Regulators will release a report today that says the variable annuity business is plagued by abusive sales tactics and will urge consumers to be cautious.
The report, by the Securities and Exchange Commission and the NASD, finds that annuities are frequently sold to people without regard to their financial circumstances, said a person familiar with the review.
The SEC's staff is expected to refer some of its findings to the agency's enforcement division for possible action, this person said.
The report's findings are expected to add pressure to the booming variable annuity business as regulators consider imposing new rules.
Variable annuities are retirement savings vehicles that aren't taxed until funds are withdrawn. The investor's money is typically placed in a stock or bond mutual fund that has the added protection of insurance that guarantees regular payments until death, which is known as an annuity.
Critics say annuities are often a bad deal in which consumers pay high fees for the benefits and brokers often don't disclose all the charges.
Variable annuity sales jumped tenfold during the 1990s, and last year assets in the industry increased 20% to about $985 billion.
An SEC spokeswoman declined to comment on the report, except to confirm that it would be released today. With the report, the agency is expected to issue a consumer alert reminding investors that variable annuities are not suitable for everyone.
The report finds that annuities may be especially inappropriate for people who cannot tie up their money for a long time. That's because the contracts typically require investors to pay surrender charges if they withdraw more than 10% of their money in any of the first seven or so years, with exceptions for emergencies.
The report is expected to cite several examples of brokers making unsuitable recommendations to seniors and other investors. In some instances, investors had to mortgage their houses to afford the contracts, the source said. In other instances, consumers were not told about all the investment risks and expenses associated with the products, the report is expected to say.
Regulators and financial planners say that variable annuities can be useful as long-term investments but that consumers should be aware of their intricacies, including the surrender charges. In addition, ongoing expenses for the funds are usually higher than those for mutual funds.
Defenders of variable annuities note that the products offer far more features than mutual funds. In addition to guaranteed payments, annuities offer a "death benefit." When an annuity owner dies, his or her heirs are guaranteed to get at least the amount of the original investment.
For retirement savers, annuities also contain no investment caps -- unlike individual retirement accounts, 401(k)s and similar vehicles that are also tax-deferred.
The NASD -- the brokerage industry's self-regulatory organization formerly known as the National Assn. of Securities Dealers -- recently proposed a sweeping set of rules governing the sales and marketing of variable annuities. The NASD's plan would require additional supervisory approval by any brokerage selling the products, as well as new training for brokers and "plain English" disclosure regarding the contract details at the point of sale.
In recent years, the NASD has brought approximately 80 enforcement actions against brokers alleging abusive practices in the sale of variable annuities. Among other abuses, brokers have been accused of "churning." Churning refers to the practice of getting investors to trade in old annuities for new ones to generate sales commissions.
In May, the NASD fined three securities firms and one broker a total of $503,000 for violations involving variable annuity transactions. Two brokers were barred from the industry.
Times staff writers Walter Hamilton in New York and Jonathan Peterson in Washington contributed to this report.