Massachusetts Mutual Life Insurance Co. last week reached a $1.63 million settlement with the Securities and Exchange Commission related to insufficient disclosures on one of its variable annuity riders.
The SEC claimed that the insurer 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, both of which have been canceled. 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 accumulated.
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 If the rider hit this cap, every dollar withdrawn would cut the value of the benefit by a pro-rata amount tied to the percentage decrease in the contract value.
NO INVESTORS HARMED
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 happened if a GMIB value reached the cap. MassMutual also removed the cap from clients' riders to ensure that they never reached the maximum GMIB value.
None of the investors were harmed.
The insurer neither admitted to nor denied the findings.
“We are pleased to have resolved this matter with the SEC,” Mr. Cybulski said. “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.'”
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