With the DOL's increasing focus on fee transparency and disclosure, and with the growing market for annuities in defined contribution plans, the wording of annuity contracts will take on added significance in the very near future.  As anyone who has trudged through a typical annuity contract will attest, the language, syntax, and structure used can be a little "thick" (to be gentle). 

Often times, the contract will contain language that is simply at odds with the plan language.  When the plan's attorney comes across such terms, his or her first reaction will usually be to negotiate a different term.  These are bi-lateral contracts after all, which as any first year law student can tell you, must be a mutually acceptable bargained-for exchange representing a meeting of two minds.  If one party wishes to change the bargain, it may do so by renegotiating the terms with the other party. Right?

Well, maybe.

Though insurance contracts are indeed bilateral contracts, a third party comes into play when trying to change their wording: the state insurance department.  Consistently, state laws do not allow an insurer to make changes to an insurance policy without the prior approval of (or at least filing with) the state insurance department. 

State form approvals (or non-disapprovals) can be based on any number of factors. For example, some states require certain disclosures and descriptions of coverage, some even specify the font sizes and the color of ink and others specify that certain disclosures must be on the first page of the policy—a requirement that forces an insurer to have state-specific cover pages for their policies.  Still, some states require the policy language to be based on specific readability standards, such as a minimum score on readability tests. 

With such requirements, it is no surprise that making changes to insurance products within qualified retirement plans can be a sore spot with employers.  States justify form approval as a necessary tool for consumer protection. However, having multiple technical state requirements makes it very difficult, and very costly, for an insurer to roll out new products. So unless the plan is of sufficient size or importance, insurers will generally be reluctant to submit a single case filing for approval of a particular change.

This is state of affairs can be frustrating for insurers, as well. Not only does this slow the pace of product innovation, it makes complying with changes in federal law a more cumbersome for an insurer than, for example a registered investment company.  As federal regulators continue to pile on more rules that will require plan language changes, the likelihood increases that the language will be at odds with the annuity contract language.   As the prevalence of annuity products continues to grow in the qualified plan space, we think state insurance departments and federal regulators will be forced to address this complex and important issue.