Hard to understand

Summary prospectuses for variable annuities are supposed to help consumers make informed decisions about buying these complicated investments.

Unfortunately, hardly anyone understands the documents, despite years of industry pressure on the Securities and Exchange Commission to make them more investor-friendly.

The Insured Retirement Institute, an annuity trade group, is not giving up.

It is working with SEC staff members on a draft summary prospectus that it first submitted to the agency two years ago, trying to make it a “plain-English” document that is about 10 pages long. A document of that length would be a far cry from the 200- to 300-page variable annuity prospectuses that are common today.

Over the next two months, the IRI will submit the sample prospectus to the commission’s staff for review, according to Lee Covington, the group’s senior vice president and general counsel.

“Today’s prospectus isn’t achieving a consumer goal,” he said. “The challenge is how to blend the objective of being a good disclosure document with one that is also consumer[-friendly] and written in plain English.”

In December 2009, SEC Chairman Mary Schapiro said that her staff was developing a simplified summary prospectus for VAs, but it never issued one. Eileen Rominger, who replaced Andrew “Buddy” Donohue as the director of investment management, took over that role this month but hasn’t mentioned the idea.

A study by Cogent Research LLC for the IRI last March found that 89% of investors would be more likely to read a variable annuity prospectus if it had a short summary. Out of 961 surveyed retirees and pre-retirees with at least $100,000 in investible assets, only 20% read their investments’ prospectuses.

In addition to being helpful to investors, an easy-to-understand document may be even more important for financial advisers.

“These will make it easier for financial advisers to compare products,” Mr. Covington said. Advisers want clarity and confidence, and this is a tool that will help them with that, he said.

NO ONE READS THEM

Financial adviser Rick Bloom, a principal at Bloom Asset Management Inc., which has about $800 million in client assets, said: “No one reads the current variable annuity prospectuses.” He said he’d consider recommending variable annuities if the documents were easier to understand.

“If I can’t understand the ins and outs of the investments, I’m not going to get into them,” Mr. Bloom said.

Disclosure documents that were only one or two pages would be even better than the one about to be proposed, he said.

Neal Frankle, a financial adviser who sells only no-load variable annuities — and not very many of those — said he might be willing to re-examine variable annuities if they were easier to understand and compare.

“If a variable annuity company called and said, ‘Here are three reasons why we think you should consider our product,’ I would owe my clients the due diligence to look at it,” said Mr. Frankle, whose Wealth Resources Group has $100 million in client assets.

Regulators already require plain-English versions of mutual fund prospectuses and disclosure documents for financial advisers, and a 1998 SEC handbook helps public companies write sections of their prospectuses in straightforward prose (read How to create clear SEC disclosure documents).

In meetings, the SEC staff has asked the IRI for a sample prospectus that is written in plain English, with less legalese and fewer technical terms that are confusing to a normal consumer, according to Mr. Covington.

An IRI working group has brought in consultant Lightbulb Press Inc. to improve its sample summary prospectus. The consultant, which has worked on simplified-language projects for Texas state securities regulators and others, last month recommended making the prospectus understandable no matter what page is read first. Additionally, it found that the sample included some terms that were being used before they were defined, he said.

Within the next two months, the IRI will finalize the document, run it by its own committee on federal regulatory affairs and submit it to the commission’s staff for review, Mr. Covington said.

“We want to get a sample summary prospectus that everyone thinks is good for the consumer,” he said.

Variable annuity companies support the move because consumers will understand their product better and the smaller prospectuses will be cheaper to prepare, print and mail. Even after incurring some costs to translate their prospectuses into plain English, the expense should be less than the hundreds of thousands of dollars companies now spend each year, Mr. Covington said.

A new prospectus should also reduce consumer complaints. People don’t want these long documents that they know they’ll never read, and they worry about wasted trees, Mr. Covington said.

“We continue to work to get it right for consumers,” he said. “No process is as fast as you want it to be, but we’re pleased with the commitment that the SEC has on it.”

E-mail Liz Skinner at [email protected].

Related Topics: Money Management Institute (MMI), Securities and Exchange Commission