirement plan because of other benefits they offer, such as the right to annuitize, or convert the contract into a guaranteed stream of monthly payments for life.
Taking Insurers to Court
Milberg Weiss, the firm leading much of the annuities litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute.
When a person begins a civil lawsuit, the person enters into a process called litigation. , was instrumental in negotiating settlements against many of the largest life insurers in the alleged improper selling of life insurance. The firm's biggest prize came from Prudential Insurance Company of America, the hardest-hit company in the litigation, which has set aside more than $2.6 billion for its settlement and has paid out more than $1 billion.
Milberg Weiss' role in the annuities litigation involves suits against five insurers: Nationwide Financial Services The examples and perspective in this article or section may not represent a worldwide view of the subject.
Please [ improve this article] or discuss the issue on the talk page. , Columbus, Ohio Columbus is the capital and the largest city of the American state of Ohio. Named for explorer Christopher Columbus, the city was founded in 1812 at the confluence of the Scioto and Olentangy rivers, and assumed the functions of state capital in 1816. ;American United Life Insurance Co., Indianapolis; American Express American Express (NYSE: AXP), sometimes known as "AmEx" or "Amex", is a diversified global financial services company, headquartered in New York City. The company is best known for its credit card, charge card and traveler's cheque businesses. Financial Corp., Minneapolis; SunAmerica Inc., Los Angeles Los Angeles (lôs ăn`jələs, lŏs, ăn`jəlēz'), city (1990 pop. 3,485,398), seat of Los Angeles co., S Calif.; inc. 1850. ; and Hartford Life Insurance Co., Simsbury, Conn.
A case against American Express that settled in January will provide $215 million of benefits to more than 2 million class participants, according to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. the company. The suit was filed in Minnesota state court on behalf of Richard and Elizabeth Thoresen of Portland, Ore. The settlement was reached before the judge ruled on class-action certification, said the Thoresens' attorney, Ronald A. Uitz, a Washington, D.C., lawyer who is partnering with Milberg Weiss on the case. Notice will go out this summer to 2.7 million people who are eligible for a piece of the settlement. Under the settlement, American Express admits no wrongdoing wrong·do·er
One who does wrong, especially morally or ethically.
wrongdo , and the settlement is intended to cover all of American Express' exposure, Uitz said. The parties were still negotiating the details of the settlement in May, he said.
A case against Hartford Life is scheduled for trial Aug. 25. The suit was brought on behalf of about 14,000 municipal employees in San Diego San Diego (săn dēā`gō), city (1990 pop. 1,110,549), seat of San Diego co., S Calif., on San Diego Bay; inc. 1850. San Diego includes the unincorporated communities of La Jolla and Spring Valley. Coronado is across the bay. County, Calif., and a companion case was brought on behalf of about 10,000 municipal workers in Los Angeles. the employees are enrolled in 457 plans, which are qualified plans for municipal workers.
The San Diego case has been certified as a class action, but the Los Angeles case has not progressed that far, said James Lance James Lance (born 29th September 1975) is a British actor who is best known for his appearances in a string of British comedy series. Other roles include dealer Sticky in the drug-related series Top Buzzer, Matt in two series of Teachers , a partner in the law firm of Post Kirby Noonan & Sweat in San Diego, which represents the plaintiffs. "The gist of the cases is that Hartford is charging fees that are not properly disclosed and are exorbitant for the services it is providing," he said. "Our position is that millions of dollars in damages have been caused to policyholders in San Diego alone."
Hartford's minimum death benefit has been singled out. Lance said that from the time the plan originated in 1982 until 1995, Hartford charged an annual fee of 85 basis points (0.85%) on assets for the death benefit, which guarantees that beneficiaries will receive at least as much as the contract holder invested in the contract. The law firm's experts have determined that the death benefit is not worth nearly the amount charged, Lance said. Hartford reduced those fees after 1995, he said.
Milberg Weiss includes commentary on the subject on its Web site, www.mwbbl.com. "Scrupulous scru·pu·lous
1. Conscientious and exact; painstaking. See Synonyms at meticulous.
2. Having scruples; principled. companies do not recommend deferred annuities Deferred annuities
Tax-advantaged life insurance products. Deferred annuities offer deferral of taxes with the option of withdrawing one's funds in the form of a life annuity. for funding qualified plans because the main benefit and primary selling point selling point
An aspect of a product or service that is stressed in advertising or marketing.
