100% of Plan Assets in Annuity Contract

[chris]

Client's profit sharing plan has invested all of the plan assets into an investment variable annuity contract. the annuity contract is on a seven year schedule and provides for participants to withdraw a certain % of their account balance per year without penalty. If withdrawal is greater than that % certain penalties apply. Also, upon death, a participant's beneficiaries are entitled to market value of the account or the original investment value of the account plus a guaranteed % per year. Isn't there a diversification issue with respect to the sole trustee's potential liability???

[Belgarath]

It's a very subjective area at best, and if you ask 20 people you'll probably get at least a dozen strong opinions. I've never been a fan of variable products in qualified plans, simply because the tax deferral of gains is already available on mutual funds in a plan, and usually with lower associated costs. Nevertheless, there are arguments that can be made in favor of the VA - i.e., you already have inherent diversification of the funds, often it is backed by a state insurance Guarantee fund, and, particularly in the light of market performance in the last year, your gains are often protected once you've passed a policy anniversary, etc.

Ultimately, the responsible party, (Trustee/Fiduciary) will have to able to justify any investment decisions, no matter what they choose for investments. As a general rule, I think it is easier to justify investments in more than one financial institition, from a Fiduciary prudence/diversification issue, than it is investing in a single policy or investment.

[chris]

Thanks for your response, Belgarath.