Just when I thought I was going to get a chance to talk a bit about annuities again, the IRS drops a bomb: it has proposed the design of its long awaited 403(b) prototype program and List of Required Modifications.  Announcement 2009-34 is the description of the prototype program; and the LRMs can be linked here. 

Combined, it is 92 pages of pretty serious reading. Pay close attention to the detail as you read it, as some very small statements seem to reflect some pretty large decisions.

There is a lot in that announcement and the LRM, and you’ll find us blogging on a number of issues we have already noticed. First, however, let’s tip our hats to the IRS. The documents are clearly written and well considered. There a number of things to take issue with, but this is  a vast improvement over the ambiguities introduced by the difficult language under Rev. Proc 2007-71. I have read a large number of documents in the past year, and this is really among the best written I have seen. The Announcement itself also shows that the IRS has been listening to (though not necessarily agreeing with) the comments of the 403(b) community.  Angelique Carrington and James Flannery should be complimented on their efforts, as well as the drafters of the LRMs.

So, now that I’m done gushing about the IRS staff, lets take a quick look at a few key points about the structure:

  • Comments are due by June 1. The IRS also wants to hear from potential volume submitters and prototype sponsors. They want to know who will be sponsoring these plans, and how many plans do they intend to sponsor.
  • There will be a Standardized and Non-Standardized program, both based upon using a basic document.
  • There will be an individual determination letter program, but it is still in the making.
  • In a thoughtful move, there will be the ability to retroactively correct defects in currently drafted plans, by a date to be determined-but it will be no earlier than March 15, 2010.
  • There is not yet any auto-enrollment language, that is still being written.
  • No changes will be required for any school district which has adopted the sample language in Rev. Proc. 2007-71. There will still be reliance to the extent the 2007-71 language is used, but sponsors will not have the benefits of a prototype program.  
  • It limits Notice 2007-3 to 2009 only; that Notice will not be extended.

Some initial thoughts on a few substantive points:

  • The IRS wants to cover what they consider to be "most eligible employers," a decision which seems to have driven most of their substantive choices. Several of its choices, however, severely limit the use of the prototype:
    • Users of the prototype can only have one beneficiary per contract. Virtually all annuity contracts support multiple beneficiaries.
    • The prototype MUST have language under which the specific plan language will override any inconsistent provision in any annuity contract or custodial account. This will force employers to take a serious look at each of their contracts (assuming they can figure out which contracts are part of the plan) before they can adopt a prototype. On the positive side, does this imply that a Plan Administrator for an individually designed plan has the authority to determine if the contract language or the plan language applies?
    • The prototype language requires that the participant can change investments at will. This is a particular problem for a lot of annuity contracts, many of which have transfer restrictions on their "guaranteed" funds. 
    • All employer contributions must be fully vested-even under the Non-Standardized contracts. This means that most plans with employer contributions will not qualify for the prototype program.
  • The IRS recognizes that many plans will not be able to be covered by the prototype program. I suspect there will be a lot more not eligible than they think.
  • The administrative duties language in the LRM is smartly written: it obligates the sponsor to monitor and make sure things are being done, instead of commanding them to do specific acts for which they may not have the authority. Well done. 
  • The LRM and the proposed Rev. Proc. have taken a huge step in identifying the 415 limit as an Employer based limit, not an individual limit. IRS staff in the past had suggested publicly that the 415 limit was to be applied against all 403(b) contributions from unrelated employers.

There is much more to come.

 

It has been a couple of weeks since we’ve last posted a blog, and with good reason. Between Evan, Monica and I, this two month span has us doing some 15 presentations and articles, whie keeping up with clients (and a couple of us squeezing in some overdue vacation time!).  Monica is speaking this week at the Plan Sponsor 403(b) Summit in Orlando; Evan will be speaking this week at a TIAA Client Forum in DC and at the CUPA Eastern Regional Conference in two weeks; and I am speaking at the IRS/ASPPA Great Lakes benefits Conference in Chicago next week and the NIPA Annual Conference in Las Vegas the week after. Come up and say hi if you see us! 