Noun 1. selling point - a characteristic of something that is up for sale that makes it attractive to potential customers of a deferred annuity Deferred Annuity
A type of annuity contract that delays payments of income, installments or a lump sum until the investor elects to receive them. This type of annuity has two main phases, the savings phase in which you invest money into the account, and the income phase in which is tax deferral of earnings, which is a benefit automatically provided by a tax-qualified retirement Account--regardless of what investment is used to fund the account," Milberg Weiss wrote. According to the law firm, in unscrupulous selling, no disclosure is made that the tax-deferred accrual accrual,
n continually recurring short-term liabilities. Examples are accrued wages, taxes, and interest. feature is provided by the tax-qualified retirement plan and that the annuity's tax deferral is unnecessary.
"The impact of annuity insurance fees over time can deplete de·plete
1. To use up something, such as a nutrient.
2. To empty something out, as the body of electrolytes. up to one-third of an investor's account by retirement age," wrote Milberg Weiss. When consumers "discover the deception," they are often trapped by high surrender fees Surrender Fee
A charge levied against an investor for the early withdrawal of funds from an insurance or annuity contract, or for the cancellation of the agreement. Surrender fees act as an economic incentive for investors to maintain their contract, and they allow the insurance .
"To add insult to injury, these surrender fees are used to pay off the sales commission to the agent who improperly recommended the contract in the first place," Milberg Weiss wrote.
The American Council of Life Insurers The American Council of Life Insurers (ACLI) is a Washington-based lobbying and trade group for the life insurance industry. ACLI represents 373 insurance companies that account for 93 percent of the U.S. life insurance industry's total assets. (ACLI ACLI American Council of Life Insurers
ACLI Associazioni Cristiane Lavoratori Italiani (Italy)
ACLI American Council of Life Insurance
ACLI Ada Command Language Interpretation ) argues that the tax-deferral redundancy should not be an issue since the annuity fees do not pay for the tax deferral of the product. Instead, they pay for the death benefit, the right to annuitize and a guarantee that fees will never increase, said Laurie D. Lewis, senior counsel at the life industry's trade association, which is based in Washington, D.C.
These annuity fees, known in the industry as the mortality and expense charge, also might pay for the costs of issuing and administering the product, Lewis said.
Mortality and expense charges average about 115 basis points. Variable annuities also charge for the management of each fund, or subaccount, offered in the contract. This can bring total expenses up to 250 basis points or more in many contracts--almost twice the cost of most no-load mutual funds No-load mutual fund
An open-end investment company whose shares are sold without a sales charge. There can be other distribution charges, however, such as Article 12B-1 fees. A true no-load fund has neither a sales charge nor a distribution fee. .
The U.S. government sanctions variable annuities as an acceptable investment inside qualified plans. "A specific section of the tax code covers annuities as part of a qualified plan, so there's no question in our mind that they were anticipated and expected by Congress," Lewis said.
The U.S. Department of Labor also recognizes a place for variable annuities within qualified plans. Last year, it asked the ACLI, bankers and the mutual-fund industry to develop a form to be used to disclose product fees to 401(k) plan participants Plan participants
Employees or other beneficiaries who are eligible to receive benefits from a company's employee benefit plan. , said Ann Combs, vice president and chief counsel for pension and retirement at ACLI. "The Labor Department The Department of Labor (DOL) administers federal labor laws for the Executive Branch of the federal government. Its mission is "to foster, promote, and develop the welfare of the wage earners of the United States, to improve their working was very pleased with the form;' she said. "Clearly, it believes annuities can be part of a pension plan."
Combs said the form contains an area for mutual funds to disclose their loads and 12(b)-1 fees. The latter are charged by some mutual funds as an annual percentage of assets to pay for distribution costs distribution costs distribute npl → Vertriebskosten pl , including advertising.
"It's important that people understand what they're paying for," Combs said. "We welcome this disclosure, because it helps our case and to illustrate what we offer."
