The past few years have seen the development of much court litigation and disputes in other forums involving variable annuities.
Admittedly, the bulk of these disputes are related to the losses that a number of variable annuity contract owners have sustained as a result of the downturn in the stock market in 2000-2003. Most of these disputes involve allegations that the salesperson made recommendations that were not “suitable” for the needs of the customer.
In a number of such disputes, Norse has served as an expert witness. His role is usually to attempt to help the court, jury or arbitration panel to understand annuities and to assist in establishing that the sale of a variable annuity was, in fact, suitable to the customer’s needs.
Surprisingly, these disputes have involved both immediate and deferred variable annuities, and annuities involving qualified retirement plans as well as nonqualified investments.
These variable annuity disputes often take the form of a dual attack by the complainant about the transaction.
The first complaint is that the variable annuity itself was not suitable because variable annuities have been portrayed as too expensive, too inflexible and unnecessary for proper retirement planning–particularly when the funds involved are derived from a qualified retirement plan.
This is the old complaint that it is inappropriate to put “a shelter within a shelter” that has been in the popular and financial press so prominently in recent years. Even with nonqualified retirement funds, most complainants and their lawyers join the uninformed ranks of the media in failing to understand that a variable annuity is, in fact, insurance against living too long, not merely insurance about dying when the stock market is down.
The second ground for attack is that even if the variable annuity was “suitable” for the needs of the customer, the mix of underlying investments was not. After all, the complainants reason, the contract value went down when the stock market went into the tank; therefore the investments must have been “unsuitable.”
This second complaint inevitably results in the expert witness being asked to render an opinion as to what are the “proper” investments for a retirement portfolio.
It is easy with perfect hindsight to determine what the customer should have bought at the time of the original sale–those investments that did not go down in value. It is considerably more difficult to determine what those investments would have been looking into the future.
However, it is easy and reasonable to utilize commonly accepted investment doctrine in selecting a mix of retirement investments. Obviously, no one can predict which investment will go up and which will go down, but professionals can use methods that tend to level the volatility of investments and thereby minimize the risks.
Planning for retirement at the time when distributions are to begin is different from planning for accumulation of assets for future retirement. The time horizons are different.
In retirement, people do not have the time to recoup huge losses. Moreover, their income needs are immediate.