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Drinker Biddle Retirement Income Team Newsletter

Drinker Biddle Retirement Income Team Newsletter

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Categories:Types, Business/Law
Published by: DrinkerBiddle on Feb 01, 2013
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RetirementIncome TeamNewsletter
 January 2013
Dear Reader: The Drinker Biddle Retirement Income Team bringstogether seasoned lawyers with diverse talents in multiple
practice areas, including employee benets, investment
management, securities, insurance, income taxation andgovernment relations, to provide one source to which
nancial services companies and plan sponsors can look 
for help in resolving complex legal issues that impactthe design and sales of retirement income products and
their selection for use in dened contribution plans.
 This is our second newsletter, which addresses legalissues faced by retirement industry service providers — insurance companies, mutual funds, banks and trustcompanies, investment advisers, broker-dealers, third-party administrators and record-keepers — as well as by 
plan sponsors and duciaries. Our
newsletters aim to provide timely and valuable information regarding recent or expected regulatory 
developments and industry trends.
 The Retirement Income Team canbe most effective by focusing onthe issues, developments and trends
that impact you. Please let me or
any other member of the teamknow if there is a matter relating to retirement income products orservices that is of particular interestto you or if you have any comment or question regarding 
the information in our newsletters or on our website.
For additional information about the RetirementIncome Team and legal, regulatory and otherissues affecting retirement income products andservices, please visit our website at
for other Retirement Income Team publicationsand updates please send an email communication to
 John BlouchChair, Retirement Income Team
 (202) 230-5420
2 ERISA Considerations in the Sale of Individual Annuity Contracts toPlans3Insurance Companies Take Steps to Reduce Their Risks UnderGuarantees in Outstanding Variable Contracts5Applying the Qualified Joint and Survivor Annuity Requirements toGMWBs6Proposed IRS Guidance Would Facilitate Partial AnnuityDistributions from Pension Plans, but Raises Concerns for SomePlan Sponsors7Projections of Retirement Income9Around the Firm
Retirement Income Team www.drinkerbiddle.com
In This Issue
 A ‘Most Inuential’ Individual On January 3, 2013RIABiz named Fred Reish one of the 10 mosinuential individuals in the 401(k) business: “Fred Reish is one of the most authoritative and knowledgeable leaders about any aspect of retiremen plans.” Congratulations,Fred! 
Retirement Income Team www.drinkerbiddle.com
Retirement Income Team | January 2013
ERISA Considerationsin the Sale of Individual AnnuityContracts to Plans
In recent years — perhaps because of the volatility of stock markets or the aging of the baby boomers — wehave seen increased activity in the sale of individual
annuity contracts to participants in dened contributionplans. More specically, most of the sales are of 
individual variable annuity contracts with guaranteed
minimum withdrawal benet riders (GMWBs). While the desire of participants to obtain insurance
company guarantees is understandable, there are anumber of issues related to both the sales process andthe terms of the contracts when viewed from an ERISA
perspective. In this article, I discuss only two of them.First, the preamble to the DOL’s 408(b)(2) regulationindicates that the regulation’s disclosure requirements
apply to insurance brokers and the sale of insurance
contracts to ERISA-governed retirement plans. To
complicate matters, insurance agents and brokers have
historically relied on Prohibited Transaction ClassExemption 84-24 (and its disclosure requirements) to
avoid prohibited transactions in the sale of insurance
contracts to retirement plans. Unfortunately, the DOL
has not clearly indicated whether an insurance agent
or broker must satisfy both disclosure requirements.If both must be satised, we are concerned that theremay be a signicant number of inadvertent violations
(and resulting prohibited transactions) in the sale of 
individual annuity contracts to retirement plans. (In
conversations with other ERISA attorneys, thereappears to be a consensus that the “safe” position is
to satisfy the conditions of both requirements.)
From the perspective of an insurance company, it seemsclear that the issuance of an annuity contract to anERISA retirement plan does not fall within the scope
of the 408(b)(2) regulation. That is, it is the issuance of a product and not the provision of a covered service.However, there are other issues for insurance companies.
For example, most annuity contracts designed for theindividual market contain provisions that are permissible
under the insurance laws but create duciary issues
for insurance companies when the contracts are held
in ERISA retirement plans. That is because of theconvergence of two fundamental ERISA concepts. First,
an asset held within an ERISA plan is a “plan asset”
and, thus, is subject to ERISA’s duciary and prohibitedtransaction rules. Second, the exercise of discretionary control over a plan asset may give rise to a duciary status,e.g., for the insurance company. (Unfortunately, that can
occur even if the insurance company had not focused on
the fact that the contract was owned by an ERISA plan.)
From an ERISA perspective, discretionary control canresult from the ability of an insurance company to
affect the terms of the individual annuity contract. That
