Fixed Accounts - Why the Restrictions?

If you talk to 403(b) plan participants and plan sponsors across the country, you’ll likely hear some mixed opinions about any fixed account investment option offered in their plans.?Some totally love it because they’ve been the recipient of a high interest rate for a long time, and some may have a sour taste because they experienced a transfer restriction at some point and felt “locked in.”?I’ve received a lot of questions about fixed accounts over the years, as sponsors and participants try to understand how it works, what the benefits are (short and long-term) and why so many have liquidity restrictions.?The structure of some fixed accounts can also appear to be very complicated especially when there are many share classes available, and I’ve found that most of the issues come when the fixed account contract is not fully understood before it’s utilized as an investment option.?By issues, I mean the liquidity restrictions hitting at an inopportune time.?Inevitably, there will be participants who transfer most or all of their account into the fixed account option with the intention of trying to time the market and invest it all back into equities after a short time period.?Once they find out there are liquidity restrictions and their money cannot fully transfer out immediately, it can cause some frustration.?On the flip side, I’ve run into many happy participants who invested in the fixed account because they wanted safety of principal and a good, steady interest rate and they didn’t mind the liquidity restrictions at all.?Again, it all comes down to fully understanding the details before investing in them.

First off, we should discuss why fixed accounts are so prevalent in 403(b) plans.?A big reason for that is the global investment restriction currently in place.?403(b) plans can only offer mutual funds, annuities, and insurance-based investment products. ??They cannot currently offer any investment considered a Collective Investment Trust (CIT), which happens to be what a lot of Stable Value investments are categorized as.?This looks like it will be changed in the near future if Secure Act 2.0 is passed, but for now, these are still restrictions on place.?So that does limit the types of principal-protected investments that can be offered and also explains why fixed accounts were created.?To qualify as an insurance-based investment and are generally tied to an insurance company’s general account.?

Second, we should discuss how they work and why liquidity restrictions are so common.?As I mentioned, fixed accounts are typically insurance general account-based products.?The general account is where insurance companies typically hold all of their premium payments, and they can invest it in a multitude of different areas.?They typically investment in more conservative assets such as long-term treasuries, high grade bonds and real estate, which is what allows them to collect a more predictable return.??This in turn allows them in many cases to offer a guaranteed minimum interest rate on their fixed accounts. But to keep the general account asset level predictable with healthy exposure to longer-term assets, they put liquidity restrictions in place so they won’t have to fear a mass exodus of liquidations at any given time.?The higher the minimum interest rate, the higher the liquidity restriction.?This is the trade-off to receiving a higher guaranteed minimum interest rate.?

These fixed accounts can actually be a great option to offer participants but as I mentioned earlier, the big issue is sponsors and participants not fully understanding them prior to investing in them.?If the liquidity issues are explained up front and participants understand that it’s a long-term retirement savings option, this will head off any future confusion and frustration.?For some, getting a high minimum interest rate is not a bad trade-ff for the liquidity restrictions.?Also, some of the fixed accounts will also offer what they call a “bonus rate,’ which is an increased rate for participants who’ve invested in the fixed account for a long period of time and choose to annuitize their money within it at retirement.?I would encourage all sponsors to dig into their fixed account contracts and as a fiduciary make sure you fully understand it.?Keep an open communication with your Provider on it as well, as there are various versions of fixed accounts that they can offer so if the current structure doesn’t work for you and your employees, they likely can offer you an alternative share class that will work.?

Thanks again for reading this week!?My apologies about miss last week, but I was out serving at my two oldest kids beach retreat through our church.?If you have any questions or if I can ever be a resource, please don’t hesitate to reach out!

About Strategic Retirement Partners?

Strategic Retirement Partners is a nationwide independent retirement plan consulting services firm dedicated to providing guidance in decision-making and problem solving to employers and sponsors of retirement plans. With 23 offices from coast to coast, Strategic Retirement Partners currently consults on over 975 corporate and non-profit plans and over $16.8 billion in assets as of January 1, 2022.?

Securities offered through LPL Financial, Member FINRA/SIPC. For hyperlinks to FINRA and SIPC, please refer to ‘See Contact Info’ section in my Linked In profile. Investment advisory services are offered through Global Retirement Partners, an SEC Registered Investment Advisor. Global Retirement Partners and Strategic Retirement Partners (SRP) are separate entities from LPL Financial.