SEC Steps Up Scrutiny of Annuity Sales

The Securities and Exchange Commission is stepping up scrutiny of variable annuity sales to make sure insurance companies and brokers are reviewing whether the investments are appropriate for clients.

“It’s a question of whether brokers are accurately describing and considering if variable annuities are suitable,” said Paul Roye, director of the SEC’s investment management division.

The SEC is concerned that investors don’t understand that they won’t receive double tax benefits by purchasing variable annuities for certain tax-qualified retirement plans, such as 401(k) plans and individual retirement accounts, Roye said.

A variable annuity is an insurance-mutual fund hybrid that permits tax-deferred retirement savings and can produce income for holders until death. Investors in variable annuities don’t pay capital gains taxes on earnings as they accumulate. Instead, they pay ordinary income tax on the money when they receive it.

Some tax-qualified retirement plans let customers invest their funds in variable annuities. There is no additional tax-deferred treatment for earnings, though, beyond what’s provided in the retirement plan itself, which typically is a deferral of taxes.

Also, variable annuities generally charge higher fees than mutual funds.