Monday, May 4, 2015

No. 97: Senator Elizabeth Warren Investigates Annuity Sales Incentives

On April 28, 2015, U.S. Senator Elizabeth Warren (D-MA) sent a five-page letter to the chief executive officer of each of 15 major issuers of annuities seeking "information on rewards and incentives offered by your company to brokers and dealers who sell annuities to families and small investors." The response date is May 11. Senator Warren identifies herself in the letter as the Ranking Member of the Subcommittee on Economic Policy of the Committee on Banking, Housing, and Urban Affairs. Her office released copies of the 15 letters, a press release, and several examples of the incentives.

The Companies Contacted
Senator Warren sent her letter to the companies referred to in her press release as "15 of the largest annuity providers today." The companies, using the names shown in the letters, are AIG Companies, Allianz Life Insurance Company of North America, American Equity Investment Life, AVIVA, AXA Equitable, Jackson National Life Insurance Company, Lincoln Financial Group, MetLife, Nationwide Financial, New York Life, Pacific Life, Prudential Annuities, RiverSource Life Insurance, TIAA-CREF, and Transamerica.

The Information Requested
The second paragraph of Senator Warren's letter lays the foundation for her request. The paragraph reads:
A preliminary review by my staff reveals that annuity providers offer a vast range of perks—from cruises to international travel to iPads to diamond-encrusted "NFL Super Bowl Style" rings to cash and stock options—to entice sales of their products. I am concerned that these incentives present a conflict of interest for agents and financial advisers that could result in these agents providing inadequate advice about annuities to investors and selling products that may not meet the retirement investment needs of their buyers.
Senator Warren's specific request for information is near the end of her letter. The four components of her request are:
  1. A list of all incentives—including cash awards, cruises or other vacations, electronics, jewelry, and any other items of value—that are awarded by your company to agents, brokers, FMOs [field marketing organizations], or other sellers or middlemen involved in sales of your annuity products.
  2. Documents and information provided to agents, brokers, FMOs, or other sellers or middlemen involved in sales of your annuity products describing the incentives and the qualifications for earning those incentives.
  3. Information on the number of each of these incentives awarded to agents, brokers, FMOs, or other sellers or middlemen involved in sales of your annuity products, and the total value of each of those incentives.
  4. A copy of your company policies for disclosing and describing sales incentives and conflicts of interests to annuity purchasers. 
The ACLI Comment
Senator Warren's letter prompted the American Council of Life Insurers (ACLI) to issue a comment entitled "Comprehensive Regulations Protect Consumers' Interests In Annuity Sales." The ACLI comment describes "Product Content and Marketing Rules," "Sales Practices Requirements" including references to four model regulations promulgated by the National Association of Insurance Commissioners (NAIC), and "Federal Laws and Regulations." The ACLI comment does not mention the incentives that are at the heart of Senator Warren's investigation.

The NAIC Comment
When I saw Senator Warren's material and the ACLI comment on it, I asked the NAIC for a comment. In response, I obtained a short comment from Monica Lindeen. She is the president of the NAIC and the Montana commissioner of securities and insurance. The NAIC comment, like the ACLI comment, mentions various model laws, model regulations, and other materials, but does not mention the incentives that are at the heart of Senator Warren's investigation.

The DOL Proposed Rule
On February 23, 2015, President Barack Obama asked the U.S. Department of Labor (DOL) "to update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests." On April 14, DOL issued a press release announcing a request for public comment on "a proposed rule that will protect 401(k) and IRA investors by mitigating the effect of conflicts of interest in the retirement investment marketplace." DOL also issued a "Fact Sheet" and other materials about the proposed rule. On April 20, DOL published the proposed rule in the Federal Register.

General Observations
The investigation launched by Senator Warren is long overdue. I agree with her that the widespread use of sales incentives is a serious problem. It is surprising that the insurance and securities regulators have not explored this area. It is disappointing, but understandable given the circumstances, that the vacuous comments by the ACLI and the NAIC merely call attention to existing rules and regulations without making any direct reference to the subject of Senator Warren's investigation. The comments therefore imply—incorrectly in my view—that there is no cause for concern because annuity sales activities are regulated. 

I am offering a complimentary 19-page PDF consisting of one of the five-page letters, the four pages of examples, the one-page press release, the three-page ACLI comment, the one-page NAIC comment, and the five-page "Fact Sheet" concerning the DOL proposed rule. Send an e-mail to and ask for the Warren annuity incentives package.