With the current attention being paid to annuities by the recent activity of Treasury, those plan sponsors and their advisors who may be interested in annuities in their 401(k) plans may also be tempted to take a close look at the wide array of annuities that are available for the IRA and individual marketplace for their selections. After all, there seems to be a lot of different choices that are available out there, and some of the features offered look pretty good. These include a wide array of guarantees and and other things which may well seem appropriate for many 401(k) plans.

Think twice, however, before attempting to purchase what I call a "retail," or "nonqualified" annuity for a qualified plan. Annuities which are designed to be purchased by individuals outside of qualified plans, or are designed for IRAs, may actually cause a number of difficulties for the 401(k) plan. They really should only be used in small, specialized arrangements where the plan sponsors are cognizant of the special challenges presented by these products.

These retail products are typically designed to be sold individually by insurance agents and registered reps to what is sometimes called the "high net worth" (HNW) market. The are often sold as part of complex estate planning efforts, or for business succession. What generally makes these things inappropriate for the typical 401(k)plan is that:

 –They are complex. Simple annuities can be complicated enough, but the terms and conditions for the sometimes exotic guarantees within the typical GMWB contract or GMAB contract can make your head spin. As a fiduciary, it will be difficult to explain these complications on a mass basis, and many of them are just inappropriate for the smaller account balance.

-They can be expensive. In part because they are so complex, and can take a bit of effort to fit into the financial scheme of the policyholder, their fees are can be a bit "salty."  The mortality and expense charges are generally well above those you will find in a 401(k) plan, and the commissions paid on these products can be significant.

-Lack of ERISA compliance support.  Financial service companies are interesting places. Products sold to individuals typically are on different systems, and administered by different staffs, than those sold to retirement plans.  Administratively, even if one comes to terms with the complexity and the expense, the insurance company may not be set up to provide the 408b(2) disclosures; the 404a-5 information; Schedule C or Schedule A information; and may not even have the suitable SSAE-16 opinion.

-Minimum premium. These retail products can have hefty minimum premium requirements which, if applied in the qualified plan context, could cause serious Benefits, Rights and Features discrimination issues.

 -Harris trust.  And, of course, our old friend "Harris Trust." Products sold to the individual marketplace never had to deal with the issues related to protecting the general account assets of an insurer from being considered "plan assets" subject to ERISA governance. Many of these retail products do have a "fixed fund" based upon the investment in an insurer’s general account. If the terms related to that general account benefit are not designed properly, the insurer may have some challenges.

Many insurers are now designing interesting new products which, while providing the sort of guarantees that participants are looking for, are also designed to be administered as part of a qualified plan.  They tend to be simpler, less expensive, not have substantial minimums, and can be well supported by the "retirement arm" of the business.

Should your client really want the retail product, the solution then is to purchase it as a part of a rollover into an IRA.



Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.