State Prohibition on the use of annuities as a funding medium

[joel]

NY law prohibits the use of annuities as a funding medium. This in my view recognizes the principle that the purchase of an annuity with pre-tax dollars is like using an umbrella indoors.

Q.: Please identify the other states that have the same prohibition.

[Demosthenes]

Forget the states!

What fiduciary, in his/her right mind, would permit them in the plan?

I know the answer is most 403(b) and 457 plans, but it doesn't change the fact that the benefit to the producer is a legalized (in most states) form of theft.

[mbozek]

Joel: What NY law section are you referring to?

[joel]

Demo: I could not agree with you more!

mb: I was informed about this requirement from someone that is in a position to know. I will try to get the citatation and post it up.

[joel]

mb,

Here is the citation

Joel

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NY State Finance Law, § 5; L. 1982, ch. 547)

Sec. Sec.

9003.1 Contracts or agreements 9003.5 Miscellaneous requirements

9003.2 Competitive proposals 9003.6 Acknowledgment

9003.3 Criteria for selection 9003.7 Precluded investments

9003.4 Provision of diverse investments 9003.8 Transfer of assets

9003.7 Precluded investments. No contract or agreement entered into with a financial organization may provide for the investment of any amounts under a plan in any annuity contract providing for a term which could exceed five years or which is measured by one or more natural lives or any life insurance or other contract providing traditional death benefits.

[david rigby]

I don't see anything in the quoted regulation about a plan.

[joel]

9003.7 Precluded investments. No contract or agreement entered into with a financial organization may provide for the investment of any amounts under a plan........

[david rigby]

OK, so I don't read very well. But, my point is that the reg should be reviewed in context. It might have a purpose other than relating to a retirement plan, and the word "plan" in the text might mean something other than retirement plan.

I don't know, and I don't care.

[joel]

I don't know, and I don't care.

========================================

Pax: Are you feeling ok?

[joel]

For those of us who do care: Section 9001.1 Application; Incorporation by Reference. (a) This Subtitle shall be interpreted and applied so that any plan established hereunder shall be an eligible deferred compensation plan under section 457 of the Internal Revenue Code.

[joel]

Ted Siedle will be on Wall Street week tomorrow. He will be disclosing the shark like fees associated with 403(b) investing.

[david rigby]

Q.: Please identify the other states that have the same prohibition.

What is the point?

[mbozek]

I know of 457 plans established by municipal govts that are funded with VAs so I dont know what the reg prohibits.

[joel]

Are these local governments in NY?

[mbozek]

Yes.

[joel]

Posted on Dec 23 2004, 01:32 PM

I know of 457 plans established by municipal govts that are funded with VAs so I dont know what the reg prohibits.

=====================================================

It prohibits VAs as funding mediums...it would not be the first time a municipal government violated state law.

[david rigby]

What is the point?

Once again...

[joel]

OK, so I don't read very well. But, my point is that the reg should be reviewed in context. It might have a purpose other than relating to a retirement plan, and the word "plan" in the text might mean something other than retirement plan.

I don't know, and I don't care.

You are a strange character inasmuch as you tell me you don't know and you don't care and then come back and pose a question. I elect not to discuss this topic with you because I am of the opinion you are mean spirited.

[GBurns]

pax,

What does it matter what is the point if you don't care?

[mbozek]

Joel: Paragraph 8a of Section 5 of the NY State finance Law which authorizes the Deferred Comp board expressly permits insurance cos licensed by the NYS ins dept to be a financial organization which can administer a public employee 457 deferred comp plan and invest funds held under such plan.

[GBurns]

But does it allow the insurance company acting as administrator of the 457 to use annuities etc since it prohibits " the investment of any amounts under a plan in any annuity contract providing for a term which could exceed five years or which is measured by one or more natural lives or any life insurance or other contract providing traditional death benefits."?

[mbozek]

The web site for the NYS def comp plan indicates that it is available for those employers who elect to adopt it. There does not appear to be a requirement that a NYS public employer can only adopt the NYS def. comp. plan under State finnace law Sect 5 which would leave NYS public ers free to adopt another plan that uses annuity products. Reg 9000.1 states that the rules of the Board apply to a 457 plan established by any municipal employer under sect 5 of the NYS finance law.

[joel]

Reg 9000.1 states that the rules of the Board apply to a 457 plan established by any municipal employer under sect 5 of the NYS finance law.

====================================================

And rule 9003.7 states: 9003.7 Precluded investments. No contract or agreement entered into with a financial organization may provide for the investment of any amounts under a plan in any annuity contract providing for a term which could exceed five years or which is measured by one or more natural lives or any life insurance or other contract providing traditional death benefits.

