Q: What disclosures, if any, must be included in communications that discuss the return available on the dollar cost averaging fixed account of a variable annuity contract?
A: Members must be careful not to overstate the returns available on these accounts. The NASD has seen a number of communications that promote a dollar cost averaging fixed account based on a very high annual effective yield. In contrast to the standard fixed account of a variable annuity that might offer a 4% or 5% yield commensurate with other fixed income investments, we have seen some accounts advertised with rates as high as 12% or 15%. However, investors do not actually earn this rate over a full year.
The account is only available for lump sum investments. The lump sum is then automatically transferred into the variable account options in equal monthly installments over a period of six months or one year. Because all of the money must be transferred out of the account, the high annual effective rate is paid on a declining balance and, in the case of a six-month program, the rate is earned for less than a year. Thus, the actual return on dollars invested is much lower than the advertised annual effective yield.
To avoid misleading the public about these accounts, members must avoid over-emphasizing the annual effective yield figure. Instead, members' communications about these accounts should focus first on explaining how the accounts operate, including the requirement that all monies be transferred out of the account within a pre-set timeframe. In addition, if any type of return is mentioned in communications about the account, the focus should be on the actual return on investment the customer can expect to receive over the term of the account net of applicable fees and charges. The annual effective yield figure may be disclosed provided it is not over emphasized and that it appears in context that clearly explains that it is used to calculate the return on investment, but does not reflect funds the customer will receive.