DOL Addresses Fiduciary Duty to Monitor Annuity Providers


A retirement plan sponsor's fiduciary duty to monitor an insurer's solvency generally ends when the plan no longer offers an annuity as a distribution option, the Department of Labor said in new guidance.

The guidance clarifies that a defined contribution plan sponsor's fiduciary duty doesn't last all the way to the point at which the insurer finishes making all promised payments, the DOL said in Field Assistance Bulletin 2015-02, released July 13.

The DOL said it issued the guidance because of concerns that “confusion or lack of clarity” on the nature or scope of fiduciary responsibilities to monitor annuity selections might lead plan sponsors to “overestimate or otherwise misunderstand the duration or extent” of those duties and discourage them from offering annuities as a distribution option.

The DOL's annuity selection safe harbor, finalized in 2008 under 29 C.F.R. § 2550.404a-4, requires, among other things, that sponsors consider information sufficient to assess the ability of the  annuity provider to make all future payments under the annuity contract, and determine that, at the time of selection, the provider is financially able to make all future payments under the contract.

The safe harbor “in general wasn't helpful” due to its lack of clarity, Kathryn L. Ricard, senior vice president for retirement policy at the ERISA Industry Committee, told Bloomberg BNA. “Any attempts to clarify the guidance we welcome and find helpful.”

The new guidance was released the same day that the White House directed the DOL to issue by the end of the year regulations that would facilitate states' workplace-based retirement initiatives (see  related article in this issue).

Annuity Safe Harbor

The guidance is part of the DOL's focus on encouraging sponsors to offer lifetime income options such as annuities in defined contribution plans. Less than 20 percent of sponsors offer annuities, with the share of plans falling over time, the DOL said in a fact sheet accompanying the guidance.

The DOL is also working on proposed rules on lifetime income illustrations, a project in the works since it issued an advance notice of proposed rulemaking in 2013.

Ricard said the DOL also hinted in the guidance that it's continuing to work with the Treasury Department on lifetime income guidance and plan annuities to encourage plan sponsors that are considering offering such options. The agencies “want to cut down any trees in the way” of offering these options, she said.

The DOL guidance comes less than a week after Treasury and Internal Revenue Service action on the lifetime income front. On July 9, they said in Notice 2015-49  that they intend to amend the required minimum distribution rules under tax code Section 401(a)(9) to bar defined benefit plans from replacing various kinds of annuity payments with lump-sum payments, or other accelerated distributions in some circumstances.

Excerpted from a story that ran in Pension & Benefits Daily (07/14/2015).

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