A funny thing happened on the way to the marketplace: the classic securities law status signposts have been turned around.

Variable insurance products are the marker for securities law status that requires variable product registration under the Securities Act of 1933. Meanwhile, fixed insurance products are the marker for eligibility to the statute’s exclusion of certain insurance products from status as a security.

The core reason why these products are the markers has to do with risk. That is, variable products entail shifting the investment risk to the contract owner, while fixed products entail retention of the risk by the insurer.

Now, enter the guaranteed minimum withdrawal benefit and guaranteed income benefit features in variable products. These newer features result in the insurer bearing the investment risk that the owner-accumulated assets will be insufficient to address the diverse concerns on which retirees are currently focused.

This perception is not intended to suggest that the Securities and Exchange Commission or the courts would find the role of variable products has been reversed. At a minimum, these bodies would be likely to find that, as a guarantee of a security, the guarantee is itself a security.

Rather, the perception is a useful tool for better understanding the reason for, and nature of, the recent proliferation of differing retirement and income guarantee optional features and the addition of sub-features such as step-ups. Moreover, it suggests that the SEC staff should cut the insurers some slack regarding the related investment restrictions discussed below.

Most people who are managing their investments to provide retirement income want to provide themselves with sufficient lifetime income and/or to provide for their heirs and dependents. The main obstacles they face in meeting these goals are the uncertainties shown in the box.

The current and likely continuing volatility of the markets, particularly equity, coupled with the irrepressible fear of inflation, make these two uncertainties even greater. As others have expressed recently, the simple fact is that the retirement years are the spending years. Hence, the predictable prime concern is outliving one’s assets, frequently coupled with fear that one’s dependents will be left without resources and no way to manage or hedge these risks.

In reviewing and comparing the array of optional retirement benefits, it soon becomes clear that this GMWB variety seeks to address the differing concerns of the owners. Hence, there are features with and without one-time, annual, or periodic step-ups; payment guarantees for varying specified periods; and payment guarantees for the life of the owner or joint lives, both spousal and non-spousal.

The features are also designed to get a jump on–or match–the insurer’s competitors.

These two goals converge to ratchet up the amount of risk that insurers are assuming, with commensurate increases in the costs. Thus, while risk management is the business of insurers, managing investment risk of the magnitude produced by the volatile equity markets and generated by the investment selections of the owners, produces new challenges for insurers.

To partially meet these challenges, insurers have introduced certain investment restrictions and conditions.

The SEC staff has not been particularly perceptive in reading the signposts that have been turned around. The SEC staff persists in categorizing the investment requirements as the provision of asset allocation services that require an advisory relationship with the owner.

The SEC staff may be so conditioned to seeing variable products as the shifting of investment risk to the owner that they remain unconvinced that the mandatory investment limitations are anything other than investment advice to the owners.

The risk-shifting analysis may still be useful, however, in assisting the SEC staff in recognizing this reality: the assumption of investment risk is what motivates insurers to mandate specific investments as a risk management tool and as a condition of participation in certain guaranteed benefits.

In the midst of all the risks and uncertainties that retirement presents, it is more probable than not that optional retirement and income benefits will continue to evolve. There will be additional sub-features that address additional concerns, including long term care tailored payout adjustments.

The one certainty is that, notwithstanding the risk shifting turnabouts, variable optional benefits will retain their securities law status, and they will deserve some regulatory adjustments to promote continued evolution.