Combs pointed to a recent event to support the validity of variable annuities inside qualified plans. Early this spring, the U.S. Chamber of Commerce The U.S. Chamber of Commerce is the world's largest not-for-profit federation of businesses, representing more than 3 million businesses and organizations in the United States. As of 2003, the chamber was comprised of 3000 state and local chambers and 830 business associations. chose SunAmerica, a defendant in one of Milberg Weiss' lawsuits, to provide a variable annuity Variable Annuity
An insurance contract in which, at the end of the accumulation stage, the insurance company guarantees a minimum payment. The remaining income payments can vary depending on the performance of the managed portfolio. for the 3 million small-business members eligible for its 401(k) plan. Fidelity Investments Fidelity Investments is a group of privately held companies in the financial services industry. It is made up by two independent but closely cooperating companies, Fidelity Management and Research Corporation (FMR Co. , Boston, previously had the contract, but decided not to renew it. The chamber considered proposals from 50 companies before choosing SunAmerica, Combs said.
"Certainly, the business-savvy chamber should know what it's doing, and they went with a variable annuity," said ACLI spokesman Jack Dolan.
Disclosure and Suitability
Last year, the National Association of Securities Dealers National Association of Securities Dealers (NASD)
Nonprofit organization formed under the joint sponsorship of the investment bankers' conference and the SEC to comply with the Maloney Act, which provides for the regulation of the OTC market. , a regulatory agency regulatory agency
Independent government commission charged by the legislature with setting and enforcing standards for specific industries in the private sector. The concept was invented by the U.S. overseeing the securities industry, issued a notice that both sides of the debate embrace as supporting their positions. The NASD NASD
See: National Association of Securities Dealers
See National Association of Securities Dealers (NASD). in May 1999 issued Notice 99-35 to its members, reminding them of their responsibilities regarding the sales of variable annuities.
The notice states: "When a registered representative recommends the purchase of a variable annuity for any tax-qualified retirement account...the registered representative should disclose to the customer that the tax-deferred accrual feature is provided by the tax-qualified retirement plan and that the tax-deferred accrual feature of the variable annuity is unnecessary. The registered representative should recommend a variable annuity only when its other benefits, such as lifetime income payments, family protection through the death benefit and guaranteed fees, support the recommendation."
The notice requires that a representative "make reasonable efforts" to obtain information concerning the customer's financial and tax status, investment objectives and other factors that bear on suitability of the product. It states that a member "should conduct an especially comprehensive suitability analysis prior to approving the sale of a variable annuity with surrender charges Surrender Charge
A fee levied on a life insurance policyholder upon cancellation of his or her life insurance policy. The fee is used to cover the costs of keeping the insurance policy on the insurance provider's books. to a customer in a tax-qualified account subject to plan minimum distribution requirements." Minimum distributions are required to begin at age 70 1/2.
NASD Notice Sparks Debate
While Lewis sees the NASD notice as evidence of governmental acceptance--and as a guideline for sales representatives to explain the benefits of annuities--plaintiffs' attorneys see it as ammunition for their cases. "It's highly supportive of our position," said Spencer of Milberg Weiss. "The type of insurance companies we've sued has basically never honored the guidelines set forth in the notice."
The insurance code and NASD code of conduct include "rules of fair dealing," Uitz said. "That's why insurers cannot argue it's a 'buyer beware' situation in the sale of annuities" inside qualified plans.
"The target marketing of qualified-plan investors is clearly unconscionable Unusually harsh and shocking to the conscience; that which is so grossly unfair that a court will proscribe it.
When a court uses the word unconscionable to describe conduct, it means that the conduct does not conform to the dictates of conscience. , yet that's what insurers are engaged in," Uitz said. "If there were a [legitimate] market, it would be reached by full and fair disclosure of the redundancy by converting insurance charges from basis points into dollars and by truthful labeling of sales loads Sales load
See: Sales charge
See load. ."
Uitz also maintained that the annuity commission structure puts producers' interests at odds with clients. In the past five years, commissions paid on variable annuities have risen, and the spread between those paid on annuities and mutual funds has widened, he said. One of the incentives for selling variable annuities is that there are no break points on the commissions. "In the mutual-fund world, the more you invest, the lower the percentage you pay in commissions," he said. "For the large-value rollover IRAs Rollover IRA
A traditional individual retirement account holding money from a qualified plan or 403(b) plan. These assets, as long as they are not mixed with other contributions, can later be rolled over to another qualified plan or 403(b) plan. Also known as a conduit IRA. , the commissions on a mutual-fund sale might be one-tenth that on a variable-annuity sale."
