The regulator claimed that the carrier failed to disclose to investors the downside of a cap on its guaranteed minimum income benefit riders — specifically that if the benefit base reached a maximum value, accruals would end and subsequent withdrawals would reduce the value of the contract and the GMIB.
“In a worst-case scenario, [investors] would withdraw all of their contract value, the GMIB value would decline to zero and they would be left with nothing to annuitize,” according to the SEC.
The case focuses on MassMutual's GMIB 5 and GMIB 6 riders, which were offered from 2007 to 2009. Both set a floor on which future income withdrawals were based, expanding the value of the GMIB by 5% or 6% annually. Investors could make withdrawals at any time while the annuity accumulates.
In marketing pieces, MassMutual advertised the GMIBs as providing “Income Now,” if clients wanted to take money during the accumulation phase or “Income Later,” if they waited to receive annuity payments. “Even if your contract value drops to zero, you can apply your GMIB value to a fixed or variable annuity,” the insurer's sales material said.
But MassMutual failed to sufficiently explain in its prospectus or promotional literature that the GMIB would stop earning interest if it reached a maximum value, according to the SEC. If the rider hits this cap, every dollar withdrawn will cut the value of the benefit by a pro-rata amount tied to the percentage decrease in the contract value.
MassMutual's agents also misunderstood how the product worked, the SEC said. Some thought that after the GMIB value hit the cap, it would stay there and clients could keep taking withdrawals. Others thought that clients could wait until the benefit reached the cap, take 5% or 6% annual withdrawals and then annuitize the contract to get an income stream based on the GMIB's value, according to the complaint.
“Following such an investment strategy could have had severe adverse consequences for investors,” the SEC said.
The insurer pulled GMIB 5 in March 2009 and GMIB 6 in December 2008, according to MassMutual spokesman Mark Cybulski. On May 1, 2009, the company updated its prospectuses to better detail what happens if a GMIB value reaches the cap. MassMutual also removed the cap from existing clients' riders to ensure that they never reached the maximum GMIB value.
None of the investors were harmed.
“We are pleased to have resolved this matter with the SEC,” Mr. Cybulski said. “Importantly, the settlement makes clear MassMutual improved the challenged disclosures beginning May 1, 2009, and that the SEC considered our change to these riders to eliminate the maximum GMIB value or 'cap.' ”