Business of Benefits : Employee Benefits Lawyer & Attorney : Law Office of Robert J. Toth, Jr. : 403(b) Plans, Annuity & Insurance Law : Business of Benefits Blog

 Mark Iwry, one of the principals of of the Retirement Security Project, has been appointed as  Senior Advisor to Treasury Secretary Geithner and Deputy Assistant Secretary for Retirement and Health Policy.

First and foremost, our heartfelt congratulations to Mark. This is a post well suited to him, and an appointment which will serve the nation's retirement needs well.

Mark's policy pedigree will be known to many readers of this blog: he was one of the early advocates behind the Automatic Enrollment rules under the PPA; he was instrumental (with David John) in the development of the Administration's retirement policy of mandatory employer based IRAs; and has done much work with the RSP (through writings and many presentations) on the value of annuities and lifetime guarantees in defined contribution plans.  We have mentioned his work a few times in our blog.

We have no crystal ball or any inside information, but the presence of a senior administration official who passionately believes in protecting workers' retirement income, and who sees annuities as one of the critical tools in that effort, is likely to manifest itself in the policies developed by this administration.

This appointment clearly gives a boost to an imorrtant financial tool. The challenge is for vendors  to develop a series of appropiate products and policymakers appropriate rules that address the concerns that advisors continue to raise, most particularly the transparency of an annuity's financials and addressing the fear of insurance company meltdowns.

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The mantra of Congress, investment advisors and the DOL over the past decade has been consistent: retirement plan assets must be invested in such a way to provide American workers with sufficient assets upon which to actually retire comfortably. This is as basic as apple pie, and a concept with which one can hardly disagree. It has even been the driving force behind regulatory efforts like the QDIA regs, where stable value or insurance investment options were openly scorned as appropriate default investment options.

As laudable as these efforts have been in the past, and as sound as they still may be, encouraging investment gain for the purpose of providing adequate retirement gain is NOT and has NEVER been the standard by which fiduciaries are judged.

ERISA Section 404(a)(1)(b) is written pretty clearly:

...a fiduciary shall discharge his duties.... by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly imprudent to do so."

There is no talk of maximizing gain. There is no language about providing any particular level of income. There is nothing about testing to see what level of return is needed to maintain a lifestyle. There is no discussion of age based target funds. It is truly based upon the concept of preserving the assets of the trust. 

It is important to re-find this lost concept, particularly as fiduciaries review their investment policies to test whether they are adequate under the current market conditions. This is not an argument against the use of equities, merely that the manner in which one fulfills the duty to minimize large loss necessarily includes investments designed to preserve capital.

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Just when I thought I was going to get a chance to talk a bit about annuities again, the IRS drops a bomb: it has proposed the design of its long awaited 403(b) prototype program and List of Required Modifications.  Announcement 2009-34 is the description of the prototype program; and the LRMs can be linked here. 

Combined, it is 92 pages of pretty serious reading. Pay close attention to the detail as you read it, as some very small statements seem to reflect some pretty large decisions.

There is a lot in that announcement and the LRM, and you'll find us blogging on a number of issues we have already noticed. First, however, let's tip our hats to the IRS. The documents are clearly written and well considered. There a number of things to take issue with, but this is  a vast improvement over the ambiguities introduced by the difficult language under Rev. Proc 2007-71. I have read a large number of documents in the past year, and this is really among the best written I have seen. The Announcement itself also shows that the IRS has been listening to (though not necessarily agreeing with) the comments of the 403(b) community.  Angelique Carrington and James Flannery should be complimented on their efforts, as well as the drafters of the LRMs.

So, now that I'm done gushing about the IRS staff, lets take a quick look at a few key points about the structure:

• Comments are due by June 1. The IRS also wants to hear from potential volume submitters and prototype sponsors. They want to know who will be sponsoring these plans, and how many plans do they intend to sponsor.
• There will be a Standardized and Non-Standardized program, both based upon using a basic document.
• There will be an individual determination letter program, but it is still in the making.
• In a thoughtful move, there will be the ability to retroactively correct defects in currently drafted plans, by a date to be determined-but it will be no earlier than March 15, 2010.
• There is not yet any auto-enrollment language, that is still being written.
• No changes will be required for any school district which has adopted the sample language in Rev. Proc. 2007-71. There will still be reliance to the extent the 2007-71 language is used, but sponsors will not have the benefits of a prototype program.  
• It limits Notice 2007-3 to 2009 only; that Notice will not be extended.

