Participant Directed vs. Trustee Directed

[Dennis Povloski]

An insurance agent sold a profit sharing plan to a Dr. group. The group has 6 participants (2 doctors, and 4 staff). The insurance agent set up each participant in an individual variable annuity. The annuities have sub accounts that the employees can direct. The plan document says the employees can direct their investments.

The plan's new advisor wants to ultimately get out of these annuities for the employees, but because of surrender fees, he doesn't want to move them right away. For the two doctors, the annuities make sense, and they want to keep them. Since 90% of the money in the plan belongs to the doctors, the advisor is at a loss as to what to do with the employees.

Since the employees don't have enough money to be up on a platform, I suggested that he open individual brokerage accounts for them, and they could invest the funds however they wanted to.

He's concerned about costs. He feels that if he pools the employee money, he can take advantage of cost savings because they will his some sort of breakpoint at the mutual fund company. The pooled account would be directed by the trustee.

If they set up this pooled account and give the employees the option to invest in this or in annuities, does it still count as participant directed? It kind of makes me think of the pooled account as a "fund of funds" type option, but it makes me nervous that the trustee is directing the funds.

Any thoughts?

[Bird]

You don't mention why the annuities are appropriate for the docs but not the employees; it seems one option is to just leave everything as is.

In theory, you could offer everyone the option of investing in a pooled account or in a self-directed option (in this case, the variable annuities). But that adds a hassle factor and costs too.

It might be a good time, given the pending participant fee disclosure rules, to consider whether the annuity provider or the advisor can provide the necessary disclosures without incurring additional expenses for that.

If it were me, I'd take a serious look at a platform where everyone has the same options and where the provider takes care of the disclosures. I know, surrender charges make it look unattractive, but if you compare the one-time surrender charges to the additional fees the participants pay on an annual basis, it's probably a wash. (e.g. you might have a 5% surrender charge decreasing over 5 years but there's a wrap or other mortality and expense charge of 1% to 1.5% every year, so there's 5% or more paid over time. It all depends on what you're comparing it to but I guarantee I could make a good case to get rid of the annuities!)