SEC Warns on Variable Annuities

By Marcy Gordon
AP Business Writer
Monday, June 5, 2000; 7:47 p.m. EDT

WASHINGTON -- Federal regulators are warning investors to be wary about variable annuities, an increasingly popular way to save for retirement that combines features of mutual funds and insurance.

While they offer attractive features such as lifelong payments and death benefits, variable annuities also have some pitfalls which salesmen often don't reveal to investors, the Securities and Exchange Commission said Monday. The agency issued an "investor alert" and a brochure on its Web site to help investors understand the benefits, costs and risks of variable annuities.

The warning came as Paul Roye, director of the SEC's Investment Management Division, told an industry group that SEC inspectors have been gathering information on sales of variable annuities from brokerage firms and financial advisers around the country with an eye to possible sanctions.

The SEC is warning, for example, that bonuses offered by some companies selling variable annuities to lure investors may be outweighed by higher expenses. The bonuses, typically a small percentage of the value of the annuity, are in the form of credits applied to an annuity holder's purchase payments.

The companies offering bonuses may, for example, charge higher penalties for withdrawals, the SEC notes.

"What we have found in our scrutiny of bonus products is that there's no such thing as a free bonus," Roye said in a speech to members of the National Association for Variable Annuities. "I would urge you not to wait for our inspections staff ... to come knocking on your door with questions about bonus products."

Mark Mackey, president and chief executive officer of the variable annuities trade group, acknowledged in an interview that bonus credits "benefit some, but not all, investors."

Variable annuities are sold by insurance companies, brokerage firms and other financial companies. Sales nationwide reached some $120 billion last year, up from around $100 billion in 1998.

A variable annuity is a contract between an investor and the company selling it in which the company agrees to make periodic payments to the investor, beginning immediately or at some future date. The investor buys a variable annuity contract by making either a single purchase payment or a series of payments.

The payments to the annuity holder vary and are determined by the performance of the underlying investments. Variable annuities offer several investment options, usually involving mutual funds that invest in stocks, bonds or money-market instruments, or some combination of the three. With fixed annuities, by contrast, all payments to the annuity holder are equal.

Variable annuities differ from mutual funds in several important ways. They are tax-deferred, for example, which means annuity holders pay no taxes on the income and investment gains from their annuities until they withdraw their money.

In general, the SEC says, the benefits of tax deferral will outweigh the costs of a variable annuity only if it is held as a long-term investment to meet retirement and other long-range goals.

Individual Retirement Accounts and 401(k) retirement plans, which offer tax deferral at no cost, are often more advantageous than variable annuities, the SEC notes.


On the Net: The brochure "Variable Annuities: What You Should Know" is available on the SEC's Web site at http://www.sec.gov/investor/pubs/varannty.htm