Some initial thoughts on a few substantive points:

• The IRS wants to cover what they consider to be "most eligible employers," a decision which seems to have driven most of their substantive choices. Several of its choices, however, severely limit the use of the prototype:
  • Users of the prototype can only have one beneficiary per contract. Virtually all annuity contracts support multiple beneficiaries.
  • The prototype MUST have language under which the specific plan language will override any inconsistent provision in any annuity contract or custodial account. This will force employers to take a serious look at each of their contracts (assuming they can figure out which contracts are part of the plan) before they can adopt a prototype. On the positive side, does this imply that a Plan Administrator for an individually designed plan has the authority to determine if the contract language or the plan language applies?
  • The prototype language requires that the participant can change investments at will. This is a particular problem for a lot of annuity contracts, many of which have transfer restrictions on their "guaranteed" funds. 
  • All employer contributions must be fully vested-even under the Non-Standardized contracts. This means that most plans with employer contributions will not qualify for the prototype program.
• The IRS recognizes that many plans will not be able to be covered by the prototype program. I suspect there will be a lot more not eligible than they think.
• The administrative duties language in the LRM is smartly written: it obligates the sponsor to monitor and make sure things are being done, instead of commanding them to do specific acts for which they may not have the authority. Well done. 
• The LRM and the proposed Rev. Proc. have taken a huge step in identifying the 415 limit as an Employer based limit, not an individual limit. IRS staff in the past had suggested publicly that the 415 limit was to be applied against all 403(b) contributions from unrelated employers.

There is much more to come.

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It has been a couple of weeks since we've last posted a blog, and with good reason. Between Evan, Monica and I, this two month span has us doing some 15 presentations and articles, whie keeping up with clients (and a couple of us squeezing in some overdue vacation time!).  Monica is speaking this week at the Plan Sponsor 403(b) Summit in Orlando; Evan will be speaking this week at a TIAA Client Forum in DC and at the CUPA Eastern Regional Conference in two weeks; and I am speaking at the IRS/ASPPA Great Lakes benefits Conference in Chicago next week and the NIPA Annual Conference in Las Vegas the week after. Come up and say hi if you see us! 

DC annuitization seems to be picking up a head of steam recently, with attention being paid to guaranteed income streams because of the effects of the recession on 401(k) and 403(b) accounts. As our good friend and fellow blogger Jerry Kalish has posted, the train is pulling out of the station. The Retirement Security Project has been espousing this for a few years; many of the major insurance have developed products specifically for this market; and even mutual fund companies are working with insurers to develop solutions. We have also blogged and published on this issue a few times.

Now Phyllis Borzi, the President's nominee for Ass't Secretary of Labor for the EBSA, is reported to hold the same conviction as well.

So, the real question is now what? Most consultants, TPAs and lawyers have only a passing familiarity with annuities, particularly the new breed of annuities which offer innovative guarantees. How does one go about deciding which annuity is right, whether the fees are appropriate, and whether the insurance company is solvent enough?  How do you explain their features to plan participants, and what part does it play in an employer's benefit program? What do you need to know about state guarantee associations, and what about rating agencies and the problems they now seem to be having?

In short, the things a plan has to look at to buy these financial guarantees creates quite a "fog" for an industry unaccustomed to them. The products are not difficult to understand, but their features, documentation and issues are much different than the typical plan investment we have been dealing with over the past few decades.

The DOL has made a first stab at things,  publishing an annuity safe harbor  designed to assist fiduciaries in their choice of annuity policies as a distribution option under their individual account plans. The insurance industry is not enamored by the safe harbor, as it seems to set some pretty high standards for fiduciary review, one which competing long term investments don't seem to have to suffer.

Imperfect as they may be, take a look at the DOL regulation. It does provide a chance to help begin to understand these products so that fiduciaries may become more comfortable with them.  We'll be addressing a number of those issues raised in the reg in the next few blogs.

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