Unnallocated Deferred Annuities in Retirement Plans

Unnallocated Deferred Annuities in Retirement Plans

One of the trends in the retirement space is to get participants focused on “income replacement” rather than “asset accumulation”.  After all, once workers retire, the assets that they have must generate a sufficient income for them to maintain their desired lifestyle.  Guidance from the Treasury Department and the Department of Labor within the past week has generated a lot of news on adding deferred annuities within Target Date Funds.

A letter written by Phyllis Borzi, Assistant Secretary at the Department of Labor wrote an information letter to the Department of the Treasury, which provides a good explanation of how the annuities work within a Target Date Fund:

An “unallocated deferred annuity contract” is a contract with a licensed insurance company that promises to pay income to covered plan participants at some date in the future (possibly far into the future) on a regular basis for a period of time or for life. The annuity is written on behalf of a group of participants and not issued to and owned by a specific individual. As such, unallocated deferred annuity contracts do not ordinarily require the insurance company to have or maintain any personal information on individuals in the group. Rather, units of the unallocated annuity generally are largely interchangeable among members of the covered group, which facilitates transferability and allocation within the group, for example at the dissolution date of each Fund.

At its target date, each Fund dissolves, and participants with an interest in the Fund will receive an annuity certificate providing for immediate or deferred commencement of annuity payments. The certificate represents the participant’s interest in the unallocated deferred annuity contracts held by the Fund. For instance, if a Fund’s asset mix contains a fifty percent investment in unallocated deferred annuity contracts, then half of each participant’s individual account balance will be reflected in the certificate. The remaining portion of each such participant’s interest in the Fund will be reinvested by the participant or plan fiduciary in other Plan investment alternatives in accordance with title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA).

 The full letter can be found on the DOL’s website.