In fixed-annuity hype, fees often veiled

PHILADELPHIA -- Fixed index annuities have surged since the 2008 financial crash, when mom-and-pop investors saw the stocks and mutual funds they counted on for retirement plummet in value.

Seizing opportunity, insurance agents began pitching the popular but complex product known for lucrative commissions and opaque fees, on cable TV and radio infomercials, telling senior citizens how to protect their savings with investments reassuringly described as "risk free" and "no fee."

But in most states, sales agents aren't required to disclose their commissions, typically 6 to 10 percent, that insurance carriers pay them for putting retirees' money into these long-term investments. Seniors also can face huge penalties for early withdrawals for unexpected medical bills or other emergencies.

California Insurance Commissioner Dave Jones, who oversees the nation's biggest insurance market, urged caution: "We've seen people being sold annuities that are entirely unsuitable because of their age, because of their financial circumstances. ... It's an area of increasing complexity, a population that is extremely vulnerable, and one in which there is a lot of room for mischief."

The U.S. Department of Labor, which has oversight of retirement plans, became alarmed about insurance agents and investment brokers pushing clients into inappropriate retirement investments with high or undisclosed commissions. These practices, it estimated, cost retirees $17 billion a year in excess fees.

The department crafted a regulation, set to take effect in April, that would require financial advisers to put their clients' interests first when selling investments for retirement. Known as the "fiduciary rule," it was the first federal regulation of insurance agents.

In February, President Donald Trump, by an executive order, halted the long-debated regulatory change and called for another review. The insurance and investment industry had fought the new rule for years and hope the new administration can kill the Obama-era change.

If so, sales of insurance products will remain overseen primarily by state regulators, unlike sales of stocks and mutual funds, which have some federal consumer protections.

Consumer protection for seniors has become all the more important because of a shift in how Americans prepare for their retirement. Today, old-standby pension plans -- in which the employer provides a fixed monthly payout for life -- are offered by only 5 percent of Fortune 500 companies, down from 50 percent in 1998, according to a recent study.

Retirement planning is now more do-it-yourself, with some turning to fixed index annuities. They're marketed as a way to give investors a portion of the stock-market gains while protecting against market downturns. But they're hard to understand for most investors. The "fixed" part of the annuity is this: The company will set a minimum rate of return on money invested, often about 1 to 2 percent a year over the term of the contract, often six to 17 years.

The "index" part is tied to the S&P 500 or another well-known market index, and can provide an upswing of several more percentage points, depending on how the stock market performs. But the insurance company typically caps how much of the upswings an investor receives.

For those who find comfort in a minimum guaranteed return, even if small, and strict control on their money, some experts say putting a portion of savings in index annuities can be a good choice. But Barbara Roper, director of investor protection at the nonprofit Consumer Federation of America, said "absent real reforms ... just stay away."

Business on 03/15/2017

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