Perez calls out variable annuities in argument for DOL fiduciary rule

Using an anecdote critical of VAs, Thomas Perez says most people are better served by simple investments.

When he goes to Capitol Hill and other venues to advocate for a rule that would raise investment-advice standards for retirement accounts, Labor Secretary Thomas Perez uses an anecdote that highlights the dangers of variable annuities.

He tells the story of Merlin and Elaine Toffel of Lindenhurst, Ill. The late Mr. Toffel, a Navy veteran and electrician, and his wife, an accountant, had built a portfolio over four decades based on Vanguard funds. When Mr. Toffel fell ill with Alzheimer’s disease, his wife turned to a broker at a local bank for help managing their nest egg.

The broker convinced Ms. Toffel to liquidate the Vanguard products and buy $650,000 of variable annuities, an insurance product that combines an underlying mutual fund investment with income-guarantee features.

The Toffel’s variable annuity came with a 4% annual fee and a 7% surrender charge, if the couple wanted to withdraw their lump sum. Mr. Perez said the annuity was not a suitable investment for the Toffels, and that the related conflicted investment advice cost them more than $50,000.

The proposed Department of Labor fiduciary rule is designed to reduce conflicts of interest for brokers working with clients’ retirement funds by requiring them to act in their clients’ best interests.

“You know what I’ve learned in this business is that most people, especially the small saver, their needs are simple,” Mr. Perez said at the Brookings Institution in Washington on Tuesday. “Their needs are served by simple investments. Variable annuities are not the answer for so many people. The reason they become the answer, inappropriately for so many people, is because the system is misaligned.”

By that he means the interests of brokers and their firms can result in putting customers in high-fee products that erode retirement savings.

On Monday, Voya Financial Advisors modified its variable annuity sales policies after the Financial Industry Regulatory Authority Inc., the broker-dealer regulator, told the company one of their products was unsuitable.

The National Association of Insurance and Financial Advisors supports annuities for their ability to guarantee lifetime income.

“Variable annuities provide an important tool for many retirement savers and their advisers under certain situations,” NAIFA President Juli McNeely said in a statement. “A one-size-fits-all approach is not in the best interests of consumers. And while many small savers’ needs may be simple, only a thorough conversation between an adviser and the client will determine the most appropriate investment options. A DOL rule that would unduly restrict that conversation does a great disservice to consumers who might benefit greatly from annuities or other retirement investment products.”

In a survey of its members released Tuesday , NAIFA criticized the DOL proposal for limiting investment advice about annuities.

Cathy Weatherford, president and chief executive of the Insured Retirement Institute, said she didn’t know the details of the transaction Mr. Perez highlighted, and that the organization is looking into it. She added that variable annuity sales are highly regulated.

“Financial professionals who recommend variable annuities must hold both insurance and securities licenses and must adhere to a robust framework of consumer protections — at the state and federal levels — that oversee the distribution of annuity products,” Ms. Weatherford said in a statement. “IRI and its members expect all financial professionals meet these requirements of these laws and regulations — no exceptions.”

A critic of how advisers are paid for selling annuities said varying commission levels are at the heart of the problem with the products.

“The only way to solve this is if all annuity products paid the same commission,” said Stan Haithcock, an independent insurance agent. “Then the best solution for the customer would be chosen.”

Mr. Perez said most brokers are not intentionally hurting their clients.

“I don’t believe that the challenge here is that we have a bunch of people who have malice in their heart,” Mr. Perez said at Brookings. “The crux of this issue is that there are good people operating in a structurally flawed system — a market that sees the interest of the adviser and the firm all too frequently misaligned with the best interests of the customer.”

Mr. Haithcock said the best approach is to strengthen disclosure about variable and indexed annuities.

“The realistic answer is full transparency of the products, fees and commissions,” he said.