Information Letter

January 6, 2004

Jon W. Breyfogle, Esq.
Groom Law Group, Chartered
1701 Pennsylvania Avenue, NW
Washington, D.C. 20006-5893

Dear Mr. Breyfogle:

This is in response to your request as to whether certain group annuity contracts would satisfy the definition of a "guaranteed benefit policy" contained in section 401(b)(2) of the Employee Retirement Income Security Act of 1974 (ERISA).

The contracts to which your request relates are group annuity contracts issued to defined benefit and defined contribution plans that are subject to ERISA ("contractholders"). Your request describes two classes of such group annuity contracts (Group Annuity Contracts). The first class of Group Annuity Contracts provides for one (or a very few) guarantee period(s) and terminates on the last maturity date. The second class of Group Annuity Contracts operates for an indefinite period, although guarantee periods mature under the terms of such Group Annuity Contracts. These guarantee periods are of indefinite number. Further, the second class of Group Annuity Contracts is terminated by the independent action of the contractholder, and not as a result of reaching a maturity date.

Both classes of Group Annuity Contracts provide for a specified rate of guaranteed interest for fixed periods. Principal and guaranteed interest may be withdrawn at book value on the maturity date of each guarantee period or for the payment of benefits upon certain events known as "Benefit Events". Benefit Events include termination of employment, retirement, disability or death as permitted under the plan that is being funded by the Group Annuity Contract. You represent that the Group Annuity Contracts, irrespective of class, operate as a bundle of guaranteed interest contracts with different maturity dates. Guarantee periods under the Group Annuity Contracts are always issued for a fixed number of years that is agreed to in advance by the contractholder. Generally, guarantee periods are for two, three, five or seven years. No guarantee period is offered for a period of less than two years.

You represent that amounts deposited under the Group Annuity Contracts are invested in a guaranteed interest contract (GIC) option supported by the insurer's general account assets. Once the maturity date and the interest rate is set for a GIC option, the interest rate and maturity date cannot be changed throughout that GIC option's guarantee period. The entire amount of the amount deposited and interest credited is guaranteed throughout the guarantee period. You represent that no non-guaranteed or excess interest is credited under the contracts.

You represent that guaranteed interest rates are established under one of two methods. Under the first method, the interest rate is set in advance of the guarantee period, and contributions may be made to the selected GIC option(s) throughout a defined period of no more than a year (Deposit Year). Under the second interest method, the participant or contractholder elects a guarantee period. Each deposit made during a Deposit Year is credited with the interest rate in effect on the date that deposit is received. This rate is made available in advance and cannot be changed throughout the entire guarantee period. At the end of the Deposit Year, the account receives a composite guaranteed rate that is determined using the weighted average of all deposits made during the Deposit Year. This composite guaranteed rate is guaranteed for the remainder of the guarantee period.

At the maturity date, participants or the contractholder (as appropriate under the plan and Group Annuity Contract) may transfer the value of the GIC option to other investment options available under the Group Annuity Contract or withdraw amounts from the Group Annuity Contract entirely. Amounts subject to transfer or withdrawal would consist of principal plus interest, without the imposition of either a market value adjustment (MVA) or withdrawal charge. Alternately, the participant or contractholder may elect to invest in a subsequent GIC option subject to a new fixed guarantee period with a new fixed guaranteed interest rate.

You represent that the Group Annuity Contracts provide the contractholder with the right to convert all or part of the Group Annuity Contracts' value to annuities for the payment of benefits. The insurer cannot unilaterally take away the right to purchase annuities. The Group Annuity Contracts set forth a schedule of guaranteed annuity purchase rates. In the event the contractholder elects to purchase one or more annuities for one or more participants or beneficiaries, the Group Annuity Contracts provide that the insurer will make available its then-current guaranteed annuity rates for that class of Group Annuity Contracts, if those rates are better than the guaranteed purchase rates.

You represent that meaningful base annuity rates are guaranteed for each GIC option started during the initial five years that the Group Annuity Contract is in effect. Thereafter, the insurer may prospectively change the annuity rate guarantees applicable only to future guarantee periods. Any new annuity rate guarantees will be permanent only for guarantee periods started while the annuity rate guarantee is in place, and annuity rates may be changed no more frequently than every five years.

You represent that participants may withdraw or transfer the value of the GIC options before the end of a guarantee period. Participant withdrawals for Benefit Events are always made at book value. While most Group Annuity Contracts are "benefit responsive" (i.e., they provide book value withdrawals upon Benefit Events), a few Group Annuity Contracts are not. A contractholder may negotiate with the insurer so that its Group Annuity Contract is not benefit responsive and, in return, may obtain a higher interest rate for the plans and the participants. Amounts transferred or withdrawn by participants for non-Benefit Events from a GIC option prior to the end of the guarantee period may be subject to a negative one-way MVA.

You represent that the contractholder also may have similar authority and can elect to terminate the Group Annuity Contracts and withdraw amounts in a single sum. Contractholder withdrawals from a GIC option in a single sum prior to the end of the relevant guarantee period may be subject to a negative one-way MVA. Alternatively, a contractholder who elects to terminate a contract may elect at the time of termination to hold amounts in the GIC options until the end of the guarantee periods and withdraw the amounts at book value.

