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Life Health > Annuities > Variable Annuities

SEC Investor Advocate: RILAs Are Hard for Consumers to Understand

By Allison Bell

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What You Need to Know

  • The SEC advocate has a team that studies how consumers interact with the investment marketplace.
  • The team found that using a question-and-answer format might make RILA information somewhat easier to understand.
  • The team sees widespread problems with disclosures for many of the products that it classifies as complex.

Researchers at the Securities and Exchange Commission’s Office of the Investor Advocate had a hard time getting the information they wanted to analyze registered index-linked annuities, and consumers showed little understanding of the RILA disclosures tested.

When the researchers gave 2,500 consumers who read RILA disclosures a true-and-false test, the consumers answered only 58% of the questions correctly.

The average score “is only slightly better than what we would expect if the participants were randomly guessing,” the researchers concluded in their report, which was included in a report on the advocate office’s fiscal year 2023 activities prepared for Congress.

“We rarely have examined a more complex retail investment product,” Cristina Begoña Martin, the SEC’s investor advocate, wrote in a message introducing the report. “We believe an enormous level of effort on the part of providers, regulators, and investors is needed to ensure RILAs are purchased by investors who can benefit from them.”

What it means: The advocate’s concerns about RILA complexity could end up affecting disclosures for many SEC-regulated products: The advocate suggested that the SEC’s ”historical approach to disclosures may prove insufficient, not just for RILAs, but for many highly complex financial products.”

RILAs: A RILA is an annuity that can tie the owner’s crediting rate to the performance of one or more investment indexes.

Because a RILA exposes the owner to the potential for investment-market-related loss of account value, the SEC regulates RILAs as securities.

The Testers:  The investor advocate had its Policy-Oriented Stakeholder and Investor Testing for Innovative and Effective Regulation team, or POSITIER team, study RILA disclosures along with other topics, such as mutual fund visual aids.

The POSITIER team helps the investor advocate understand how investors and other people are affected by SEC policies and how they interact with the investment marketplace.

POSITIER’s Views:  The POSITIER team noted in its report that RILA issuers are less likely to charge annual fees than providers of some other investments, such as mutual funds.

“As an alternative to charging annual fees, providers will often make money in other ways such as by earning more on their own investments than they promise to pay investors,” according to the researchers.

But many fees and charges, such as surrender charges, interim value adjustments when annuity owners pull cash out early, and tax penalties could affect a RILA contract’s performance, the researchers found.

Contract provisions meant to limit a contract owner’s losses or limit the issuer’s risk could also affect performance, the researchers said.

When the researchers created disclosures reflecting their understanding of the products, they found that complexity and industry terms made RILAs hard to understand; that insurance features greatly affected product performance; that timing of various moves could have a big effect on product performance; and that the research itself revealed ways to improve RILA disclosures.

The researchers found some evidence that simplifying the wording and using a question-and-answer format helped to increase investors’ understanding of the RILA disclosures.

Data gaps: The researchers noted that they were unable to find a data source with reliable, current and historical data on RILA products or data on topics such as the impact of early RILA withdrawals.

“While some proprietary data sources may provide some insights for investors, the lack of readily available data makes it more difficult for potential investors to properly evaluate the benefits and costs of investing in RILAs and to select appropriate investment options for themselves,” the researchers wrote.

The SEC building. Credit: Diego M. Radzinschi/ALM

Allison Bell

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