Individually Owned Annuities in a Cash Balance Plan

[emmetttrudy]

A CBP has invested the plan assets in 3 different accounts.

One is a variable annuity owned by the business owner.

The 2nd is a variable annuity owned by the other business owner (they are spouses).

The 3rd is a generic mutual fund (not important for these purposes).

I do not think these are appropriate investments for a CBP. Annuity investments must be owned by the Plan, they cannot be assigned to an individual annuitant. I fail to see how these are appropriate investments in a CBP.

They are contributing the CB credits to the two annuities, as if the assets in that annuity are solely for the purpose of the named individual on the annuity.

Could anyone recommend any specific IRS and/or DOL regulations that would back up the position that these are not appropriate investments for a CBP?

[emmetttrudy]

by "owned" I mean the individual participant is listed as the annuitant. not the plan.

[david rigby]

Are there other participants in this plan?

[Effen]

Well, you need to check the document to make sure they aren't using some sort of market rate of return crediting, but I generally agree that they most likely are not appropriate. However, as we know, the Ned Ryersons of the world never let appropriateness get int he way of a good sale.

Probably the best way to proceed is to simply explain how the plan works to the owners. Explain how all of the assets support all of the liabilities and that individual policies are basically meaningless to the funding. Also explain the non-discrimination rules regarding insured death benefits and explain how they need to provide the same benefit to all other participants.

I know some of the insurance companies were pushing these products a few years back, but a few got wise and required the actuary to sign off. This ticked off a bunch of agents because most actuaries refused to agree to the appropriateness of the investment. But that didn't necessarily stop the transaction from going through.

Good luck. Make sure you are getting properly compensated for the clean up, because you know the agent who sold it certainly did.

[My 2 cents]

Just wondering whether this would be a prohibited transaction of any sort, as it seems to be using plan assets directly to benefit one or more plan participants. Dealing with a party in interest or something like that.

What fiduciary process was followed to analyze the investments for suitability and prudence? The choice of plan investments would certainly require that degree of care.

[AndyH]

As Effen alluded to, Ned may have included life insurance in the policies, which could have created exposure under a couple of sets of rules.

[Bird]

They are contributing the CB credits to the two annuities, as if the assets in that annuity are solely for the purpose of the named individual on the annuity.

I'm going to buck the current here and say they may not be prohibited or otherwise not allowable. "as if" ...they are solely for the purpose of the named individual does not necessary mean they are solely for said individual. As long as the plan owns them (and I think your second post says that), and can use them for others in the plan if needed, then they are just assets of the plan. Naming someone as annuitant is a requirement of the policy but doesn't mean much of anything until the policy is annuitized.

I'm not saying it's "good" - expenses are probably - definitely - higher than they need to be, and all the crap built in about "guarantees" doesn't do anyone any good in the context of a plan, but it doesn't make them prohibited or wrong.

[emmetttrudy]

thanks all.

there are other participants in the plan.

i think part of the issue i have with it is how it is being presented to the client. it is definitely being presented to the client as "all the money in this annuity is yours". it's certainly not presented to them in the sense that all of the money in the plan, including the money in the annuities, belongs to everyone in the plan, and is for use to pay out benefits to all participants.

i don't think they're appropriate. i am sure they are costly. but when there's money to be made, i'm sure the advisor can come up with a "justification".

[My 2 cents]

Trying to imagine what would be their reaction if, when the owners want to retire, the plan would not be 110% funded and they would be barred from cashing out without posting enough security to facilitate clawing back part of their distribution!

[mbozek]

Who is the owner of the contract? If it is the participant then the plan is violating the rules that require that plan assets must be held in trust or in a group annuity contract issued to the employer or plan trustee. Its a PT for participants to own a plan asset.

[emmetttrudy]

the annuitant for one contract is listed as the wife and the annuitant for the other contract is listed as the husband, both 50/50 owners and both Trustees.

[Mike Preston]

The annuitant is not the owner.

[K2retire]

the annuitant for one contract is listed as the wife and the annuitant for the other contract is listed as the husband, both 50/50 owners and both Trustees.

Listed as owners individually, or listed as owners as trustees?