Executive Order 14330 had, unfortunately and probably unintentionally, swept annuities into a classification of investments intended to promote the use of private equity interests in participant directed defined contribution plans. I do understand the desire to address tontines, but this broad inclusion did not recognize the potential rippling impact that treating annuities as “alt assets” could have.

So, separate from any future substantive discussion regarding the resultant proposed reg, it is first worth noting that the DOL adroitly addressed this potential annuity conundrum in two ways. First, it broadly applied its guidance to all plan investments, not just to alternative assets. Secondly, it specifically provided assurances as to its view of the nature of annuities and tontines, noting that “the Department has also added guidance on lifetime income longevity-sharing pools, which are a risk-sharing mechanism that can incorporate many investment strategies, rather than itself constituting an alternative asset.” I suggest that this means that as we all work forward to reviewing the efficacy of the proposed reg and to suggest changes, it will be helpful to keep in mind that annuities and tontines are not classified or treated as unusual “alternative assets” under the proposal.

So, then I put on my Engineers Cap (see my posting on the “Engineers, Analysts and Operators of DC Lifetime Income”) to lend further credence to the DOL’s position by putting up a reminder of the basic and long-standing financial services DC annuities have always provided to participant directed plans. This list is neither nuanced nor complete, and the features I list may not even be available in a single contract type. We’ll discuss at a later point more detailed descriptions of the provisions of these services under the VA, FIA, RILA, fixed annuities and straight life annuities, and specialty riders like GLWB, along with their transparency challenges, btw.

Annuity contracts have long provided the following capabilities to DC plans:

1. Asset accumulation. Though you would not know it by reputation, annuity contracts actually can provide one some of the most cost effective asset accumulation tools in the market-depending on their design and pricing. This is by way of a “separate account,” by variable crediting rates under indexed based annuities, or even by contract simply guaranteeing periodic crediting rates. For example, as to separate accounts, I best describe their potential as a CIT on steroids. They can hold virtually anything (yes, including “alternative assets”); can be managed by any manger chosen by the insurer, any management fee (if any ) at which the insurer wishes to offer the market; and even the unrelated general account provides a measure of scale advantages. As to index contracts, there is the oft-overlooked opportunities for accumulations where market exposure is managed by the insurer.
2. Protection of asset accumulations. Annuities have the ability to set a floor on some portion of losses on those accumulated assets.
3. Accumulations of guarantees. The annuity contracts also can give participants the ability to accumulate guarantees over time, and, under certain circumstances, provide longevity bonuses.
4. Protection and distribution of guarantees. Annuities have the ability to then guarantee the distribution of income related to these accumulated guarantees, or the assets supporting them, either in the plan itself or through distributions of contracts from a plan.

The question raised by the DOL’s proposed prudence safe harbor, at least from the lifetime income side, will be whether and how any of the description of the standards apply to any of these particular features-and the different types of contracts under which they are provided. The DOL’s approach at least gives us the opportunity to reasonably assess the rules without the cloud of being labelled an “alternative asset.”