The SEC charged Massachusetts Mutual Life Insurance Company with securities law violations for failing to sufficiently disclose the potential negative effect of a “cap” included on certain annuity products.  According to the SEC Order Instituting Administrative and Cease-and-Desist Proceedings, MassMutual included a “cap” feature in around $2.5 billion of its variable annuities.  From September 2007 to March 2009, MassMutual offered a “Guaranteed Minimum Income Benefit (GMIB)” rider as an optional feature on some of its variable annuity products.  The products’ prospectuses failed to sufficiently explain that once the GMIB value reached a cap, it would no longer earn interest and withdrawals would cause pro-rata reductions to the GMIB value.  The firm’s failure to sufficiently explain the effect of the cap on withdrawals confused sales agents and others.

According to the SEC’s Order, a variable annuity with a GMIB rider reflects two values, the contract value and the GMIB value.  The contract value fluctuates with market performance.  The GMIB value automatically increases on the contract issue date and each contract anniversary thereafter by 5 or 6% (depending on the product.)   MassMutual refered to the annual increases as interest credits.  GMIB riders were advertised to provide “Income Now” and “Income Later” features to investors.  In the Income Now feature, MassMutual GMIB riders have a “dollar-for-dollar” withdrawal characteristic, meaning that the GMIB value will decline only by the dollar amount of any withdrawal, so long as the withdrawal does not exceed the annual interest credit (of5 or 6%, depending on the product.)  In the Income Later feature, MassMutual’s sales literature stated that “[e]ven if your contract value drops to zero, you can apply your GMIB value to a fixed or variable annuity.”  MassMutual failed to specifically disclose the effect of taking withdrawals after the GMIB value reached the cap, including that: 1) after reaching the cap, MassMutual would no longer apply an interest credit for purposes of taking withdrawals; and that 2) at that point, MassMutual would deem all withdrawals to be excess withdrawals that would reduce the GMIB value in direct proportion to the contract value reduction.  As a result of the improper disclosures, a number of MassMutual sales agents, wholesalers, and at least one annuity specialist at another insurance sales agency did not understand the negative impact the cap feature had on the contracts.

During the GMIB riders offering periods, MassMutual had indications that sales agents and others did not understand the effect of post-cap withdrawals on the GMIB value, which should have alerted it to the fact that its disclosures were inadequate.  MassMutual removed the cap after the SEC’s investigation to ensure that no investors would be harmed.  Without admitting or denying the allegations, MassMutual has agreed to settle the charges and pay a $1.625 million penalty.