You represent that the MVA formula and a description of the methodology used to determine the MVA are set forth in the Group Annuity Contracts. The insurer may not change the MVA formula or description of the methodology for any guarantee period that has already been established under the GIC option. The MVA may be changed for future guarantee periods with 60 days advance notice to the contractholder. Thus, the contractholder will have an opportunity to withdraw before the changed MVA takes effect. Before making an early withdrawal or transfer (i.e., prior to maturity date), the contractholder or participant may obtain an estimate of the amount of any MVA from the insurer. The amount of any particular MVA, however, would likely be different for different guarantee periods because of the different interest rates applicable to each guarantee period. Whether to make an early transfer or withdrawal that is subject to an MVA is solely the decision of the contractholder or participant.

You represent that, in addition to the MVA, the Group Annuity Contracts may place some modest limitations on withdrawals. In the event of unstable or disorderly market conditions, the insurer may delay payments not related to Benefit Events or annuity purchases for up to 270 days. This provision has never been utilized in the history of the company. You represent that an additional limitation may be placed on contractholders who want to transfer or cash out more than $25 million in a 12-month period. This right has never been utilized in the history of the insurer, and only the largest of the insurers customers would ever be subject to this potential limitation.

You represent that, under some Group Annuity Contracts, contractholders may enter into a separate written service agreement with the insurer to provide administrative and recordkeeping services to the plan. This service agreement specifies the nature of the services and applicable fees. Under these agreements, the contractholder may pay administrative and recordkeeping expenses directly to the insurer or may elect to have all or a part of the administrative and recordkeeping expenses paid from the Group Annuity Contract. At the election of the contractholder, these amounts may be deducted in the form of a charge allocated to each participant account or all (or part) of the charges may be deducted from the investment returns credited to the GIC option.

As provided in the Group Annuity Contracts and relevant service agreements, the insurer may propose increases in administrative and recordkeeping expenses, subject to at least 30 days advance notice. If the contractholder does not agree to the proposed increase, the contractholder may withdraw amounts in a GIC option subject to the MVA. However, the contractholder may keep amounts invested in a GIC option until the end of the guarantee period, during which time no expense increase will apply.

You have requested guidance on whether the Group Annuity Contracts, as described above, qualify as "guaranteed benefit policies" within the meaning of ERISA section 401(b)(2).

Section 3(21) of ERISA provides that a person is a fiduciary with respect to a plan to the extent they exercise any discretionary authority or control respecting the management or disposition of the assets of the plan. Section 404(a)(1) of ERISA provides that fiduciaries must discharge their duties with respect to the plan prudently and solely in the interest of the participants and beneficiaries. Section 406 of ERISA provides, in part, that a fiduciary with respect to a plan shall not cause the plan to engage in a transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan and that a fiduciary shall not deal with the assets of the plan in his own interest or own account or act in a transaction involving the plan on behalf of a party whose interests are adverse to the interests of the plan.

The application of sections 404 and 406 of ERISA will depend on the extent to which fiduciaries and parties in interest with respect to the plans deal with plan assets. Section 401(b)(2) of ERISA provides that in the case of a plan to which a guaranteed benefit policy is issued by an insurer, the assets of such plan shall be deemed to include such policy, but shall not, solely by reason of the issuance of such policy, be deemed to include any assets of such insurer. For purposes of this provision, the term guaranteed benefit policy means an insurance policy or contract to the extent that such policy or contract provides for benefits the amount of which is guaranteed by the insurer. Such term includes any surplus in a separate account, but excludes any other portion of a separate account.

The Supreme Court addressed the meaning of "guaranteed benefit policy" in its decision in John Hancock Mutual Life Insurance Co. v. Harris Trust & Savings Bank.(1) In that decision, the Court held that a contract qualifies as a guaranteed benefit policy only to the extent it allocates investment risk to the insurer. Specifically, the Court indicated:

[w]e hold that to determine whether a contract qualifies as a guaranteed benefit policy, each component of the contract bears examination. A component fits within the guaranteed benefit policy exclusion only if it allocates investment risk to the insurer. Such an allocation is present when the insurer provides a genuine guarantee of an aggregate amount of benefits payable to retirement plan participants and their beneficiaries.(2)

Applying the principles set forth by the Supreme Court, group annuity contracts, such as those described above, that provide for reasonable rates of return (taking into account any fees and costs charged against the contract), guaranteed for fixed periods, as well as a right to convert the funds into annuities at the guaranteed annuity purchase rates set forth in the contract, would, in the absence of other guidance, appear to constitute guaranteed benefit policies within the meaning of section 401(b)(2) of ERISA. This result would not, in our view, be altered by a prospective change by the insurer in annuity rates or in administrative expenses that could be paid from the guaranteed portion of the contract where there has been full disclosure to the contractholder regarding such change and the contractholder has the opportunity to withdraw before such change take effect.(3) This result would also not be altered by the inclusion of a market value adjustment for withdrawals before the end of the guarantee period where such market value adjustment formula accurately reflects the effect on the value of the contract's accumulation fund (aggregate net considerations credited to the contract) of its liquidation in the prevailing market for fixed income obligations taking into account the future cash flows that were anticipated under the contract, and the methodology used to determine the market value adjustment is fully disclosed in the contract and not subject to change for the guarantee period.

In addition, we note that no presumption should be drawn, from the limited interpretive guidance provided by this letter, regarding the status of other insurance policies under section 401(b)(2) of ERISA. We hope this information is of assistance to you.


Louis Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations


  1. 510 U.S. 86 (1993).

  2. 510 U.S. at 106.

  3. If a plan offers only a lump sum payment option for distribution, this result would also not be altered because a group annuity contract does not provide for the right to convert to an annuity.