The DOL's newly delayed 408(b)(2) regs are particularly striking in that they demonstrate a growing sophistication, and efficiency, on the part of the EBSA staff in its approach to retirement plan financial products and services. The regs are short, by almost any measure of federal regulations, yet they are packed with meaningful rules which will apply in different ways to different product and services.
The marketplace is a fast moving one, with complex instruments and services being used in new and unusual ways. Keeping up with this whirlwind is a challenge for the industry and employers, let alone a government regulatory agency which must somehow craft rules which have broad application to ever-shifting, complex and unanticipated circumstances. Though not always successful, the DOL is approaching its learning curves impressively-including the way in which continues to seek to know and understand what it does not.
A prime example of this is the manner in which the 408b2 rules apply to variable investment accounts within the annuity contracts used to fund 403(b), 401(k) and other 401(a) plans. What is fascinating is that the word "annuity" only shows up with regard to IRAs; the words "individual," "group," "variable," "fixed," "registered," or "non-registered"-all of which are descriptors of a variety of different sorts of annuity contracts- never show up; and the word "insurance" only appears once. Yet, it provides clear guidance on how these investment products are to be regulated.
Lets take a quick look at the way the rules apply differently to registered variable annuity separate accounts (lets call these "Type 1" for purposes of this blog) typically used in the 403(b) market, and the way they apply to non-registered variable annuity separate accounts (which I'll call "Type 2") typically used in 401(k) plans.
This, by the way, is important for plan sponsors to know because they have to sort out whether they are receiving the disclosures they need, and report it to the DOL if they are not.
Type 1 accounts are registered securities (of the sort that cannot be publicly traded outside of the annuity), under which their assets are NOT treated as plan assets under 29 CFR 2510.3-101-meaning the insurance company is not a fiduciary with regard to the management of those assets. These are both group and individually owned contracts.The "securities" are held in an annuity contract platform, under which the insurance company has the direct contractual relationship with the responsible plan fiduciary, and under which the insurer provides both recordkeeping and other services to the plan. It will receive direct compensation for these services, through its "M&E charge" (mortality and expense), but it is also possible that it will receive indirect compensation as well from the managers of those separate accounts. And, by the way, there may be a fixed account in the contract backed by the insurer's general account.
The regs have three types of Covered Service Providers (CSP), (which I tend to call "A" "B" or "C" types in reference to the reg sections which describe them, and upon which their different disclosure obligations are based-which I won't go into here).
For Type 1 separate accounts, the insurance company is a (generally, unless there is something unusual in the contract) non-fiduciary recordkeeper which, if purchased by an individual account plan, makes it a "B" CSP. If it also receives indirect compensation, it may also be a "C" CSP.
Interestingly enough, the fixed account does not seem to trigger any disclosure requirement. "Insurance" only triggers disclosure if there is indirect compensation involved.
Type 2 accounts are almost exclusively held in group annuity contracts purchased by 401(a) plans (governmental 457b plans use them as well, but that is irrelevant here). These contracts act more like trust arrangements than annuity contracts. The assets in these non-registered separate accounts ARE plan assets under 29 CFR 2510.3-101-meaning the insurance company IS a fiduciary with regard to the management of those assets (there are circumstances where they are more like a directed trustee in such accounts than anything else). These accounts are held in insurance company accounts. The assets may be actively managed, under which an investment manager is often delegated the fiduciary obligation to manage the assets; or it may be passively managed by holding specific mutual funds (which may pay 12b-1 fees or sub-transfer agent fees to the insurance company). The insurer has a direct contractual relationship with the plan, under which it will also provide recordkeeping services to the plan. It typically receives a contract charge levied on assets under the contract, but may not.
This means the insurer for a Type 2 contract is an "A" CSP because of its fiduciary role; a "B" CSP if it is bought by an individual account plan because it provides a recordkeeping platform; and usually a "C" CSP because it is receiving indirect compensation (those 12b-1 fees and sub-transfer agent fees) and providing administrative services.
Whew. All of this from a few, well placed words in the reg. I think any frustration from the intricacies of this analysis should not arise from the reg, but in the complexity of the instruments which few understand but which many use.
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