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EBSA Official: 403(b) Plan Product Not Really An Annuity

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An Employee Benefits Security Administration official wants employers to stop treating a retirement plan investment product as an annuity.

Lisa Alexander, a divisional chief at EBSA, an arm of the U.S. Labor Department, discusses the topic in Advisory Opinion 2010-01A, which was written in response to a question from Steven Kronheim, associate general counsel of the Teachers Insurance and Annuity Association of America-College Retirement Equities Fund

Kronheim had asked EBSA about Form 5500 annual return reporting for the TIAA Traditional Annuity contract. The contract, used mainly in college and university 403(b) plans, guarantees principal, pays a minimum rate of return, and also may pay additional interest in years when TIAA investments do well.

Kronheim asked whether EBSA would treat the Traditional Annuity as the kind of “allocated insurance contract or policy” that a pension pension can use to provide “fully guaranteed” benefits that are free some types of Form 5500 reporting requirements.

Many 403(b) plan sponsors offer the Traditional Annuity contract alongside a mutual fund account investment option and a real estate account option, Alexander writes.

The Traditional Annuity contract provides that each annuity premium payment buys a definite amount of lifetime income, and may buy some additional income.

“You take the position that the annual additional interest credited to a participant’s Traditional Annuity account should not affect the Traditional Annuity’s status as fully allocated because the additional interest is discretionary and only exists when declared and becomes allocated when credited to the participant’s Traditional Annuity account,” Alexander writes. “You also represent that the additional interest amounts are not subject to market fluctuation because they are declared in advance on an annual basis.”

The relevant Form 5500 schedule instructions provide that a product qualifies for the streamlined reporting requirements “only if the insurance company or organization that issued the contract unconditionally guarantees, upon receipt of the required premium or consideration, to provide a retirement benefit of a specified amount,” Alexander writes. “This amount must be provided to each participant without adjustment for fluctuations in the market value of the underlying assets of the company or organization, and each participant must have a legal right to such benefits, which is legally enforceable directly against the insurance company or organization.”

The Labor Department does not want to expand the definition to include insurance products whose premiums are not immediately applied to purchase annuities but that purport to generally “guarantee benefits,” or that “guarantee a fixed rate of return,” or where group annuity contracts held by defined contribution plans credit or allocate each participant’s interest in the contract to the participant’s individual account in the plan, but the value of each participant’s interest in the contract is adjusted for market value fluctuations,” Alexander writes. “The Department has specifically rejected the view that a guaranteed rate of return is the same as a guarantee of a specific dollar benefit payable as retirement income. In light of the fact that the Traditional Annuity only carries a guaranteed minimum rate of return, and the value attributable to each of the Traditional Annuity contributions can increase when additional interest is declared, the Traditional Annuity does not provide a retirement benefit of a specified amount upon receipt of each contribution.”

The Labor Department will apply that interpretation for plan years beginning on or after Jan. 1, 2009, but it will not apply it to plans that use the Traditional Annuity contract retroactively, Alexander writes.

A copy of the opinion is available here.

“We are well prepared for this and other administrative changes that affect retirement plan reporting, and have a complete suite of services for plan sponsors and their auditors,” Chad Peterson, a TIAA-CREF spokesman, says in a statement about the advisory opinion.