The regulatory agencies themselves were reluctant to say specifically what, if anything, they have been doing about the issue. Amy Hyland, an NASD press officer, said Notice 99-35 was "a reminder of the very thing brokers were supposed to know" and that it therefore applies to conduct before it was issued.
SEC Joins the Fray fray 1
1. A scuffle; a brawl. See Synonyms at brawl.
2. A heated dispute or contest.
tr.v. frayed, fray·ing, frays Archaic
1. To alarm; frighten.
The Wall Street Journal in November reported that the Securities and Exchange Commission, in its annual reviews of insurance companies, was focusing "on whether companies adequately disclose why annuities aren't necessarily appropriate for qualified plans." Paul E. Roye, director of the commission's investment-management division, told the newspaper, "There's a heavy burden that has to be overcome to justify that product in a tax-deferred plan."
SEC spokeswoman Joanne Bamberger said the Office of Compliance Inspections and Examinations Office of Compliance Inspections and Examinations
An SEC office that administers nationwide examinations and inspections for registered self-regulatory organizations, broker-dealers, transfer agents, clearing agencies, investment companies, and investment routinely looks at suitability. "To the extent it looks at suitability in compliance reviews, yes, that would be something we'd look at within qualified plans," she said. (See "SEC Wary of Booming Variable-Annuity Sales," page 109.)
Spencer said deferred annuities had grown "phenomenally" in the last decade and now were coming under regulatory scrutiny. "As usual, it takes time for regulators and other watchdogs to catch up to the latest abusive innovations that arise when companies are willing to sacrifice correct conduct for profits," he said. "We applaud the NASD for issuing the notice and following up on it. There are indications that they are continuing investigations."
As for what insurers do with the mortality and expense fees they charge, there is no easy answer. Each company makes it own underwriting Underwriting
1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt).
2. The process of issuing insurance policies. decisions based on what is likely to happen in the future, said ACLI's Lewis. "It's possible the M&E charge will provide insurers with a profit, but it's also possible it will cause a loss," she said. "How much things will cost is likely to change. Companies don't know Don't know (DK, DKed)
"Don't know the trade." A Street expression used whenever one party lacks knowledge of a trade or receives conflicting instructions from the other party. how many people will claim a death benefit or how many will annuitize. You have to set the charge on a level based on your assumptions, but it's not an exact science."
Value of a Death Benefit
Death benefits in some variable annuities promise the highest anniversary account value. Others promise at least the amount invested, less withdrawals, plus 6% per year compounded annually.
Moshe Arye Milevsky and Steven E. Posner recently undertook a project to estimate the value of a death benefit. Milevsky, a professor of finance at York University York University, at North York, Ont., Canada; nondenominational; coeducational; founded 1959 as an affiliate of the Univ. of Toronto, became independent 1965. , Toronto, is a mathematician, statistician and physicist and holds a doctoral degree in finance. Posner is with Goldman Sachs The Goldman Sachs Group, Inc., or simply Goldman Sachs (NYSE: GS) is one of the world's largest global investment banks. Goldman Sachs was founded in 1869, and is headquartered in the Lower Manhattan area of New York City at 85 Broad Street. & Co., New York.
In their April 4 report, The Titanic Titanic (tītăn`ĭk), British liner that sank on the night of Apr. 14–15, 1912, after crashing into an iceberg in the N Atlantic S of Newfoundland. More than 1,500 lives were lost. Option: Valuation of the Guaranteed Minimum Death Benefit in Variable Annuities and Mutual Funds, they reach the conclusion that a simple return-of-premium death benefit is worth from 1 to 10 basis points a year, depending on gender, purchase age and asset volatility. In contrast, the median mortality and expense charge for return-of-premium variable annuities is 115 basis points, according to the report.
"It's all about fees and individual circumstances," Milevsky said. "If the M&E is low enough, then I would put a client in a qualified plan since the death benefit and guaranteed annuitization rates do have some value--about 5 basis points," he said. "But if the fees are 125 basis points each and every year and you are selling it to a 45-year-old in a low tax bracket Tax Bracket
The rate at which an individual is taxed due to a particular income level.