DC annuitization seems to be picking up a head of steam recently, with attention being paid to guaranteed income streams because of the effects of the recession on 401(k) and 403(b) accounts. As our good friend and fellow blogger Jerry Kalish has posted, the train is pulling out of the station. The Retirement Security Project has been espousing this for a few years; many of the major insurance have developed products specifically for this market; and even mutual fund companies are working with insurers to develop solutions. We have also blogged and published on this issue a few times.

Now Phyllis Borzi, the President’s nominee for Ass’t Secretary of Labor for the EBSA, is reported to hold the same conviction as well.

So, the real question is now what? Most consultants, TPAs and lawyers have only a passing familiarity with annuities, particularly the new breed of annuities which offer innovative guarantees. How does one go about deciding which annuity is right, whether the fees are appropriate, and whether the insurance company is solvent enough?  How do you explain their features to plan participants, and what part does it play in an employer’s benefit program? What do you need to know about state guarantee associations, and what about rating agencies and the problems they now seem to be having?

In short, the things a plan has to look at to buy these financial guarantees creates quite a "fog" for an industry unaccustomed to them. The products are not difficult to understand, but their features, documentation and issues are much different than the typical plan investment we have been dealing with over the past few decades.

The DOL has made a first stab at things,  publishing an annuity safe harbor  designed to assist fiduciaries in their choice of annuity policies as a distribution option under their individual account plans. The insurance industry is not enamored by the safe harbor, as it seems to set some pretty high standards for fiduciary review, one which competing long term investments don’t seem to have to suffer.

Imperfect as they may be, take a look at the DOL regulation. It does provide a chance to help begin to understand these products so that fiduciaries may become more comfortable with them.  We’ll be addressing a number of those issues raised in the reg in the next few blogs.

 

Evan and I spoke at the ALI-ABA’s Advance Law of Pensions this past week in San Francisco, probably the leading seminar for experienced employee benefit lawyers in the country. Our topic was "Getting Over The Hump," a 403(b) guide for the non-403(b) practitioner. We’re checking with ALI-ABA for permission to publish our paper and PowerPoint here.

One of the most difficult questions we received from the audience had to do with the counting of former employees for purposes of the 2009 Form 5500 (those "Lost Souls of 403(b)"), which 403(b) plans will need to file in toto for the first time. Follow this link to the DOL’s 2009 Form 5500 regs.

The question went something like this (with editorial license taken): a private tax-exempt employer has maintained a 403(b) plan for 25 years, under which 75 employees are currently eligible to participate (remember, here, the universal eligibility rules will really goose this number).  The employer also has had, over its 25 years of maintaining the plan, 100 former employees who had left its employ owning individual 403(b) contracts (either custodial accounts or annuity contracts). The employer has never tracked these contracts, and now needs to know whether or not to include these former employees in their counts for the Form 5500.

This is a huge question, because the answer will determine whether or not an expensive audit will be needed for the plan year: if contracts for those "lost souls" need to be included, the participant count will cross the audit threshold of (generally) 100 participants; if the plan doesn’t need to count them, the audit will not need to be done. Its an important issue even for those for whom the threshold will not be crossed, as the totals will still be needed for inclusion in the shortened Form 5500 schedules, and the Form itself.

Regrettably, there are a whole host of other Title 1 questions which are also implicated.

One would hope that we could look to the IRS’s Rev. Proc. 2007-71 for guidance, to glean some sort of sensible ERISA answer which would be consistent with the Code: perhaps if you don’t need to track the participant’s contract or account for tax compliance purposes, you wouldn’t need to include it in plan counts for ERISA purposes.  This, though, has its odd results: the inactive contracts issued prior to 2005 would all be excluded, and inclusion of those in the 2005-2009 "transition" period would depend upon whether they were for active or former employees and whether a good faith effort has failed. Given the difficulties and ambiguities surrounding the implementation of 2007-71, this Rev. Proc. will not provide a testable, objective standard which would pass an auditor’s scrutiny.