could include, for example, a provision that permits theinsurance company to amend the terms of the annuity 
contract unilaterally. (Note that there is guidance that
permits limited amendment rights if certain procedures
are followed.) If an insurance company has broad
discretion to amend an annuity contract or a particularprovision of an annuity contract (that is, affect the value of a plan asset), the insurance company ma
become a duciary for that purpose. (Note that ERISArequires that a duciary exercise its discretion in thebest interest of the plan participants.) Furthermore,
if an insurance company exercises its discretionary amendment rights, or any other discretionary rightsunder the contract, for its own interest, there is a risk that the insurance company could have engaged in a
prohibited transaction as well as a duciary breach. That
could result in the insurance company being requiredto restore any losses or other “amounts involved”
to the plan, together with interest and penalties. What should insurance companies and brokers do with
this information? I am not suggesting that the sale of individual annuity contracts to ERISA plans should beavoided, but instead that contracts should be designed,
and the sales process undertaken, with ERISA in mind.
Fred Reish is a partner in the rm’s Employee Benets &  Executive Compensation Practice Group, Chair of the Financial Services ERISA Team and a member of the Retirement Income Team. His practice focuses on duciary issues, prohibited transactions, tax-qualication and retirement income. He represents plans, employers and duciaries before the governing agencies (e.g., the IRS and the DOL); consults 
Fred Reish
 (310) 203-4047
Retirement Income Team www.drinkerbiddle.com
Retirement Income Team | January 2013
with banks, trust companies, insurance companies and mutual  fund management companies on 401(k) investment products and issues related to plan investments and retirement income; and represents broker-dealers and registered investment advisers on issues related to duciary status and compliance, prohibited transactions and internal procedures. Fred is a well-known speaker and author on ERISA topics.
InsuranceCompanies TakeSteps to Reduce Their Risks UnderGuarantees inOutstanding Variable Contracts
 The 2008-2009 nancial crisis, ongoing market volatility and persistently low interest rates have signicantly 
increased the risks and costs to insurance companiesof the lifetime income guarantee provisions in their
 variable annuity contracts. Insurance companies haveresponded in a number of ways. Some have exitedthe variable annuity market altogether. Others have
redesigned the products they offer by reducing guaranteerates, increasing fees, limiting available investment
options and/or tightening asset allocation programs.
 A few have taken steps recently to reduce theirrisks under outstanding contracts by:
refusing to accept additional purchasepayments from existing contract holders;
offering incentive payments to terminatelifetime income riders or exchange into new 
contracts with less generous benets;
offering to buy-out contracts in exchange
for an “enhanced” surrender value.
 These strategies raise a number of issues, including 
certain issues under the federal securities laws. Asnoted by Norm Champ, the Director of the SEC’sDivision of Investment Management (the Division),
these include suitability and the adequacy of risk 
For variable annuity contracts that
involve registration under the Securities Act of 1933(1933 Act) and the Investment Company Act of 1940 (1940 Act), other issues include determining the appropriate manner of reecting the strategy in1933 Act registration statements and complying with1940 Act provisions governing contract exchanges.
1933 Act Filings
  A company pursuing one of these strategies will have
to reect it in the offering documents for the affectedcontracts. Recent SEC lings suggest that a decision
to no longer accept purchase payments from existing 
contract holders may be included in a 1933 Act Rule497 supplement,
which typically is not reviewed
by the SEC staff and may be used as soon as led
 with the SEC, while offers of incentive payments
to exchange or buy-out contracts should be led as1933 Act Rule 485(a) post-effective amendments,
  which are subject to SEC staff review and become
effective after 60 days unless accelerated by the staff.
Sales of variable annuity contracts are subject to
Financial Industry Regulatory Authority (FINRA) Rule2111, the general suitability rule, and FINRA Rule2330, which applies specically to sales and exchangesof variable annuities. Rule 2330 requires that a selling 
broker-dealer have a reasonable basis to believe that
the customer has been informed of, and would benet
from, the various contract features, and that theparticular contract as a whole (including any riders) is
suitable for the particular customer. In the case of a
contract exchange, the suitability determination mustalso take into account whether the customer would incursurrender charges, be subject to a new surrender period
or increased fees or charges or lose existing benets,and whether the customer would benet from productenhancements and improvements in the new contract.
 The SEC staff has stated that offers to exchange existing contracts for newer contracts offering less generous
benets, as well as offering incentive payments for the
surrender of a contract or the termination of guaranteed
benet riders, raise suitability questions. Susan Nash,
the Associate Director of the Division, has pointed
By Bruce W. Dunne
 (202) 230-5425

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