This topic has never been one that has much concerned either analysts or operators of programs which involve the purchase by a DC plan of an annuity contract. This one has always been in the purview of the engineer-those insurance legal and compliance folks who have well established procedures to deal with each state’s insurance laws.

However, when you look at it closely, especially in relation to the selection of any of these innovative DC lifetime income programs, you can see its relevance to the analyst, as least requiring they know something about it.

The issue: what is the state of issue of any annuity contract purchased under any of these programs, and how does choice impact the plan participants and the fiduciaries?

I think you start with a fundamental insurance rule that applies to ALL DC Lifetime income selected by any non-governmental plan sponsor: at some point, regardless of the design of the lifetime income program, the plan itself must be the purchaser of an annuity contract.

This is just not in the case of the “In Plan Annuity,” where the participant can direct the purchase of an annuity accumulations as an investment option of part of a plan’s internal managed account, or to be directly held by the plan and allocated to a participant’s account. It also includes those instances where the insurance guarantees are being accumulated under a CIT structure, and under those “purchase programs” where a participant can elect the purchase of an annuity contract at the time of separation from service.

In each of these instances, the plan itself must eventually, at some point in the process, be the actual purchaser of the annuity contract in order for the distribution of those rights to properly occur. For example, where a participant elects to take a distribution of the lifetime income guarantees accumulated under the typical CIT arrangement, the plan itself must actually purchase (or direct a purchase on its behalf) an insurance contract with those guarantees before they are distributed. This is also the case in those “purchase” programs, where the participant is given the ability to select from a menu of negotiated annuities offered by the plan at separation from service. The plan still must first purchase (or direct the purchase on its or the participant’s behalf) that annuity contract before then distributing it to the planned participant. In all of these instances, the plan participant is NOT the purchaser, the plan is. Looking at my recent blog on distributing annuity contracts may be helpful to understand this point.

In insurance lingo, this means that an insurance application typically must be completed, and a contract delivered (note, the process may be a bit different on the issuance of a certificate under a group annuity contract). There are actually three purchaser options: the “plan” (as a legal entity); the trustee of plan, typically a different entity, especially if part of a lifetime income program; or even the employer (which is permitted by the Code and ERISA to own an annuity contract on behalf of the plan). Often, each of these entities can be domiciled in different states.

And therein lies the rub. There are a bunch of nitty little insurance details related to that choice of purchaser but the REAL question which demands some attention by the purchaser relates to the “domicile” of the purchaser. Any insurance person will tell you that domicile is important, and you want to, if at all possible, avoid the contracts’ issuance being in particular states (indeed, a number of policies are not even filed in certain states because of the various state regulations and approval processes). Each annuity contract “form” is subject to the the insurance rules of the state in which the contract is sold. The question then becomes whether or not there is anything meaningful in there which affects anyone but the issuing insurer.

There are probably two separate answers to that question. The first is the most obvious one, but not one often discussed. Each state requires insurance companies required to participate in their state’s guarantee associations to protect the policyholders of all companies within the state in the case of the insurer’s insolvency. (See the NOLHGA site for further information). This is an imperfect system, and insurance companies are severally restricted by law from discussing this guarantee with their policyholders. However, an analyst, or fiduciary should, in any event be aware of what the rules limitations and restrictions apply to the purchasing plan in that state-which will then impact any participant’s rights, as the distributed contract will be considered as being subject to the laws of the state in which it was purchased.

The second answer is that the analyst should be having that conversation with the folks who are offering the product or program, for information on the impact of being purchased in one state rather than another, if that option is available. In many instances there is little meaningful difference, but it is a data point to be known.

Attention to these sorts of details will serve to protect fiduciaries in their selection of lifetime income programs.

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Thanks!

Bob