The DOL continues with its sensitivity to the challenges created for 403(b) plan sponsors in the transition to an employer accountable world. In today’s release of the final 408(b)(2) regs, the DOL provided tremendously needed relief for 403(b)plans. The language from the preamble speaks for itself:
The Department was persuaded by commenters on the interim final
The successful chair of a committee serves the committee, the committee does not serve the chair. And so it was with the creation of the just-released "best practices" 403(b) Model Disclosure, which was developed jointly by NEA, ASBO, NTSAA and ASPPA. I was fortunate enough, and honored, to serve as the chair of that
Freedom and liberty are not merely themes sounded by politicians in political campaigns, or in rousing marches by military bands (though I am personally particularly fond of them!), nor are they ideas which you will typically see being discussed in a piece about retirement issues. But they are themes woven into the fabric of our
A while back, I did a piece on the manner in which the 408(b)(2) regs applied to the variable investment accounts under a group annuity contract held by a retirement plan, in particular, 401(k)plans; and a "light" piece on its application to general account products. In that I hear more and more rumblings about the "fixed investment" portion of these accounts under 408(b)(2), it may be helpful to take another, more detailed look at how that reg applies to such accounts.
The first thing that comes to mind when looking at the regs for these purposes is the thing I noted in that previous blog: regardless of what you may think about 408b2 and the requirements now imposed by the rules, this reg has been craftfully drafted. The pieces fit together nicely, and complex issues with regard to investment products have been meaningfully addressed in as simple and direct manner as possible.There may be a few interpretaive issues that need to be resolved (which is to be expected), and 403(b) issues continue to be a serious challenge, but this is a fine piece of technical writing.
So it is with the "guaranteed account," "stable value fund" or "fixed account" within these group annuity contracts. The 408(b)(2) pieces fit well together.
First, it may be helpful to read my piece on general accounts, and how they work. This can go a long way in understanding why 408b2 applies in the way it does. It is one of my favorites, because it includes a Dick Van Dyke clip from "Mary Poppins." That blog only generally addressed the 408b2 issue.
Next, the fiduciary needs to know whether or not the investment account is a contractual obligation of the insurer, backed by the "general assets" of the insurer, or if it is part of a "separate account" (see my above noted blog on this). Confusion may arise from the variety of marketing names these funds may be called: the general account product will sometimes be called a "stable value fund" (typically because the crediting rate is set by use of an unrelated, third party index), which may be confused by a "stable value" mutual fund or collective trust interest which is offered under the annuity contract’s variable investment separate accounts.
Once you know that fund is a fixed obligation of the insurer from its general account, you need to see what kind of Covered Service Provider (CSP) is the insurer. It will not be considered an "A" type with regard to the fixed account, because it is not a fiduciary with regard to the management of the assets of the general account backing its contractual promise (a book could be written on this point, alone). It may be a "B" type of CSP if, under the contract, the insurer is a "recordkeeper." It will not typically be a "C" type of CSP because, even though it is insurance, the insurer will not usually receive indirect compensation (as that term is defined by 408b2) related to that account (but keep in mind that these contracts may be part of an annuity where separate accounts are used-and thus indirect comp typically received-for which "C" status may occur).
What needs to be disclosed?
-If the plan will only buy a group annuity contract with a fixed fund from the insurer, and the insurer will not provide any participant level recordkeeping services, then the insurer may not even be a CSP that will need to report under the new 408(b)(2) regs. The only complication will be the reporting of commissions.
-If the insurer is a "B" CSP, then two things will need to be reported: (i) a description of any compensation that will be charged directly against the account balance in connection with the acquisition, sale, transfer of, or withdrawal from the product, like surrender charges; and (ii) description of any ongoing expenses such as mortality and expense charges or contract charges.
What will NOT need to be reported, however, is any "spread" between the crediting rate under the contract and the investment return on the insurers’ general account, as the regs specifically exempt "operating expenses" from needing to be reported from a fixed account.
Didn’t say it would be easy, but it all does fit together nicely…..
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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.
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“ERISA Accounts,” or “Fee Recapture
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