Using FIAs in defined benefit plans: it can and should be done

By Roccy Defrancesco

The Wealth Preservation Institute


Insurance companies over and over again have told advisors who want to use FIAs in defined benefit plans that they do not allow their products to be sold in such plans. As you will read, there is no technical reason a FIA can’t be used to fund a DB Plan.

I’ve been receiving an increasing number of frustrated inquiries about using fixed indexed annuities in defined benefit plans.

Why frustrated inquiries? Because insurance companies over and over again have told advisors who want to use FIAs in defined benefit plans that they do not allow their products to be sold in such plans. As you will read, there is no technical reason a FIA can’t be used to fund a DB Plan.

Let me start with the basics:

What is a DB plan?

It’s a qualified retirement plan that employers fund for employees. In the right setting, business owners can tax deduct $100,000 or more annually into the plan for retirement.

What kind of investments can be used in DB plans?

In traditional DB plans, there are no restrictions where the money can be invested.

What kind of investments should be used in DB plans?

Ones where the money is not at risk. Why? Because, unlike a defined contribution plan where employees can self-direct the money allocated to them in the plan (and suffer the consequence of bad choices), in a DB plan, the employer is guaranteeing that there will be money in the plan to pay a specific retirement benefit to employees in retirement.

There are many DB plans out there invested in mutual funds and are now in big trouble because they are way underfunded. Guess who will make up the difference if the investments don’t come back to required levels? The business owners.

Using annuities in DB plans

Today many DB plans are funded with traditional fixed annuities. The problem with them is that the returns are pathetic.

Using FIAs in DB plans

FIAs are ideal for DB plans. The money will not go backwards when the market tanks, gains are locked in annually (up to a cap) and you can even buy them with guaranteed income riders (ones that are superior to similar riders on variable annuities).

That should be the end of the article, right? Go pitch DB plans to help clients reduce taxes and build wealth for retirement and use FIAs to protect the money and grow it at the needed rate of return.

What’s the problem?

As I stated, virtually none of the insurance companies who sell FIAs allow their products to be sold in DB plans. In fact, I’ve heard advisors complain about this so much that I went out of my way to verify with several insurance companies specifically why they won’t allow their products to be sold in DB plans.

You know what I was told? There is no technical reason their products can’t be sold in DB plans; they just don’t allow it. I asked why and was told that it was too much of an administrative nightmare.

After doing some research, I found there are a handful of companies that allow their FIAs to be sold in DB plans if you have a third party administrator who can administer a plan correctly.

As always, I don’t give free ads for insurance companies in my articles so I won’t name them herein. However, if you don’t have time to do your own research to find the companies, feel free to send me a message for that information. Also, if you would like the contact information for the TPA who can properly admin a DB plan with FIAs, message me and I’ll get you that information as well.

Summary

There is a huge market out there for advisors who want to help clients with year-end tax planning by implementing DB plans. You can help your clients protect themselves by using FIAs, and now you know that the reason insurance companies don’t allow it has nothing to do with anything except their unwillingness to deal with the administration.

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