A clearer answer is likely to be found in using the DOL’s traditional analysis of what constitutes a "plan asset" for its regulatory purposes. The DOL has consistently ruled in the past that "in situations outside of the scope of the plan assets-investments regulation, the assets of a plan are to be identified on the basis of ordinary notions of property rights," Advisory opinion 92-22A. See also 2005-08A, and 2003-05A.

So, it would seem that you would need to look to the terms of the annuity contracts and custodial accounts of these former employees and make a determination if the particular contract fell within the "ordinary notions" concept. To me, this is particularly attractive because it uses an existing "structure" to address the tough issues for employers like the one in my example, who may have no idea if any particular contract even exists any more. It also may provide a method by which to sanely determine whether an individual annuity contract, a certificate under a group annuity contract, an individual custodial contract or an interest in a group custodial arrangement should be covered: that is, look at their terms and the legal rights they convey, not merely at the "type" of arrangement it is.

There is no doubt a bit of tweaking will need to be done to make this work in the 403(b) context-including developing protections to avoid excluding active contracts, and how to deal with plan terminations. But the DOL has addressed odd issues before, noting in footnote 2 to Advisory Opinion 94-31A that they can be informed by their ability to further develop the "common law" of ERISA when dealing with the definition of "plan assets."

Important participant rights can be protected in the same manner as under terminal funding annuities or under plan distributed annuities (about which we have blogged). It would be also helpful if whatever the DOL comes up with was recognized by the IRS as representing the same "pool of lost souls" against which the tax compliance rules would apply. 

 

 

In our anger at AIG, Bank of America, Merrill Lynch and the other holding companies which have sorely abused the public and marketplace trust, we need to recognize  the many good men and women in those organizations who will and do put their shoulders to the wheel without demanding ransom; those who believe in their organizations, the work they do and in their fellow employees who are struggling to make their companies work.   It is sad that they will now take the heat for their abusive leaders. It is often their pay which was first cut, their budgets and staffs first reduced, their jobs first eliminated, even while their executives paid each other far too well.

I sorely hope that the compensation consultants who have had their way in the design of outrageous executive compensation programs do not hold sway in their arguments that exorbitant pay is necessary to attract and maintain a high level of executive talent. Many of us who have counseled the financial services industry over the years do hold many executives in the highest regard, and remain confident in their leadership and heart. They are also disgusted by what they see is happening.  But  we have also seen far too many of them who have gained a position of high authority (and with the concurrent ability to amass great wealth) by their political adroitness rather than business insight; and have seen those who have arrived at positions of inflated pay not by possession of any unusual skill or knowledge, but merely by serendipity and the abuse of the customer’s trust.

Let us be careful in our anger, though. Let us make sure that those who work in those companies, the bulk of them, those who do the hard work of designing and operating fine retirement programs, do not become the inadvertent targets of our rage. They have suffered their fools for far too many years, and they know it. It would be unfair now to heap any further insult on them which would only add to the indignities they themselves have suffered over the years from such corrupt leadership.

 

 

One of the most unfortunate and unintended consequences of the new 403(b) regulations is the freezing of hardship distributions and loans from contracts of "deselected" vendors, at a time when these funds are needed the most.

What at first seemed like an almost esoteric, academic discussion of what to do with contracts which were issued prior to 1/1/09 and to which all contributions ceased as of that date has now become one which is fraught with human tragedy. Participants in in 403(b) plans (and, it seems, mostly in non-ERISA plans like school districts) are now caught in a terrible cat-fight between employers and vendors which has resulted in employees not having access to those 403(b) funds to help them through this economic mess in which we find ourselves.

