Freeing variable annuities from information overload
Time to allow summary prospectuses for VAs
Investment product-marketing materials inevitably come with the warning: Read the prospectus carefully before investing. But do investors really read them? Not many. Do those who read them understand them? Hardly.
This reality has gotten regulator attention — at least when it comes to mutual funds. In 2009, the Securities and Exchange Commission adopted a final rule requiring funds to include key information in plain English in a standard fashion at the beginning of prospectuses. It also allowed mutual funds to use the key information as a standalone summary prospectus, with the traditional version still available for those hardy investors who just can’t get enough details about what they’re buying.
Now the call has gone out to adopt similar rules for variable annuities, most recently from the SEC’s own investor advocate, Rick Fleming.
Summarizing key information that is standardized across investment options is useful when comparing important factors such as objectives, performance, cost and risks.
UNWIELDY PROSPECTUSES
Current rules prohibit VAs from offering a pared-down version of their unwieldy prospectuses — often filling 150-200 pages. Clearly this prohibition does not align with the SEC’s mandate to protect investors. Confusing or blinding investors with information overload hardly helps them.
Better yet, all relevant players seem to be on board with such a change. According to an InvestmentNews article by Mark Schoeff Jr., the Insured Retirement Institute, an interest group representing the annuity market, has been pushing for VA summary allowances for about nine years. And the IRI said all five SEC commissioners expressed their support for such summaries in meetings last fall.
We appreciate that the SEC’s agenda is heavy with Dodd-Frank mandates, but for goodness sake, take the easy win when it’s so clearly ahead of you and so obviously will benefit investors.
Last year, the SEC reported that about 80% of mutual funds had developed summary prospectuses since the rule came out six years ago. Time to allow the same logical disclosures for VAs.
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