A 401k plan that’s held with an insurance company often offers a product used by investors to gain positive returns called a Pooled Separate Account. While these accounts can offer options from many providers, they are all placed into one, managed account. This is another way to provide mutual fund options and are usually offered through a group annuity contract.

Considered as one of the most unique, and overlooked, investment vehicles in the 401k marketplace is the insurance company variable PSA. It may be one of the more difficult investment platforms to understand since it’s typically buried in group annuity contracts, which makes them an abomination to large portions of the advisor and broker-dealer industry. Something that also limits their popularity is that it requires an insurance agent license in order to sell them.

Alternative Investments

Benefit plans often have investment strategies in many different types of alternative platforms with differing levels of risk to the plan. The alternative investment strategies that are high-risk will often be a challenge to convert into cash and could have restrictions on the transfer of ownership interest. More often than not these alternative investment platforms are used by more experienced investors with long-term investment goals.

Other good examples of alternative investments are:

        Common-collective trusts (CCT)
        Stable Value investments
        Private equity funds
        Hedge funds
        Real Estate funds
        Funds of funds
        Securities lending

CCT’s and PSA’s are two of the most typical forms of alternative investment strategies. These platforms are combined funds that look like mutual funds, but are not registered with the Securities and Exchange Commission (SEC). The combined funds will typically be invested in mutual funds or other marketable securities, but the overall price per unit will normally be different from the value of the underlying securities because the fund may also house cash for the ability to cash out and the fees brought on by the fund are taken out of the fund value rather than billed separately to investors. Some CCT’s and PSA’s have no restrictions as to their investment strategy and can take part in riskier investments, such as derivatives, hedge funds, private equity funds, or similar investments.

Why is a PSA a good idea?

PSA’s are a good choice when it comes to investing because they leverage buying power by pooling assets and providing you the ability to use account minimums. This means that when you make a contribution to your plan, you’re putting money into a sub-account, which will be pooled with others to own shares of an underlying mutual fund. 

They provide scale to the small plan market by being able to cost-effectively consolidate the investment assets of an unlimited number of unrelated plans. Though you invest in mutual funds, your broker has the ability to manage the PSA in the same manner as a mutual fund without the attendant costs of a mutual fund. They can hire any investment manager to run the investments, including mutual fund managers who run large case investments.

NOTE: 403(b) plans must use a special type of PSA which are required to be registered under securities laws.