Each income class is taxed at a different level. Generally, the more you make the more you are taxed. who is only guaranteed to get their premium back, only at death, then it doesn't belong anywhere, let alone a qualified plan. No, correct that: It belongs in a garbage dump."
Milevsky said TIAA-CREF TIAA-CREF Teachers Insurance and Annuity Association - College Retirement Equities Fund , the New York-based nonprofit pension-fund company, sells a variable annuity with a mortality and expense charge of 7 basis points. "We'll see more of that kind in six months," he said. "That's a fair value for a death benefit anywhere." But the highest mortality and expense charges currently range up to 170 basis points.
Milevsky also was critical of surrender charges, which can last five to seven years or more. "The surrender charge is like a shadow M&E," he said. "A state regulator recently called me to lament that once he realized what he had bought, he also realized he couldn't even leave."
While Milevsky and Posner use "modern option pricing theory" to arrive at their conclusions--including many pages of calculus calculus, branch of mathematics that studies continuously changing quantities. The calculus is characterized by the use of infinite processes, involving passage to a limit—the notion of tending toward, or approaching, an ultimate value. equations--Lance, the attorney in San Diego, uncovered some real-life evidence that sheds light on the issue. Lance said his law firm asked Hartford Life during the discovery process how much in death benefits the company had paid in the 17 years the San Diego and Los Angeles plans had existed. He said Hartford claimed it had paid a single death benefit totaling only $119 in San Diego and no death benefits in Los Angeles. Lance said the mortality and expense charge from 1982 to 1995 was 125 basis points. Since 1995, Hartford Life reduced its mortality and expense charge and other contract expenses, he said.
In their report, Milevsky and Posner wrote that a 50-year-old male who purchased a simple return-of-premium guarantee should be charged no more than 3.5 basis points per year, while a 50-year-old female should pay no more than 2 basis points. If the insurer guarantees a 5% annual increase in the value of the death benefit, the fair premium rises to 20 and 11 basis points, respectively.
Milevsky also said insurers ought to charge a higher mortality and expense fee for portfolios with more volatile investments--since there is a greater chance for a steep decline in value--and a lower fee for more stable investments.
In addition to the death benefit, virtually all variable annuity policies guarantee some sort of living benefit in the form of a guaranteed annuitization rate. According to the report, a typical contract stipulates a certain mortality table and interest rate to be used in the computation of the annuity payments. Milevsky and Posner say the implied interest rates are "usually on the order of 3%," which they consider conservative. "We therefore proceed under the assumption that this benefit is presumed to have little value since it is ignored by pricing actuaries, valuation actuaries, regulators and the reinsurer re·in·sure
tr.v. re·in·sured, re·in·sur·ing, re·in·sures
To insure again, especially by transferring all or part of the risk in a contract to a new contract with another insurance company. . Furthermore, only 2% to 3% of variable annuities are ever annuitized."
The ACLI questions some of the assumptions in the Milevsky/Posner study, and it has asked actuaries to examine it. "Of particular import to us is what the professor says about not taking into account the annuitization rate, that actuaries ignore it," Lewis said. "That's not what two major issuers of annuities say. Once you start with an incorrect assumption, you reach an incorrect result."
Milevsky and Posner in their report allow for some latitude in insurer costs. "Of course, by focusing solely on economic value, we abstract from reality somewhat by ignoring any reserving requirements as well as regulatory costs, agent commissions and reasonable profits," they wrote in their conclusion.
Since the publication of the paper, Milevsky said insurers had been calling him to ask about new ways to address their risks. He's also heard from plaintiffs' attorneys in the lawsuits. "So I'm straddling strad·dle
v. strad·dled, strad·dling, strad·dles
a. To stand or sit with a leg on each side of; bestride: straddle a horse.
b. both sides of the fence," he said.
