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Investors and employees with small retirement plans have been injured by variable annuities, which combine mutual funds that offer tax-deferred compounding with insurance features. In the past, variable annuities were not viewed as a suitable product for many investors, but annual annuity sales more than doubled in the past decade, hitting a record $1.65 trillion in 2004.
In recent years, insurers have added an array of guaranteed benefits in hopes of attracting new investors. The industry’s efforts, however, have been criticized as overly aggressive and preying on senior citizens, thanks in part to high commissions. In 2004, the National Association of Securities Dealers ordered a major brokerage firm to repay more than $11 million to customers persuaded to exchange one annuity contract for another, generating $37 million in commissions.
Variable annuities are infamous for their hefty fees: the average annual expense on variable annuity subaccounts stands at 2.08% of assets, as opposed to the average mutual fund, which charges just 1.38%. New Jersey became the third state – joining Utah and Washington- to limit to no more than 10 years the length of time insurers can impose surrender charges in July 2005. Surrender charges are fees charged for the early withdrawal of funds, and states have placed special emphasis on implementing laws including provisions limiting the amount of time annuity sellers can impose penalties for canceling an annuities contract early.
New Jersey began enforcing its Senior Citizen Investment Protection Act, which limits how long annuity sellers can impose surrender charges, in July 2005, and other states - including California and Missouri - are pushing legislation that would impose additional regulation or oversight on annuity sales as well. Complaints regarding variable annuities involve the way variable annuities are being marketed to the elderly, and there is growing pressure at both the federal and state level to curb the abusive sales practice of this lucrative industry.
The senior population controls a large portion of retirement dollars, making them the obvious target for people selling unsuitable investments. The Securities and Exchange Commission and the National Association of Securities Dealers found widespread “weak” practices regarding sales suitability, disclosure, supervision and training in an examination of broker-dealers selling variable annuities. As a result, the NASD proposed regulation in July 2005 that would require disclosure documents to explain annuities in laymen’s terms and require a supervisor to double-check whether an annuity sale is appropriate before a contract is issued.
Long criticized by regulators and consumer advocates for misrepresenting its products and preying on senior citizens, some seniors may have their life savings jeopardized by unsuitable annuities. Like any investment, variable annuities are not appropriate for all retirees, and it is important to be able to identify if the policy is beneficial. Because investigations have turned up violations in the way variable annuities are marketed and risks disclosed, investors are not being given sufficient information to make educated decisions about their investments.
Experts believe retirees or seniors over the age of 65 should avoid variable annuities altogether because they do not make much sense for people already in retirement due to the high fees that will eat up a large portion of any potential gain from subaccounts. If the subaccounts do not perform well, the retiree is likely to suffer losses with high fees and market loss. Trying to get out early in an attempt to salvage investment money will bring hefty surrender fees, draining even more out of their retirement fund.
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