What is happening is all centered on the most fundamental change that the regs have introduced: the banning of the ability of a vendor or an employer to rely on a participant’s representation when taking a loan or hardship from their 403b contract. The old rule which permitted such reliance made much sense, particularly for employers where 403(b) plans were adopted and administered as the individual pensions they were intended to be.  The wholesale "dumping" of that rule has now befuddled the marketplace, as vendors and employers try to sort out who has the responsibility for doing what employees used to be able to do.

The typical scenario goes something like this: An employer, in response to the new regs, has sorted through their plan and has limited the number of vendors available. The "deselected" vendors are not named in the plan document, and are not treated by the employer as part of the plan. Deselected vendors, by the same token, do not wish to be part of the plan and want no obligation for compliance from those old contracts. The employer has engaged in the "good faith" efforts under Rev. Proc. 2007-71, and has notified the deselected vendor of the contact information necessary to get compliance data.

A participant approaches a deselected vendor for a hardship distribution to prevent the foreclosure of their primary residence, and fills out the appropriate vendor form. The vendor, instead of being able to rely upon the employee’s representation as to the existence of a hardship, is now seeking assurances from the plan that: (1) that the plan allows for hardships, and that the safe harbor will be followed which suspends elective deferrals for 6 months; (2) that the employer make a determination of hardship; and (3) that the employer approve the distribution.

The employer is now in a quandary.  They have excluded that old contract from their plan.  They fear approving the hardship brings the vendor’s contract into the plan. It will cause them to try to enter into a servicing agreement with the deselected vendor to get the compliance the employer needs.  Inclusion in the plan without referencing it in the plan document and without coordinating the terms of the contract with the terms of the plan can disqualify the plan. If it is a non-ERISA private employer, that sort of decision will trigger ERISA Title 1 obligations. So the employer tells the vendor to go away, and that its up to the vendor to make that determination.

The vendor, unwillingly to become the party responsible for complying with the new 403b regs, denies the hardship.  The policyholder is left holding the bag.

What is happening on the loan side is also causing hardship. Deselected vendor loans are very difficult to get.  Even with "selected" vendors, it is now very time consuming in the "multivendor" 403(b) environment to get a loan. It now typically takes a great deal of time to collect data from all the vendors in order to get loan approval, forcing incredible delays into the system that 401(k) plan participants do not suffer. Implementation of the SPARK standards, intended to help alleviate this, is spotty at best, and appears  to be successfully implemented only in a small number of very large vendors.

It is within the IRS’s authority to partially address the most egregious of these problems: at least for deselected contracts issued prior to 1/1/09, and to which no contributions have been made after that date, allow vendors and employers to rely upon employee representations and the single vendor’s own records. Could there be some abuse? Absolutely. But will it help bring relief in a crisis where there is terrible human tragedy? Without a doubt.

 

 

 

We recently blogged on the similarities between the Automatic Workplace Pension being proposed in President Obama’s budget proposal and the original concept of the retirement programs under IRC section 403(b). We noted that while 403(b) programs were initially set up as individual pension plans, it has been the policy of the IRS for over 15 years to treat 403(b) programs as employer plans. The IRS’ approach to 403(b) plans, most recently manifested in the new regulations under 403(b), is particularly problematic for the continued viability of the so-called non-ERISA 403(b) arrangements. These are 403(b) programs that are intended to fit under a safe harbor from ERISA coverage ( DOL regulations §2510-3.2) that exempts a 403(b) program from Title I of ERISA if the employer is minimally involved in its administration and does not exercise any discretionary authority over the program. The increased compliance responsibility imposed by the new IRS regulations can easily cause an employer to run afoul of the DOL rules, and have caused practitioners to question the continued viability of non-ERISA 403(b) arrangements.