[mbozek]

Reg. 9003.7 applies to investments under the NYS def comp plan established under Section 5 of the finance Law. The regs do not require municipal employers to adopt the NYS def comp plan. The instructions for the adopting the NYS def comp plan note that the rules apply to an employer who elects to adopt the plan. Reg 9001.2(a)(3) permits a govt employer to adopt another def comp plan that meets the requirements of IRC 457.

[joel]

Section 9000.1 Scope. This Subtitle applies to every deferred compensation plan

established by the board or any local employer pursuant to section 5 of the State Finance Law.

This means that section 9003.7 prohibition of annuities as a funding medium applies not only to the 457(b) plan operated by the state government of NY but to 457(b) plans operated by local governments of the state of NY.

[joel]

8. a. The term "financial organization" shall mean an organization

authorized to do business in the state of New York and (A) which is an

authorized fiduciary to act as a trustee pursuant to the provisions of

an act of congress entitled "Employee Retirement Income Security Act of

1974" as such provisions may be amended from time to time, or an

insurance company; and (B) (i) is licensed or chartered by the state

insurance department, (ii) is licensed or chartered by the state banking

department, (iii) is chartered by an agency of the federal government,

(iv) is subject to the jurisdiction and regulation of the securities and

exchange commission of the federal government, or (v) is any other

entity otherwise authorized to act in this state as a trustee pursuant

to the provisions of an act of congress entitled "Employee Retirement

Income Security Act of 1974" as such provisions may be amended from time

to time.

================================================

This section has nothing do do with funding mediums but everything to do with fiduciary qualifications.

[mbozek]

I disagree becausse the reg 9001.2(a) specifically permit an employer to establish a 457 plan under one of three options including a separate plan that complies with IRC 457and there are municiipal employers who have annuities in their 457 plan.

[joel]

I disagree becausse the reg 9001.2(a) specifically permit an employer to establish a 457 plan under one of three options including a separate plan that complies with IRC 457and there are municiipal employers who have annuities in their 457 plan.

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MB: C'mon give us a break! All of the plans must comply with section 457(b) THIS IS A GIVEN.

While 457 does permit annuities as funding vehicles NYS law does not! NYS law controls. The language is quite clear. Those muncipalities that offer annuities as funding mediums for their 457 plans are violating state law.

[GBurns]

I thought that the argument was whether or not municipalities had annuities in their 457 and not whether or not they had them legally. It might very well be that those that have annuities reveived an exemption or just found a way around the restriction.

[joel]

George,

I never doubted mb's assertion that he knows of municipalities in NY that use annuitites for their 457 plans. He then went on to attempt to prove that the law allows it when it clearly does not. So the question now is did these local governments receive an exemption? In your view what would be grounds for an exemption?

Joel

[GBurns]

That is a question that should be posed to those who have annuities.

In fact, from a sales (or consultant's) viewpoint, it could create much goodwill and enhancement of reputation, if help was offered to correct the situation, assuming that it turns out that they either have no exemption, did not know the law or had receieved bad advice.

[joel]

Even the law does not stop these sharks from marketing their products.

=====================================================

NYS DEFERRED LINDA ANGELLO

COMPENSATION FREDERICK J. JACOBS

BOARD MARY LOUISE MALLICK

www.nysdcp.com

December 7, 2004

«Name»

«Locality»

«Address1»

«Address2»

«City», «State» «PostalCode»

Dear «Salutation»:

The purpose of this letter is to reiterate requirements of the Rules and Regulations of the New York State Deferred Compensation Board (the “Rules”) and of the Plan document for Model Deferred Compensation Plans (the “Model Plan Document”) that preclude certain annuity contracts and set forth acceptable methods for distributing plan benefits to participants.

Precluded Investments (Certain Annuity Contracts)

As you are aware, the Rules set forth basic requirements for establishing and operating a deferred compensation plan. Although compliance is required, recent inquiries from plan sponsors and service providers have indicated a less than complete understanding of Rules that pertain to annuity contracts as precluded investments. For this reason, these basic rules are summarized below:

· A plan may not provide for the investment of assets in an annuity contract providing for a term which could exceed five years or which is measured by one or more natural lives or any life insurance or other contract providing traditional death benefits (Section 9003.7)

· Contracts of any description may not exceed five (5) years in duration in most circumstances and in exceptional circumstances may be extended for a maximum of two consecutive one (1)-year periods by a vote duly taken (Section 9003.5).

Model Plan Document Criteria for Distributing Plan Benefits

Section 7 of the Model Plan Document sets forth criteria that govern the distribution of plan benefits to participants who have severed from employment or have attained age 70½. These criteria are summarized below:

· Plan benefits must be paid from the plan trust (Section 7.1).