Performance vs. Marketing
Despite their higher fees, some annuity contracts Annuity Contract
The written agreement between an insurance company and a customer outlining each party's obligations in an annuity coverage agreement. This document will include the specific details of the contract, such as the structure of the annuity (variable or fixed), any have outperformed some name-brand mutual funds over statistically meaningful periods. That being the case, why shouldn't the issue boil down to merely a matter of good investment choices vs. lousy lous·y
adj. lous·i·er, lous·i·est
1. Infested with lice.
2. Extremely contemptible; nasty: a lousy trick.
"Because what it really comes down to is deception of consumers about the nature of the annuity product being sold," Spencer said. "You can always find good examples and bad examples of anything. Our focus here is not the investment performance of the products but how they're sold and the fees people pay for supposedly certain features of the annuities that are not in fact the reason they're sold to them."
Spencer added it is not the entire industry that is engaged in the kind of marketing practices he alleges.
Whether the core issues about variable annuities inside qualified plans are settled on their merits might depend on the outcome of some of the legal issues. They have to do with the application of the 1998 Securities Litigation Uniform Standards Act The Securities Litigation Uniform Standards Act of 1998 (SLUSA) is a federal legislative act in the United States regarding private class action lawsuits for securities fraud. , which contains provisions requiring that class actions involving "covered securities Covered Security
A class of securities, created by the NSIMA, that enjoys federally imposed exemptions from state restrictions and regulations. Most stocks trading in the US are covered securities. " be brought only in federal court under federal law.
"There's a dispute as to whether that applies to deferred variable annuities, which is a large part of our suits, because state consumer-protection laws are far more directly applicable to the marketing abuses that are raised in our cases," he said.
Milberg Weiss Bershad Hynes & Lerach and other law firms This list of the world's largest law firms by revenue is taken from The Lawyer and The American Lawyer and is ordered by 2006 revenue:
American Express Financial Corp., Minneapolis
Settled in January. Notice will go out this summer to 2.7 million people who are eligible for a piece of a $215 million settlement. Under the settlement, American Express admits no wrongdoing, and the settlement is intended to cover all of American Express' exposure, said Ron Uitz, a Washington, D.C.-based lawyer working with Milberg Weiss. The parties were still negotiating the details of the settlement in May, he said.
American United Life Insurance Co., Indianapolis
The American United case was delayed when the judge to whom it was assigned discovered that his retirement plan includes some assets from the defendant. He recused himself, and another judge has been assigned.
Hartford Life Insurance Co., Simsbury, Conn.
The case against Hartford Life was lodged in a state court in New Britain New Britain, city, United States
New Britain, industrial city (1990 pop. 75,491), Hartford co., central Conn.; settled c.1686, inc. 1871. The tin shops and brassworks in the city were established in the 18th cent. , Conn.; but Hartford had it moved to a federal court. A motion by Milberg Weiss to send it back to state court was pending before a judge.
Another case against Hartford Life was brought on behalf of about 14,000 municipal employees in San Diego County, Calif. A companion case was brought on behalf of about 10,000 municipal workers in LosAngeles. The employees are enrolled in 457 plans, which are qualified plans for municipal workers. The San Diego case has been certified as a class action, but the Los Angeles case has not progressed that far, said James Lance, a partner in the law firm of Post Kirby Noonan & Sweat in San Diego, which represents the plaintiffs. Lance said many Hartford Life executives have been deposed during the discovery stage in San Diego and experts were giving depositions in May.A trial date is set for Aug. 25.
Nationwide Financial Services, Columbus, Ohio
Nationwide filed a motion in June 1999 to have its case dismissed, but an Ohio judge denied the motion in March. That case is in the discovery stage, said Michael C. Spencer, a Milberg Weiss partner.
SunAmerica Inc., Los Angeles
A judge in the case against SunAmerica, a subsidiary of American International Group
American International Group, Inc. (AIG) (NYSE: AIG; TYO: 8685 ) is a major American insurance corporation based in New York City. , New York, dismissed seven of nine charges. The two remaining claim "false or misleading advertising" and "unlawful, unfair or fraudulent business acts and practices." Spencer said the case was proceeding as state consumer-protection claims, which do not require class certification. As of May, it was in the discovery phase.
SEC Wary of Booming Variable-Annuity Sales
As the variable-annuity business booms, the U.S. Securities and Exchange Commission is keeping a protective eye on investors.
The agency is particularly concerned about a relatively new feature of variable annuities--bonus credits--which are designed to woo investors with an initial credit. Several companies have substantially increased their sales by offering an immediate 1% to 5% credit on new accounts.
