Compliance May 25, 2023

House Committee Approves Bill Allowing CITs in 403(b) Plans

The proposal would provide the needed changes to securities laws that were missing from SECURE 2.0.

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The House Committee on Financial Services voted on Wednesday to advance the Retirement Fairness for Charities and Educational Institutions Act. The bill would amend securities laws such that collective investment trusts will be allowed in 403(b) plans.

The bill, initially proposed by Representative Frank Lucas, R-Oklahoma, passed the committee by a vote of 35-12. Lucas explained that his bill would bring parity between 403(b) and 401(k) plans. Lucas argued 403(b) plans are at an unfair and unjustified disadvantage relative to other plans, because they are not permitted to invest in CITs (which can be cheaper or more flexible to offer than mutual funds), which only serves to discriminate against teachers and charity workers who make disproportionate use of 403(b)s.

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Representative Wiley Nickel, D-North Carolina, a co-sponsor of the bill, said there is “no reason that people teaching our children and caring for our sick should be paying millions more in investment costs than private sector employees.”

Lucas noted that the substance of the bill was present in the House version of the SECURE 2.0 Act of 2022, known then as the Securing a Strong Retirement Act, which was later bundled into the larger legislative package. The House version passed Ways and Means unanimously in 2022, but due to committee jurisdiction, Ways and Means was only able to amend the relevant tax law, not the securities laws, leaving CITs excluded from 403(b)s.

Representative Sylvia Garcia, D-Texas, offered an amendment to Lucas’s bill which was defeated 26-21. The amendment would have opened 403(b)s up to CITs, but only if they are ERISA-governed 403(b)s. She explained that in order to achieve true parity, 403(b) plans should have the same protections that 401(k)s have under ERISA, and allowing unregistered funds into non-ERISA plans would remove “meaningful safeguards.”

Lucas answered that 403(b) plans can offer many of the same investment products as 401(k)s and that non-ERISA 457s are not prohibited from using CITs either. He said debating which plans should be ERISA-governed is a separate debate and should not hinder passage of this bill.

The Investment Company Institute and the Insured Retirement Institute expressed strong support for the bill. The IRI said it would place nonprofit employees on a “level playing field,” and the ICI said it “would expand opportunities for American savers and investors.”

The bill must now pass the full House before advancing to the Senate.

Data and Research May 25, 2023

Pension Risk Transfers Continue to Skyrocket in Q1

PRT sales have broken records yet again, as the market grew another $6.3 billion in the first quarter of this year, according to LIMRA.

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In the first quarter of 2023, total U.S. single premium pension risk transfer sales were $6.3 billion, a rise of 19% from Q1 2022, according to new data from LIMRA. The total was the highest first-quarter mark recorded, according to LIMRA’s U.S. Group Annuity Risk Transfer Sales Survey.  

The buy-out sales of $6.3 billion were 138% higher than the dollar amount sold in Q1 2022, and LIMRA reported that there were 116 buy-out contracts sold in Q1, up 55% from Q1 2022. 

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There were no new buy-in contracts sold. Q1 2022 saw $5.3 billion in sales split about evenly between single premium buy-ins and buyouts. 

“Traditionally, first quarter sales tend to be sluggish. This year, buy-out sales posted strong results in both premium and volume, demonstrating broad growth across the industry,” said Mark Paracer, assistant research director of LIMRA’s Secure Retirement Institute, in a statement. “With three new carriers entering the market and growing plan sponsor awareness and interest, sales activity is expected to be strong in 2023. LIMRA is forecasting sales to surpass $35 billion.” 

The year’s second quarter got a boost from the $8.05 billion transfer on May 3 by AT&T to insurer Athene Holding Ltd., owned by Apollo Global Management. The insurer is to start making payments to approximately 96,000 AT&T beneficiaries in August, according to securities filings.

“Under the group annuity contracts, Athene, through its wholly-owned subsidiaries Athene Annuity and Life Company and Athene Annuity & Life Assurance Company of New York, made an irrevocable commitment, and will be solely responsible, to pay the pension benefits of each transferred participant beginning with their August 2023 pension payments. The transaction does not change the amount of pension benefits payable to the” participants being transferred, according to the announcement.

That annuity purchase was funded “directly by assets of the plan via the pension trust underlying the Plan and required no cash or asset contributions by AT&T,” the filing stated.

Insurers Global Atlantic Financial Group, Reinsurance Group of America Inc. and American National Insurance Corp. entered the U.S. PRT market last year, bringing the total number of insurers to 21. Because not all insurers participate in all PRT transactions, Aon said in its March U.S. Pension Risk Transfer report that the addition of these new insurers will provide more services to different PRT solutions.  

LIMRA analysts found that single premium buy-out assets reached $239.5 billion in this year’s first quarter, up from 25% from the prior year. In addition, despite the lack of new sales, single premium buy-in assets were $5.9 billion, down 8% from Q1 2022. 

A group annuity risk transfer product, such as a pension buy-out product, allows an employer to transfer all or a portion of its pension liability to an insurer. In doing so, an employer can remove the liability from its balance sheet and thus reduce the volatility of its funded status.  

Paracer predicts that rising interest rates and escalating costs to maintain pension funds will likely drive plan sponsor interest in risk transfers in 2023. 

“As the market competition increases, we expect to see carriers introduce innovative solutions and new partnerships to win new deals in 2023,” he stated. 

In related news, the hospitality workers’ union UNITE HERE, which represents 300,000 workers, recently warned hundreds of defined benefit pension funds of the potential risks involved with conducting PRTs with private equity-backed insurers.  

The union’s letter claimed that Brookfield Reinsurance Ltd., which owns American National Insurance, used a strategy that involves acquiring blocks of annuities and group annuities and then replacing a portion of the safest assets with complex or illiquid investments such as private loans.  

When looking at a prospective group of annuity providers, the union urged pension funds to carefully review the investment practices of prospective group annuity providers, including the degree to which they used affiliated offshore reinsurance and their track record as risk managers of long-duration liabilities. 

A NISA Investment Advisors study argued that there is a 14% range in credit risk costs among nine PRT insurance providers.  

Marcia Wagner, owner of The Wagner Law Group, says that under the Employee Retirement Income Security Act of 1974, fiduciaries are required to gather all pertinent facts about a particular investment, including an annuity, evaluate them and make a prudent decision from there.  

The Department of Labor requires ERISA fiduciaries to select the “safest available annuity” provider when completing a pension risk transfer and continues to warn that reliance solely on ratings provided by rating services are not sufficient to determine the creditworthiness of an insurance company.  

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