Research & Insights

Upgrading Non-Profit Retirement Plans: Limitations of Individual Annuity Contracts (Part 1 of 3)

May 08, 2018

By Joseph Potosky & Christopher Schaefer

Many academic and not-for-profit employers are operating retirement plans using a platform that is rooted in the past – the individual annuity contract (IAC). 

Retirement plan regulations have changed dramatically in the past 10 years, and so have the needs of employees. These changes make the old IACs out of date – and possibly out of compliance.

Let’s look at the 6 major disadvantages of IACs as compared to more effective and attractive investment options for plan sponsors and participants.

Fiduciary Risk – Most IAC plans were created over 10 years ago, before current fiduciary regulations were in force. Under today’s ERISA standards, plan fiduciaries can be held personally liable for high cost or inappropriate investments in their organization’s retirement plans. But, this fiduciary liability can be addressed by delegating full fiduciary responsibility to a Registered Investment Advisor (RIA) who is an ERISA 3(38) fiduciary, or by jointly sharing fiduciary responsibility with an investment professional who is a 3(21) fiduciary.

Excessive Costs – Depending on the investment share class used in the plan, a large majority of IAC plans have separate account fees ranging from as low as 0.75% to as high as 1.40% of participant account balances. New fiduciary regulations require employers to ensure that participants’ costs are reasonable. One way to get there: shift to an open architecture platform that can reduce fees to 0.30%-0.40%, and enable employers to engage more robust support services.

Administrative Burdens – IACs involve substantial administrative burdens. Each participant has an individual account requiring a signed application, which increases HR’s workload. Also, many of the IAC platforms typically require duplicate plans – one for participant contributions and another for employer contributions. This leads to dual Form 5500 filings and audits, often increasing employer workload and costs.

Limited Support and Service – IACs generally do not have a high level of service support, particularly for plans with under $10 million in assets. Employers are often “on their own,” with limited assistance for plan design, enrollments, distribution of required notices, and other administrative functions.

Few Investment Options – IACs limit the employee’s investment options to those preselected by the insurance company offering the plan. These limited options typically include illiquid fixed accounts with locked-in distribution periods, heavy use of proprietary funds, and target date/allocation funds that are static. This prevents employees from allocating their assets in a diversified manner that aligns with their risk tolerance. 

Limited Education and Investment Advisory Support – Many IAC retirement plans don’t offer sufficient plan education or individual investment advisory support. Along with more investment choices, today’s employees deserve better plan education and individual investment advice.

There are solutions to these common drawbacks of IAC plans. In our next post, we will discuss ways to upgrade outdated IAC plans to meet current regulatory, employer and participant needs.

To discuss how MV Financial can help your organization with its non-profit retirement plan, please Andrea Kessler, Senior Executive, at (301) 656-6545 or

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