The problem is, the bonuses often are coupled with higher surrender charges, longer surrender-charge periods and higher asset-based charges, which might eventually outweigh the financial benefit of the sales gimmick, said Paul F Roye, director of the SEC's Division of Investment Management.
"Quite simply, we are concerned with the potential for sales-practice abuses because the cost of the bonus may be less visible than the bonus itself," he said.
Roye made his remarks before an audience of insurance executives at the regulatory affairs Regulatory Affairs (RA), also called Government Affairs, is a profession within regulated industries, such as pharmaceuticals, medical devices, energy, and banking. Regulatory Affairs professionals usually have responsibility for the following general areas:
"We understand that you operate in a competitive environment," he said. "However, increasing sales at the expense of those for whom these products are not suited will not be tolerated."
NAVA NAVA National Association for the Visual Arts
NAVA National Association for Variable Annuities
NAVA Navajo National Monument (US National Park Service)
NAVA North American Vexillological Association President and Chief Executive Officer Mark Mackey said the association "fully supports" the SEC in its efforts to educate the public about annuities.
"The SEC has an obligation as a cop on the beat to see what's going on What's Going On is a record by American soul singer Marvin Gaye. Released on May 21, 1971 (see 1971 in music), What's Going On reflected the beginning of a new trend in soul music. , and it's my understanding that's what they're doing," Roye said. "We certainly support ethical sales practices, and there must be full and fair disclosure."
The bonus credits are just one concern the SEC has about sales of variable annuities. A recent examination of 52 investment and insurance companies that sold variable annuities in 1999 resulted in about 80% of those companies being cited for not adhering to regulations governing sales practices, said Susan Nash, a senior assistant director of the SEC. About 20% of those cited warranted further investigation and possible penalties, she said. Typically, such an examination reveals about 3% to 6% of cases in the financial-services industry that are considered that serious, according to the SEC.
The commission's investigation comes at a time when the variable-annuity business has never been better, Since 1994, assets in variable-annuity subaccounts have grown an average of 36% per year compared with about 25% for total mutual-fund assets, Roye said. Assets at the end of March totaled $847.9 billion, up from $34.7 billion at the end of 1990.
The SEC's examination of variable-annuity sales practices, which has been under way since the end of last year, has moved into a new phase. On June 5, the SEC unveiled an online brochure to help investors understand the benefits, risks and costs of variable annuities, which have become more complex in the past year.
Many of the SEC's concerns are highlighted in the online brochure (www.sec.gov/news/varann.htm). It cautions investors that variable annuities might not be appropriate within tax-qualified plans; that no variable-annuity benefits are free; that tax-free exchanges tax-free exchange
An exchange of assets between taxpayers in which any gain or loss is not recognized in the period during which the exchange takes place. Rather, taxpayers are required to adjust the basis of assets exchanged. of annuities under the 1035 section of the tax code could trigger surrender charges; and that exchanging one annuity for another could cause the beginning of a new surrender-charge period.
Roye pointed to the bonus credits to illustrate this point: "Our concerns are heightened in cases when a bonus is paid to an investor transferring funds from one variable annuity to another in a '1035 exchange,' where an investor at or near the end of a surrender-charge period takes on a new surrender-charge period as a result of the exchange."
He speculated about where higher bonuses might lead the industry. Higher bonuses lead to higher charges and longer surrender periods, and the SEC is concerned that they can effectively become "nonredeemable" if withdrawals trigger these expenses plus recapture of the bonus.
"At some point, we may want to draw a line in this area to preserve the redeemability feature of these products," he said.
Roye challenged the industry to design bonus products with investors' interests in mind and to put safeguards in place to prevent inappropriate sales. "I would urge you not to wait for our inspections staff or NASDR NASDR
See NASD Regulation, Inc. (NASDR) [National Association of Security Dealers Regulation] to come knocking on your door with questions about bonus products," he said. "This is an issue that involves nothing less than the integrity and credibility of the industry," he said.
Roye said the SEC was giving "serious consideration" to NAVA's proposals for streamlining variable-annuity prospectuses. Mackey said the proposals would reduce prospectuses to about 10 pages from about 30 and would replace legal language with words the average person could understand.
"This is an area in which the industry and the SEC can agree that less can be more," he said.