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IRS allows use of annuities in target-date fund series

IRS allows use of annuities in target-date fund series

The Internal Revenue Service on Friday said defined contribution plans’ use of a target-date fund series containing deferred annuities won’t violate IRS rules against DC plans discriminating in favor of higher paid employees, as long as other IRS guidelines are followed.

Phyllis Borzi, assistant secretary of labor for the Employee Benefits Security Administration, endorsed the IRS rule as meeting the qualified default investment alternatives standards in the Employee Retirement Income Security Act as long as DC plan sponsors follow Labor Department rules on annuity contracts.

“This special rule provides that, if certain conditions are satisfied, a series of target-date funds in a defined contribution plan is treated as a single right or feature for the purposes of the non-discrimination requirements of the Internal Revenue Code,” the IRS said.

The IRS rule provided clarity to DC plan sponsors over target-date series that contain embedded annuities in some of their target-date funds designed for people nearing retirement. Although younger participants aren’t eligible for annuities in later-dated target-date funds, the IRS said a target-date series as a whole was acceptable as long as it met other standard IRS guidelines.

“This permits the target-date funds to satisfy those non-discrimination requirements as they apply to the rights or features even if one or more of the target-date funds on its own would not satisfy those requirements,” the IRS rule said.

In an letter Thursday, Ms. Borzi said the IRS ruling on the use of unallocated annuity contracts as fixed-income investments in target-date funds “would not cause the funds to fail to meet the requirements” of the DOL regulation governing qualified default investment alternatives.

The letter was sent to J. Mark Iwry, deputy assistant secretary for retirement and health policy, in the Treasury Department. Her letter and the IRS rule are posted on the DOL’swebsite.

“The selection of the unallocated deferred annuity contracts satisfies the requirements of … ERISA if the designated investment manager satisfies each of the conditions of the annuity selection safe harbor,” Ms. Borzi’s letter said.

“The plan sponsor, as the appointing fiduciary, must prudently select the investment manager and monitor the selection at reasonable intervals, in such manner as may be reasonably expected to ensure that the investment manager’s performance has been in compliance with the terms of the plan and statutory standards, and satisfies the needs of the plan,” the letter said.

Robert Steyer writes for Pensions & Investments, a sister publication of Business Insurance.

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