· Permissible distribution options include lump sum payments, periodic payments (monthly, quarterly, semiannual, annual) or partial lump sum payments (Section 7.3).

· The portion of a participant’s account not necessary for a current benefit payment shall continue to participate in the investment performance of the selected investment fund(s) (Section 7.3 ©).

NEW YORK STATE DEFERRED COMPENSATION BOARD

ROOM 124, EMPIRE STATE PLAZA CONCOURSE – NORTH

P.O. BOX 2103

ALBANY, NY 12220-2103

(518) 473-6619 Fax: (518) 473-7255

«Name» Page 2 December 7, 2004

Model Plan Document Criteria for Distributing Plan Benefits (cont.)

· A participant must be permitted to change both the timing and form of the benefit payment option they have previously chosen (Section 7.4 (a)).

· If a participant dies prior to receiving the full amount of his or her plan benefit, the remaining assets will be paid to the beneficiary (Section 7.2).

An annuity contract that guarantees a benefit payment over the life of the participant or the life of the participant and a beneficiary is not in conformance with the Model Plan Document and, therefore, is precluded as a distribution option.

Conclusion

As you are aware, by operating a Model Plan fully compliant with the Rules and the Model Plan Document, you are offering an important and valued benefit to your employees. Plan service providers share in the responsibility for ensuring that your plan is in compliance with the Rules and the Model Plan Document, both of which may be obtained from the New York State Deferred Compensation Plan’s Web site (www.nysdcp.com) or from this office.

If you have questions regarding this letter or the requirements of the Rules and the Model Plan Document, please contact me or Edward J. Lilly, Deputy Executive Director, at (518) 473-6619.

Very truly yours,

Julian M. Regan

Executive Director

JMR:st

[GBurns]

Now you have a great new opportunity to save the people.

Form a marketing team and canvass all the offending groups offering to save them from a fate worse than death, an enraged union. Or approach the unions and get an agent of record or similar blessing and attack from that end.

This is a once in a lifetime opportunity for a TSA promoter.

[joel]

George,

With all due respect please rephrase your reaction to the letter.

Thanks,

Joel

[GBurns]

I honestly do not understand what you mean.

For quite some time you have had problems with 403(b) plan investment vehicles. You also have issues with what some employers are allowing. On top of this you were or are in a position to market to employees of these employers. And you have the interests of these employees at heart.

Now I see the opportunity to give some guidance which at the same time allows you to correct that which is wrong.

So what have I offended you with? Please let me know, it is too early in the year for confrontation.

[joel]

George,

Thank you for the kind words and it's always too early in the year for confrontation. I just did not get the gist of what you were saying.

My goal is to have public employers step up to the plate and offer low cost plans. These low cost arrangements should not be much more expensive than what it costs to operate a PERS on a per capita basis.

The letter from the NYS Deferred Compensation Board confirms my suspicion that there are some unethical commissioned operators out there in NY attempting to market their expensive variable annuity wrappers to the unsuspecting sponsor and its employees. There is no reason why any public jurisdiction in NY should put up with these solicitations when the Deferred Compensation Board has made the State's Plan available to local employers.

Peace and Hope,

Joel L. Frank

[GBurns]

Therein lies the problem.

Employers, public or otherwise, do not step up to the plate. Items have to be introduced to them and then sold.

They will put up with whatever they have until pressure is brought to bear, whether by a salesman, the union or by public embarrassment in the media.

[joel]

AGREED! ESPECIALLY WHEN IT COMES TO THE 403(b) SALARY REDUCTION PLANS.

The picture is not as bleak in the 457(b) arena. NY has two outstanding plans, the State's 457(b) Plan and the one operated by the City for its employees. These are low cost programs. The City's is particularly noteworthy inasmuch as it has coverted from a mutual funds platform to Separately Managed Accounts. This conversion resulted in a weighted average expense ratio including administration and recordkeeping of 0.34 basis points. Unlike the State, the City was not sleeping at the wheel during the time when governments could establish 401(k) plans. So City employees have both to choose from and may, as you know, max out on both. The City's Deferred Compensation Board manages both plans.

Happy New Year,

Joel

[Guest getaxa]

NY 457 plans do not preclude annuities as long as it conforms to the statute. 5 year surrender, blah, blah, blah...

[joel]

I thought it would be instructive to post the Rule

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"9003.7 Precluded investments. No contract or agreement entered into with a financial

organization may provide for the investment of any amounts under a plan in any annuity contract

providing for a term which could exceed five years or which is measured by one or more natural

lives or any life insurance or other contract providing traditional death benefits."

[joel]

getaxa:

Could you please describe the type/kind of annuity that would not be in violation of Section 9003.7?