A settlement with a giant insurer charged with misleading retirement savers about hefty fees on variable annuities is highlighting gaps in investor disclosures about the complex products.
Equitable Financial Life Insurance
The insurer’s account statements to clients — mostly public school teachers and staff members investing through their 403(b) or 457(b) defined contribution retirement plans — typically listed fees of “$0.00”, the SEC said. “Though affirmatively presenting an apparently all-inclusive picture of fees and expenses to investors, Equitable’s quarterly account statements actually detailed less than three percent of the revenue that Equitable received from the Equi-vest variable annuities,” the SEC wrote in a settlement order.
The case reflects an industry with aggressive sales tactics that have soured
Equitable
Equitable’s agents “prey on educators due to the access given to them by the failed multi-vendor 403(b) system,” Dauenhauer said in an email. “Educators generally trust that their employer has their best interest at heart, but most school employers don’t give the 403(b) a second thought. It’s the perfect environment for a predator in my opinion.”
A variable annuity contract provides a client with a range of tax-deferred investments, typically in mutual funds, that come with an agreement by the issuer to make guaranteed payments to the customer for the rest of their lives or to a beneficiary under the products’ death benefits. The cost, withdrawal rules and other complexities often dissuade advisors from recommending them.
Public teachers’ 403(b) accounts are exempt from the Employee Retirement Income Security Act that requires protections for retirement savers and rules for plan sponsors. The SEC oversees variable annuities, but not the fixed products subject to state insurance regulations.
As the third largest issuer of annuities, Equitable generated $14.6 billion in sales in 2021, nearly all from variable products,
Equitable didn’t admit or deny the SEC’s allegations as part of settling the case.
“We didn’t live up to our own high standards and our clients expect more from us,” Equitable spokeswoman Abby Cohen said in a statement. “We are committed to learning from this, continuously enhancing our clients’ experience and always providing clear and transparent communications.”
The Wall Street regulator accused the firm of violating anti-fraud laws with account statements that were far from straightforward and comprehensive. The statements listed only the expenses from administrative and transaction fees amounting to no more than $30 a year, along with plan operating costs that most clients didn’t have to pay, according to the SEC. Crucially, the statements omitted separate account expenses ranging from .10% to 1.49% of net assets and the portfolio operating charges between 0.55% and 2.26%, the regulator says.
“The account statements contained no clarifying language or reference to the prospectus to explain to investors what these different categories of fees represented or to put the investor on notice of the fact that they instead had paid significant separate account expenses and portfolio operating expenses that could amount to thousands of dollars each year,” the SEC wrote.
Under the agreement, the company must now administer a fund distributing $50 million to affected investors based on the amount they invested in Equi-vest products between 2016 and the settlement. In addition, Equitable must change its account statements “immediately” and send a letter notifying eligible clients within two months of the terms of the settlement.
“When considering how to invest their hard-earned money and save for retirement, it is essential that investors not be misled about the fees they are paying,” SEC Enforcement Director Gurbir Grewal said in a statement. “This case should serve as an important reminder to investment firms to carefully review their statements to ensure fee information is disclosed properly.”
Chris Tobe, an industry
“Many annuity products hide fees, but the SEC only has jurisdiction over variable annuities — the rest are regulated by state insurance commissioners who rarely if ever fine for excessive fees,” Tobe said. “School districts need to ban firms like Equitable that violate regulations from making sales to teachers on school property.”
Dauenhauer argued that Equitable is no different from other insurers, and that most teachers and other educators “have no idea” what fees they are paying.
“By placing a line item that showed a low figure or nothing at all and using a descriptor like ‘fees and expenses’, any reasonable human being would assume that this line item encompassed every penny that they paid out in fees,” Dauenhauer said. “I can’t say that they did this on purpose, but if they did, $50 million is not nearly enough of a fine.”
