Do You Know When to Change Your Variable Annuity?

Investing for retirement is important, but it’s not always easy to know what your best option is. If you’ve chosen a variable annuity (VA), it’s especially important to investigate your investment options.

MetLife Securities, Inc. (MSI) was recently fined $25 million by the Financial Industry Regulatory Authority (FINRA) for allegedly making misrepresentations and omissions on VA replacement applications for tens of thousands of customers.

Replacing one VA with another involves a comparison of the features of each security, and VA replacements are subject to regulatory requirements to ensure complete and accurate cost comparisons by a firm’s representatives.

FINRA alleged that MSI misrepresented at least one material fact about the costs and guarantees of customer’s previous VA contracts in 72% of the firm approved VA replacement applications. According to FINRA, MSI allegedly:

  • Represented to customers that their recommended VA was less expensive than their existing VA, when that was not true.
  • Failed to disclose to customers that their proposed VA replacement would reduce or eliminate important features in their current VA, like death benefits, guaranteed income benefits, and a guaranteed fixed interest account rider.
  • Understated the value of customers’ existing death benefits in mandated disclosures.

What is a Variable Annuity?

Generally, a VA is a tax-deferred retirement vehicle that allows you to choose from a selection of investments to be paid back in retirement. The amount paid back is determined by the performance of the chosen investments, compared to a fixed annuity, which provides a guaranteed payout.

VAs may include a variety of fees when you invest in them, including surrender charges which you owe if you withdraw money from the annuity before a specified period; underlying fund expenses which relate to investment options; administrative fees for recordkeeping and other administrative expenses; mortality and expense risk charges which are charged by the insurance company for the insurance risk it takes with the contract; and charges for special features like an increased death benefit or guaranteed minimum income benefit.

Should I Exchange my Variable Annuity?

Because of the growth potential, VAs are more likely than a fixed annuity to outpace inflation, and can be a way to boost savings for retirement. Taking full advantage of the potential a VA provides requires due diligence and comparing such things as fund strategy, investment risk, diversification, and other important factors.

  • Cost: determining whether the new VA is indeed less expensive likely requires a side-by-side analysis, and is ideally done with the cooperation of your sales representative.
  • Benefits: various benefits of the new VA may be more robust or better suited to your needs, like enhanced death and living benefits that will help you achieve a financial goal.

What to Look Out for When Exchanging

Be careful when considering replacement VAs, and be on the lookout for deceptive offers:

  • When “bonus” or “premium” payments are offered as major or primary enticements to make an exchange it may sound like a good deal, but VAs with bonus credits may have higher expenses that offset any gain.
  • If you think you might need money from the VA in the short term, consider the surrender charges. Withdrawing too much money early, or deciding to sell your VA could end up being more expensive than you’re prepared for. Know when the surrender charges expire with your current VA, and consider how comfortable you are with a potentially longer surrender charge period. You are generally allowed to withdraw 10% of your contract value each year free of surrender charges, but you may be charged 6% or more on withdrawals beyond that.
  • Pay attention to new features in your replacement VA that you may not need, because they can unnecessarily increase the cost.

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