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Removing Participant Direction of Investment


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If a plan that has allowed participant directed investments switches that, to trustee/investment committee making decisions over pooled accounts (the individual ones all swept into the pooled account), may the annuity investments be continued but simply be assets belonging to the employee upon whose life expectancy the annuity is based, with the rest of the benefits in the pooled accounts be shared proportionately?

For example, suppose 2 employees. One with $150,000 in benefits, of which $100,000 is an annuity's value and the other $50,000 is mutual funds. The other employee has $75,000 total benefits, all in mutual funds. The $125,000 is swept into one plan account. The second employee has 3/5 (60%) interest ($75,000 of $125,000), and the first employee has 2/5 (40%) interest ($50,000 of $125,000) as well as all of the annuity as held by the plan.

Is this permissible? No new funds going into the annuity, just avoiding penalties for cashing it out. Leaving it as just benefits of the employee on whose life expectancy the annuity is based, with no ability to direct what happens to that annuity.

Any problems?

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By doing that you are essentially saying that either one participant is allowed to self direct to the tune of $100,000, or that the trustee is choosing to segregate and invest $100,000 of that participant's account in an annuity (you seem to imply the latter). I do believe there are problems either way.

Why not just treat the annuity as part of the pooled account? The plan can (should) be the owner and beneficiary, and the name of the annuitant doesn't really mean anything.

Ed Snyder

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By doing that you are essentially saying that either one participant is allowed to self direct to the tune of $100,000, or that the trustee is choosing to segregate and invest $100,000 of that participant's account in an annuity (you seem to imply the latter). I do believe there are problems either way.

Why not just treat the annuity as part of the pooled account? The plan can (should) be the owner and beneficiary, and the name of the annuitant doesn't really mean anything.

After this proposed change, no participant would be permitted to self direct. All decisions about the annuity would, as with other plan assets, be made by the plan trustee or an investment committee. This would allow those that had previous to this change self directed into an annuity to have the continuing benefit of their prior self direction just for their individual benefit; where as all plan assets not invested in a product the characteristics of which are tied to a specific employee would be the pooled part for which investment decisions would then be actively managed by the plan trustee or an investment committee, on a pooled basis.

Given that this would be a move taken at a time in response to new regulations taking effect, and the move is to change the plan in a way so that the new regulatory burdens do not apply, would this change likely be viewed by the IRS as a discriminatory BRF if this disproportionately favored HCEs?

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No change in my comments. What's so special about an annuity that someone should get the "continuing benefit of their prior self-direction" that someone else shouldn't get?

BTW, if you were to take my suggestion about letting it be part of the pooled account, I think it should be valued at market value, not surrender value, at the time of transfer.

Ed Snyder

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