Back in the early 1990s, after the fallout from several major insurance company failures, the industry scrambled for a new story to tell. Enter the ‘separate account’ — a clever rebranding of the same old insurance guarantee wrapped in a new package. Meant to reassure jittery retirement plan sponsors, these products were marketed as safer, more transparent, and more sophisticated than their general account predecessors. By 2000, most of the larger plans had moved on to synthetic diversified stable value as a prudent fiduciary choice. However, many mid-size to smaller plans, with a few large plans, have held on to this misleading product.

A Glossy Exterior, a Hollow Core

Separate accounts claim to offer a customized portfolio insulated from the insurer’s broader financial health. But the reality is far less reassuring. Plan sponsors hold nothing more than a contractual promise. They don’t own the assets, they can’t see inside the portfolio, and they have no control over the investment strategy. The insurer remains in full command — and the assets remain on its balance sheet. There are no strict investment guidelines, so if the annuity provider is downgraded, they can shift the high-quality assets supposedly in the Separate account ie, investment grade, and replace them with illiquid private credit.

Behind the Curtain: How the Spread Game Works

Here’s the secret sauce: insurers earn a ‘spread’ — the difference between what their investments yield and what they credit to plan participants. Sometimes that spread is over 2%, and that’s just what we can see. Insurers disclose yields on a selective basis, and often only once a year, making it impossible for fiduciaries to truly assess whether the rates offered are fair or competitive. One former Transamerica manager even described a ‘true-up’ day, where the safer, prettier assets are momentarily held just long enough to create a nice snapshot for clients. The rest of the month? Back to the riskier general account.

No Transparency, No Fiduciary Duty

Separate account contracts typically avoid any fiduciary obligations. There’s no obligation to disclose holdings, no responsibility to ensure investment prudence, and no transparency into fees, risks, or performance. The entire structure functions as a black box, with the insurer firmly in control. And if the insurer fails? Plan assets tied to a separate account are not guaranteed safe harbor — they could be frozen, impaired, or even lost in a liquidation.

Why Consultants Still Fall for It

Despite the red flags, many retirement plan consultants continue recommending these products. Why? Sometimes it’s a matter of inertia — separate accounts have been around so long that they’ve become familiar. Other times, it’s conflict: insurers often reward consultants through indirect compensation or other incentives. Whatever the reason, the end result is the same: plan participants are exposed to unnecessary risk while insurers quietly profit.

Better Alternatives Already Exist

Synthetic GICs — stable value products with transparent plan-owned bond portfolios and independent wrap providers — offer a far safer, more fiduciary-friendly alternative and are used by the majority of large plans. These products separate management, ownership, and strict transparent investment guidelines and crediting rate formulas.

The Illusion Persists

It’s time to call separate accounts what they are: a mirage. They simulate transparency. They simulate safety. But at their core, they rely on the same concentration of risk, lack of disclosure, and one-sided control that make general account annuities so problematic. Fiduciaries owe their participants better.

Accounting and Q&A NOTES

There are 3 tests to show that a Separate Account is a Fake

1. Lack of strict investment guidelines in the contract. This allows the insurance company, when they get in a liquidity credit squeeze, to swap out the higher grade bonds in the suppossed separate reference portfolio with alternative private credit, perhaps worth 80 cents on the dollar.
2. Lack of a strict crediting rate formula in the contract. While they will pretend to calculate a rate off of a reference portfolio of higher quality, that is mostly a game to justify the low yield. They control all the inputs to the formula with no transparency, so they can manipulate it to anything they want
3. No Downgrade provision. If it were really separate, they would not mind giving out.

PWC did a good description of a Separate Account Fixed Annuity in some 401 (k) 5500 financials

The Plan is a party to a fully benefit-responsive investment contract with the John Hancock Trust
Company, LLC (“John Hancock”) for the years ended December 31, 2023, and 2022. John
Hancock maintains the contributions in a general account. The account is credited with earnings
on the underlying investments and charged for participant withdrawals and administrative
expenses. The contract earnings represent the income from specific assets owned by John
Hancock in a pooled separate account. The contract issuer is contractually obligated to repay the
principal.

Maersk does not own any assets or a portfolio,  just a contract.   JH bases the rate they pay in the contract on a lower-yielding subset of assets they own in a separate account portion of the general account.  The general account is filled with investments ranging from 2% to 12%.    They carve out in a pretend portfolio some of the lower-yielding and lower-risk and come up with a rate of 3% pay it out. So they make a general account return of 7% overall and keep a 4% spread as profit.  The plan takes nearly half of the alternatives, but only gets the returns of the lowest 1/4.

There are many more examples of Separate Account examples (MassMutual Great Grey). In Chapter 32 on Separate Accounts in the book on US tax reserves for Life Insurers, Separate Account revenues are rolled up with General Account revenue on tax reporting. The DOL in 20111-07A disclosure clearly distinguishes Separate Account from Synthetic Stable Value. Blue Prairie in a 2014 study, found that the Separate Account had a 60% higher duration than synthetic, 4.42 vs. 2.53. See also the Mercer Nevada Presentation.

S&P, in general, gives the same crediting rates to General Account and Separate Account annuities from the same issuers. S&P analysts, in a chapter in the Handbook of Stable Value Investments, show that states differ so much in their credit protection for separate accounts that identical contracts could result in different ratings in different states:

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