It appears at times that the financial services industry and its regulators are adversaries. In reality, though, we’re partners with mutual objectives. We both want to prevent unethical business practices and help consumers find the right solutions.
The 2013 regulatory and examination priorities introduced by FINRA earlier this year support enhanced transparency and suitability standards to help advisors help clients make the right purchase decision. This is good for consumers and the industry because we all benefit from enhanced consumer trust. It also offers the latest example of how regulatory organizations such as FINRA are doing a great job addressing today’s issues.
As we look further down the road and begin to think about the next generation of income replacement products to address growing retirement-income uncertainty, one thing becomes clear: The financial services industry must innovate. We must think outside the box to develop fresh products for a new retirement reality in which defined-benefit plans continue to become a thing of the past and programs such as Social Security and Medicare face uncertain futures. Failure to evolve is a failure to meet our obligation to millions of Americans who depend on us to help them prepare for and live in retirement.
Regulators and the industry must build on today’s solid partnership and evolve together. This will require taking a hard look at “the way we’ve always done things” to identify new opportunities to enhance progress toward our mutual objectives. Here are four opportunities for regulators to clear the path for the product innovation consumers will need in the future:
- Support life insurance/annuity hybrid products.
About a year ago, Nationwide combined its life insurance and annuity businesses to foster innovation in developing products that address opposite ends of the income-replacement spectrum. Eventually, we hope to introduce hybrid products that address the life insurance needs of pre-retirees (the risk of dying too soon), and later transition to address their retirement-income needs (the risk of living too long). Such a product could provide comprehensive income protection and reduce complexity for consumers with a more efficient, convenient and integrated solution.
As we explore creating such products, we recognize that a labyrinth of state and federal regulations pose a significant challenge. Many states have separate departments to regulate life and annuity products and communication between them isn’t always seamless. We hope regulators will find ways to break down barriers between regulatory silos as we work to bring hybrid solutions to market.
- Develop a summary prospectus.
Consumers today must sort through as many as 150 pages of contract disclosures and prospectus language to fully understand any product. For years, regulators have increased disclosure requirements due to the actions of a few bad apples, and this has added to the stack of disclosure documents consumers must wade through. This makes it difficult to identify the most important information and contributes to the perception that products such as annuities are too complicated.
With consistent regulation, an opportunity arises to create a customized summary prospectus document that provides what consumers really need and makes it easier to differentiate why one product may be more suitable than another. This comprehensive, yet abbreviated, summary could provide a consistent look and feel to help advisors and clients make apples-to-apples comparisons of all kinds of financial service products. Such a document would accompany the traditional package of deep background information and disclosures.
The SEC is working on rules for a variable annuity summary prospectus and has had success developing a similar summary for the mutual fund industry. These efforts are a step in the right direction. I hope regulators across the country will lend their support.
- Create consistency in disclosure and sales practices across all states.
Life insurance and annuity products work the same for consumers regardless of where they live. A consumer who purchases a life or annuity product in one state should receive the same disclosures and product information as those who purchase the same product in another state.
The Interstate Insurance Product Regulation Commission has an opportunity to continue its strong leadership in driving comprehensive and consistent product standards by expanding its mission to cover product disclosure, contract consistency and sales practices. This uniformity will make it easier for companies to introduce new products by removing the cost and time associated with tailoring practices for the regulatory requirements of many states.
- Foster portability of 401(k) income-guarantee products.
While fewer employers may be offering traditional pension plans, a growing number are trying to help their employees turn their 401(k) investments into guaranteed retirement income. Such 401(k) income-guarantee products are likely to become more popular as this trend gains traction. It’s critical to create rules to facilitate portability of 401(k) income-guarantee products when employees change jobs, because today’s career path commonly involves multiple stops before retirement.
To do this, consistency must exist in the way we create these income guarantees, including a common system for placing a net present cash value on the guarantee. The value of the guarantee could be used to purchase a guarantee with a new employer plan or in an IRA investment.
Understandably, most of today’s industry and regulatory dialogue focuses on the needs of consumers. However, we all must begin plotting a path to address the needs of consumers 10 or 20 years down the road. That’s when our nation will face the brunt of the expected retirement-income crisis. We have a great opportunity to work together to ensure tomorrow’s retirees have the innovative tools they will need to achieve retirement-income security.
Eric Henderson, FSA, MAAA is senior vice president of life insurance and annuities for Nationwide Financial