In Robert Pirsig’s novel, Zen and The Art of Motorcycle Maintenance, the protagonist was a technical manual writer who went insane. The author commented that the book had little relation to either Zen or motorcycle maintenance. But at the core of the story was the minutiae which eventually drove him mad: to any explanation he could write in any of his manuals, he could always ask the question “why?”
There are really are four key issues which need to be resolved when you think about. Spousal consent/joint and survivor rules; the fiduciary standard; nonforfeiture (such as, its scary to think of a 70 year losing an annuity benefit they have been paying for- just before they are ready to take payments) and whether, and to what extent the "protected benefit" rules should apply. Some short, hopefully useful thoughts on two of these, with others to follow in a later blog:
As critical as I was on the conflicting PLRs the IRS issued on the application of the spousal consent/J&S rules to annuities, there is helpful guidance in them. In both PLRs, the participant had elected to begin payments from the plan which were based on life expectancy, which included an election of guaranteed lifetime payments from the annuity once the account balance was exhausted or a stated age achieved. It would seem that, without those conditions, the J&S rules would not apply (for example, where there is not an actual guarantee of lifetime guarantee until actually elected, with the "normal form" of benefit being, as under the typical 401(k) plan, a cash out). What is left is to resolve is an extremely nerdish-but nevertheless important-issue of whether, why and at what point does the periodic payments from these annuities are considered to be "payments as annuity" or "payments not as an annuity" under Code Section 72. Once this one point is resolved, doors open.
Having been involved in this issue for far too long, I’m coming to the conclusion that we have been thinking far too broadly and far too globally on the development of a fiduciary safe harbor. One really cannot argue much with the current DOL safe harbor regulation at § 2550.404a–4 on the purchase of annuities; it makes a great deal of sense. But I believe what is holding up its usefulness is the lack of of "minutiae" in it. Two of the five points in the safe harbor instruct the fiduciary to
"Appropriately consider information sufficient to assess the ability of the annuity provider to make all future payments under the annuity contract; and appropriately conclude that, at the time of the selection, the annuity provider is financially able to make all future payments under the annuity contract."
The problem is that who can really accomplish this? There really is very little information in the marketplace which is readily available to the typical fiduciary upon which to make these determinations (though there are some fine attempts at sorting through this going on), and the preamble to the reg only suggests looking at ratings and state guaranty association rules.
So maybe, just maybe, if the DOL identifies for plan sponsors the key pieces of information for which a fiduciary should ask, perhaps as reps from insurers, if properly collected and reviewed, would act as the safe harbor we are looking for. They would be indicators of financial strength. Some reps from the insurer could be include things like the following (though I would expect several other items on the list):
-Explain your rating, including written assessments from the rating agencies; any changes in the past five years and why; and compare it to the interest rates upon which you base your annuity payments. (Sometimes, the higher rating is not necessarily the best, as the cost of getting that rating results in a higher priced annuity-without necessarily any greater security).
-Explain how the state guaranty association rule would apply to your product being sold.
– Describe material outcomes of your most recent state insurance exams.
-Explain your level of reserves.
-Describe the risk profile of your investment portfolio which supports the annuity contracts.
The fiduciary would use the answers using these sort of standardized questions (and a few others), focusing on the close details which are indicative of financial strength (or trouble), to arrive at a prudent decision-especially when used to compare the answers of other insurers. It could possibly have the effect of putting insurance into the vernacular and make it an extremely useful safe harbor. It effectively uses the DOL’s resources to guide fiduciaries, given all the dense and arcane material which is related to insurance, as to what really is important.
My next blog will finish off with thoughts on the nonforfeiture and protected benefits issues.