Individual Annuities

[Guest Thornton]

I have a 401(k) client with the assets, around $1,000,000, invested with a national mutual fund company. The participants have investment choice and the plan complies with 404©. An insurance agent is trying to convince the plan sponsor that about 1/2 of the plan assets should be liquidated and individual annuity contracts purchased for the plan participants.

1) I recall that the DOL has expressed concern about individual annuity contracts in qualified plans. Is my recollection correct?

2) Does purchase of the annuities take the plan out of 404© compliance?

Any thoughts are welcome. Thanks.

[QDROphile]

Are you referring to real annuities or fake annuities?

Any plan asset that is not purchased at the direction of the participant is not covered by 404( c). The fiduciary is responsible for the asset. The plan sponsor should have nothing to do with decisions about investment of plan assets because investment is a fiduciary function. If the sponsor is a fiduciary, serious consideration should be given to identification of the individuals who will have fiduciary responsibility. Any individual who is a fiduciary but takes no action to discharge fiduciary obligations because of ignorance of the fiduciary status is at substantial risk.

Any fiduciary who purchases an annuity or makes annuities available as an investment option must be able to explain how the asset works and its value and disadvantages relative to other investment options, including true cost. I challenge most individuals to be able to succeed in that endeavor. Most of those who are able to evaluate annuities would not allow them in a qualified plan except as a distribution option.

[Guest mjb]

how does the purchase of individual annuities satisfy the IRS requirement that the plan assets be held in trust or by the employer in a group annuity.