SEC Investor Advocate: RILAs Are Hard for Consumers to Understand

POSITIER's Views:  The POSITIER team noted in its report that RILA issuers are less likely to charge annual fees than providers of some other investments, such as mutual funds.

"As an alternative to charging annual fees, providers will often make money in other ways such as by earning more on their own investments than they promise to pay investors," according to the researchers.

But many fees and charges, such as surrender charges, interim value adjustments when annuity owners pull cash out early, and tax penalties could affect a RILA contract's performance, the researchers found.

Contract provisions meant to limit a contract owner's losses or limit the issuer's risk could also affect performance, the researchers said.

When the researchers created disclosures reflecting their understanding of the products, they found that complexity and industry terms made RILAs hard to understand; that insurance features greatly affected product performance; that timing of various moves could have a big effect on product performance; and that the research itself revealed ways to improve RILA disclosures.

The researchers found some evidence that simplifying the wording and using a question-and-answer format helped to increase investors' understanding of the RILA disclosures.

Data gaps: The researchers noted that they were unable to find a data source with reliable, current and historical data on RILA products or data on topics such as the impact of early RILA withdrawals.

"While some proprietary data sources may provide some insights for investors, the lack of readily available data makes it more difficult for potential investors to properly evaluate the benefits and costs of investing in RILAs and to select appropriate investment options for themselves," the researchers wrote.

The SEC building. Credit: Diego M. Radzinschi/ALM