Despite some helpful efforts by the DOL to provide guidance (e.g., Field Assistance Bulletin 2007-02), there are still significant obstacles for the employer that wants to maintain a non-ERISA 403(b) arrangement. Under the 403(b) regulations, the employer is responsible to make certain that the program remains in compliance with the tax rules, but its efforts to meet this responsibility can then cause it to fall out of the DOL safe harbor.   For example, a program that allows loans or hardship withdrawals will fail to meet the IRS’ rules unless someone, other that the employee, determines that a request for a loan or hardship withdrawal complies with the applicable tax rules. If the employer makes that determination, it has gone beyond what is permitted under the DOL rules. While the determination can be made by the investment provider, many are unwilling to take on that responsibility. And the employer apparently cannot simply hire a TPA to fulfill this function; the decisions of the TPA will be attributed to the employer. This problem is exacerbated when the plan is funded by multiple investment providers and the records of each provider need to be coordinated to ensure compliance with the tax rules.   As the DOL has said that in order to fall within the safe harbor a 403(b) plan must (at least in most cases) have more than one investment provider, most non-ERISA 403(b) arrangements will need to coordinate between providers.

The similarities of the Automatic Workplace Pension proposal to 403(b) plans and its apparent (early) support from both sides of the political spectrum demonstrate that there is still a continuing need for the non-ERISA 403(b). This is a simple and relatively inexpensive retirement savings arrangement that works much like the new proposal: the employer’s major responsibility is to send salary reduction contributions to investment providers. It avoids some of the costly obligations that apply to ERISA covered plans, such as the need to have an independent audit if the plan has over 100 employees.   Moreover, the non-discrimination rules that apply to the salary reduction provisions of 403(b) plans – universal availability – are easy to apply and consistent with the policy goals of encouraging widespread participation. Arrangements under section 403(b) have a long and successful track record of promoting retirement savings among employees in the tax-exempt community, and should continue to be encouraged.

There has been a discussion circulating around Washington for a number of years about the value of establishing a simplified Defined Contribution retirement system commonly referred to as "401(x)".  This program would create a single defined contribution program with a single set of rules to replace the "alphabet soup" of DC plans currently in existence.

Many product vendors have championed this cause, particularly through organizations like the Investment Company Institute, the mutual fund companies’ trade group. Even the U.S. Chamber of Commerce’s chimed in with support in a policy report in 2007. It is an attractive notion. The claim is that the system is far too complex for employers, and that going to a single, simplified program would work to everyone’s benefit.

I have always viewed this as a dubious claim.  "401(x)" seems to be a program that is more centered on the self-interests of a handful of vendors for which such a program would save much expense; it is not one which is designed to benefit employers. While it is true that  ASPPA and Metlife count no less than 17 types of DC plans (see the Metlife’s excellent chart , which was also published by ASPPA in its latest Journal), and I could probably add a few more, it is also true that these programs did not arise in a vacuum. We have a complex, sophisticated employer base in the United States.  It stands to reason that an effective retirement program cannot be based on a "one size fits all" concept. Does it make sense that a small, 5 employee charity has the same design as a publicly traded company with 150,000 employees? I think not. Does it make sense that a start-up sole proprietorship has the same program as a large international company that is over 100 years old? I think not.

These 17 plans are there for a reason: both the marketplace and valid policy concerns have insisted that they be there. Each of the plans have a particular purpose, a particular market whose purposes they serve. Trying to force it otherwise will be disruptive to those same forces which enabled those program in the first place. I do not doubt that these programs may need a bit of tweaking, but the fundamental concept remains: they were each created in response to a (at least perceived) specific policy concern  and need of the marketplace.

