It has been quite a time the past few weeks, with working through the details of MEP transitions to the 408(b) 2 July 1st effective date. With a little break to come up for air, I’d like to comment on something for post July 1 consideration, the variable non-registered group annuity contract.
This type of contract remains one of my favorite products in the 401k space. It can, if so designed, serve merely as an efficient investment platform, or serve as a complete package of financial and administrative services, with flexible pricing and compensation. Most of these contracts have within them the fixed account, which typically has enhanced guaranteed returns of the sort never available out of money market funds or the non-insurance “stable value” funds. Wirehouses and their reps typically have a great deal of disdain for these products, which I could never quite understand. Biases, though, often do get in the way of sound businesses judgments.
These contracts, however, are not simple investments. They have a number of moving pieces , which can make them a challenge to review for 408b2 purposes. And many of the insurance company disclosures I’ve seen are far more complicated than need be.
So I offer the following list for these who need to look at the disclosure related to these products under 408(b)-2:
-Trust or not. These contracts do not need to be held by a trustee, but sometimes they are. You need to know if they are so held, because the trustee will be a CSP, and their fees will need to be disclosed and understood.
-Fixed account or not. Most of the contracts have a fixed account into which variable account assets can be transferred. The fixed account, if one which is based on the insurer’s general account, will have no separate 408b2 disclosure. So don’t look for one.
-Variable separate accounts. The assets in these accounts are plan assets. If they hold mutual funds, you typically will not find an investment management fee, but you may find a sort of account fee. Take a look at it. If the funds in the account are actively managed outside of a mutual fund, look for a separate investment management fee.
-Fiduciary status. Depending on the structure of the separate accounts, the insurer may be a fiduciary of the separate account (they’ll never be one with regard to the fixed account). Look for whether or not, and to what extent, they have fiduciary status.
-Allocation models. Many insurers are offering asset allocation and management programs to plans and participants, for managing the separate account investments. Look to see if there is fiduciary status involved in these programs, and the fees related to them.
-Contract charges. Most of these contracts have separate contract or administrative charges. These are related to the fact that they really are providing a package of financial services (such as free trading between a wide range of mutual funds, and in active monitoring those funds). In assessing this fee, make sure you understand the sorts of services you are getting for that fee.
-Termination provisions. Look for surrender charges and market value adjustments. Sometimes, they are worth it given the rate of return being paid under the general account, and for payment of services from your insurance agent. But understand them.
-Commissions. Look to the amount of commissions being paid, and whether you are getting the support you need. Commissions are not bad things; as a matter of fact, they are necessary for many plan sponsors to get the kind of information and support they need in order to adopt and maintain the plan. Just make sure they are reasonable.
-Annuity disclosure. Virtually all of these contracts offer the right to annuitize at a certain prce. You will likely receive this disclosure, but they rarely have a significant impact on the fees charged on the investment portion of the contract. Unless you are cnsidering offering anutization, don't spend a lot of tme on this.
By the way, the issues related to a registered group annuity contract, which are typically offered in the 403(b) space, can be different. I will handle those in a separate posting.
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