Product Outlines may not reflect current positions
Recently an issue arose regarding rider fees on fixed account products subject to section 4223, the nonforfeiture law in New York. As the issue developed, it highlighted some of the challenges facing companies trying to develop new products in NY. This particular issue involved a rider on a fixed annuity. The rider would impose an asset-based charge that the company felt was appropriate for the benefit offered in the rider.
A review of the most recent annuity product outline, dated 3/16/2005, indicated the following: "The contract must specify the charge for the benfit and include a description of whether the charge is calculated based on amounts allocated to the fixed account, if any, as well as the separate accounts....The charges for the benefit must not reduce the benefits applicable to amounts allocated to the fixed account below the minimums required in the nonforfeiture law for fixed deferred annuities." Looking at that interpretive language, it appears reasonable to believe that rider fees could be imposed on a fixed account product so long as the nonforfeiture minimums were not compromised. However, that turned out not to be the case.
Initially, the Department stated that the outline provision was intended for use with riders on annuities that were both fixed and variable. The statement went on to indicate that the "provision would apply to fixed annuity riders as well." BUT...in order to comply with the nonforfeiture law, according to the Department, the maximum rider fee does not have anything to do with the interest rate credited and whether the guaranteed minimum interest rate is still credited after the imposition of any fees. Rather, it is the $50 contract charge that would be the maximum rider fee. We were told: "We allow companies to treat rider fees as contract charges subject to the $50 yearly limit."
How would a company know that? Not from the law - the law is silent on rider fees. Not from a regulation, there is no regulation that addresses this. And not from a circular letter for the same reason. And the outline? It said that "charges for the benefit must not reduce the benefits applicable to amounts allocated to the fixed account below the minimums required int eh nonforfeiture law for fixed deferred annuities."
We were advised as follows because I had indicated that the company was contemplating a CL6 filing: "Please ensure compliance with our position on fixed annuity rider fees as described above."
How could a company possibly figure out that the Department would take this position on this issue? Is it even the position of the full Department? How many people know about this communication to the company? A good faith effort to be familiar with all the law and all published guidance certainly would not lead to this conclusion. If there was nothing posted on this topic, a company might think it necessary to approach the Department prior to a submission. But here the outline seemed clear. But it wasn't. If a diligent, good faith effort is not enough, then what is?