The classic example of the potential disruption which can be caused by a "401(x)" approach is found in the implementation of the new set of 403(b) regs. 403(b) plans were designed as individual pensions for employers that could ill-afford highly complex retirement plans. They have worked well for over 50 years. But since the IRS has taken upon itself the view that these should be treated like 401(k) plans, it wrote a set of regs which actually acts as a sort of "backdoor 401(x)."  While I understand and support the notion that the serious non-compliance the IRS found needed to be addressed,  the chosen approach to enforcing compliance is creating awful results. The transition costs have been unexpectedly high for the retirement industry (including many vendors which had originally supported 401(x)) and has created a growing anger and frustration in the bar and in the 403(b) plan sponsor community.  The new rules attempt to force a well designed individual pension program into an employer program that large parts of the market are ill-equipped to handle.  We will likely see, as the year progresses, a regulatory and enforcement nightmare.

It is this nightmare, I believe, that exposes the serious shortcomings of the concept of "401(x)." It doesn’t serve marketplace needs; there is no significant  policy it serves; and it has large, hidden transition costs.  The New York Times noted the lack of political will to do a single simplified program in its recent  article discussing  Workplace Pensions.  The Workplace Pension program sits on top of the current system, addresses a serious policy need and marketplace need, and does not attempt to replace the current system with thoughtless uniformity. It is a lesson which I hope policymakers remember as they discuss the revamping of the current system, one which should dissipate any notion of a "401(x)."

I was intending to leave this issue alone for a few weeks, and wait until the Workplace Pension proposal (upon which we blogged a few days ago) had a chance to percolate within the retirement industry. But I had the chance to spend a few minutes with David John (David is a senior scholar at the Heritage Foundation and is one of the Principals of the Retirement Security Project) in DC this week, and he spoke of this program-one on which he and Mark Iwry have spent years developing. The conversation set me to thinking.

Those of us who have spent serious time within a large organization, whether it be a financial services company, a manufacturing company or a governmental agency,  all have many war stories on these organizations’  capacity to ignore lessons from their own pasts-even their recent pasts. I would argue (digressing for a moment) that many of our current economic problems arise from us ignoring our history-not remembering that the anti-trust rules were there in part to prevent a handful of companies and individuals from amassing so much economic strength as to be able to wrack havoc on the entire economy.

So what does this have to do with the President’s proposals for Workplace Pensions? The retirement markets have a long and rich experience in dealing with salary deferral programs which can well inform the structure of this new program. We know what things work, and what things have been a disaster. 

This proposal is  unique in that it DOES recognize our experience. It has the support of both ends of the political policy spectrum (scholars from both Brookings and Heritage have lent their weight), which is likely because it uses well learned lessons of our past.

Some thoughts of what this thing may look like:

  • Yes, the proposal really does look a lot like the simple, old 403(b) programs. Though the legislative proposal is not yet written, the idea is designed to rely upon marketplace products. The twist is that vendors will be listed in a program designed on the successful parts of Medicare Part D. And simplicity is a key.
  • It will recognize the need for safe, "stable value" like investments for a while, until the employee can weigh in on where the money will be invested.
  • There will be "COBRA -like" rules for small employers, and there will "403(b) like" rules for part-time and short term employees.

Fee transparency will be important, and there is even some discussion of the making available the purchase of lifetime income guarantees.

There will be a number of technical issues that will come up as this thing progresses. Some may have been addressed, but they are worth noting:

  • We need to avoid the 403(b) disaster, which has arisen from trying to force an individual pension program into an employer program mold.
  • The tensions with Title 1 of ERISA will need to be addressed. A way needs to be found to balance employee protection (for example, on the deposit of the funds) with limits on employer responsibility.
  • There are a number of technical security law rules which need to be addressed, as most of these products will be registered investment products. Touchy issues such as suitability, prospectus delivery, and whether, practically,  an employer can force the purchase of a registered product.
  • Data, we have learned over time, is ugly. Privacy of data is critical. So the lesser the data requirements, likely the better.

I expect that there is much discussion and negotiation yet to be had. Of course, there is likely to be a grand policy debate on whether this sort of program will ultimately lessen the use of traditional 401(k)  and profit sharing plans, undermining incentives for employers to contribute to their employees’ retirement.

