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A recent settlement against one of the giants of the insurance industry is a good reminder that investors need to be vigilant, particularly when it comes to annuities.
Recently, the Department of Labor introduced new rules governing advisors, which basically added significant layers of protection for consumers. We covered the reasoning behind the new regulations here. Recent news about a record fine assessed to industry-leading insurer MetLife illustrates why the new rules were necessary in the first place. Whether or not you heard about the news, as an investor, you should take note.
MetLife agreed to pay $25 million to settle a probe of abuses tied to variable annuities—a record penalty for annuity-related violations by the self-regulatory Financial Industry Regulatory Authority (FINRA). The sum includes a $20 million fine and $5 million to be paid to customers for “negligent” misrepresentation and omissions, according to FINRA, a self-regulatory body that monitors the financial industry and the behavior of broker-dealers. MetLife agreed to the fine but did not admit to any wrongdoing.
What does it mean?
According to FINRA, the probe is tied to abuses from 2009 to 2014, including cases in which MetLife broker-dealers falsely told customers that new annuities offered by the insurer were cheaper than the products they were replacing. MetLife also allegedly failed to disclose to customers that new annuities would reduce or eliminate some benefits. This wasn’t an isolated advisor giving misinformation here or there; FINRA alleged a systematic process of misrepresenting or omitting material facts about the products in nearly three-fourths of applications. Yet, the company’s principals—specially trained and licensed personnel who must review and approve applications—approved them anyway. There were also fees associated with the products that were not properly disclosed, a big no-no for broker-dealers.
Why is this important?
Annuities offer significant potential benefits to retirement savers, but they generally aren’t popular with consumers for two major reasons: 1. Most consumers associate the products with death, a subject they’d prefer to avoid thinking too much about; 2. Consumers often simply don’t fully trust the benefits of annuity products. Annuities come in many varieties, have different phases that can be difficult to explain, and vary in terms of exactly how much money retirement savers will receive and when.
Some would argue that annuities present the greatest opportunity for advisors to act in ways that improve their own bottom lines at the expense of retirement savers—which is what the DOL Fiduciary rule was specifically designed to prevent. But the rule won’t be fully implemented until January 2018, although its most robust protections will be in place by next April. Until then, even though many advisors and the financial companies for whom they work have already enacted more substantial protections than even the new regulations stipulate, it’s up to you to investigate the fees and costs associated with any investment vehicle you’re considering.
Generally speaking, annuities are a really strong arrow in the retirement quiver. Still, it’s worth doing some fact-checking any time you’re in the market for an annuity product—or any other financial vehicle, for that matter. You wouldn’t expect a patient to come to your dental office without doing some homework on your legal history, background, and services offered. The same approach will help you avoid conflicts of interest and any products that may not be best for your portfolio.