But the thoughtfulness and bipartisan manner in which the proposal has been developed leads me to believe that these sorts of issues (and others) will be well addressed. It is  a welcome breather from the often frantic approach to policy we have seen emerge in the past few years.

 

 

President Obama’s new budget proposes the establishment of a new "Automatic Workplace Pension" (see pages 84 and 85 of the OMB’s budget description and David John’s description at the Heritage Foundation’s site). It is based upon proposals from the Retirement Security Project run by Mark Iwry, David John and William Gale.

There is little doubt that the proposal will catch a lot of heat, as the logistics of establishing this type of program seems, at first glance, to be almost overwhelming. A number of trade groups are already discussing the issue of what kind of financial products and services can and should be used to implement this proposal, and there doesn’t seem to be an easy answer at first glance.

But there really may be an answer. The good Mr. Iwry and I have been talking about his proposal for a few years now, and it strikes me how similar this proposal is to the original 403(b) programs of the past.  Nearly 50 years ago, 403(b) programs were designed as individual pensions.  The employer’s sole responsibility was to make sure the employee’s deferrals were sent to the company of the employee’s choosing. The design was very similar (and actually still is today) to the IRAs which were adopted some 20 years or so later, more so than the qualified plans that the IRS is now trying to make them out to be.

Think about the delivery system which was successfully established by the marketplace for those early 403(b) programs. The tax-exempt employers agreed to which vendors they would permit deferrals, and the vendors came in and did the rest. They were (and still are) registered products (to the extent they provide equity based investment accounts) which are required to be sold by registered representatives. The employees owned the products, or had individual certificates under group annuities, which were completely portable. Revenue Ruling 90-24 gave employees the right to transfer their money tax free to another 403(b) investment product, making them REALLY portable.

In short: the marketplace has proven its ability to make this kind of program work, using the old 403(b) model.  Is there any reason why this shouldn’t serve as the basis for this new proposal?

There is a curious side bar to all of this, though. The IRS has spent the last 15 years trying to force the individually based 403(b) program into an "employer" based model. The IRS may face a new challenge, as the Automatic Workplace Pension proposal may well be 403(b) on steroids. It would seem to offer an alternative to all those non-ERISA 403(b) plans who find themselves being "ERISAfied" by the new 403(b) regulations.

THIS is going to be interesting…..

For a blog discussion thread on the Automatic Workplace Pension, check out the Bogleheads blog.

 

 

I mentioned in a posting last week that we will take some time on this blog to work through a number of the legal and technical issues related to annuitizing out of 401(k) plans. This, in effect, allows the 401(k) plan to offer the best features of the Defined Benefit and Defined Contribution plans without the huge burdens that typically are associated with DB programs.

You would think from the number of articles written in the past several years condemning the use of annuities in qualified plans that any plan sponsor would be off their rocker to even consider making this benefit available under their plan.  So I think It is well worth noting the value of these types of insurance products before we get lost in the "technical weeds" of annuitization. Annuities do something that no other financial service product in the world (other than life insurance) can do: they pool our common interests for the general benefit of all.

But most folks see the "price"of this pooling as being a bit too "salty" for their tastes-they stay away from annuities because those contracts provide a benefit which is generally inflexible, inaccessible and  invisible. Or, as my brother has put it, its just a bet against the insurance company which the insurance company will win.

That world is now changing. As an example,  Transamerica and Lincoln Financial have just finished round one in their litigation over the enforceability of a patent of an annuity design which both pools interests and gives policyholders control. Each of the major insurance carriers have been developing similar products as well, trying to address policyholder concerns over balancing liquidity with security.

So, finally, it appears that there will be annuity products available in the marketplace which serves policyholders well. The technical challlenge is to successfully fit  these new products into defined contribution plans where there is a great need for a "defined benefit" type of program. I would hope then that the value we each receive from the pooling of our common interest would get the favor it deserves.