DOL Addresses Fiduciary Duty to Monitor Annuity Providers

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By Sean Forbes

July 13 — 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 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 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 story in this issue).

Annuity Safe Harbor

The guidance is part of the DOL 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 also is 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 is 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.

Discourages Annuities 

However, the DOL may wind up undermining its goal of incentivizing annuities, according to Joshua Gotbaum, former director of the Pension Benefit Guaranty Corporation and guest scholar at the Brookings Institution.

The guidance is also a direct response to the May Supreme Court decision in Tibble v. Edison, regarding a plan sponsor's duty to monitor investments, Gotbaum said. In that case, the court held that 401(k) participants who challenge high-cost investment options bring timely claims when they allege that fiduciaries failed to properly monitor investments during the preceding six-year period.

Citing the Supreme Court case in a footnote, the DOL said that “a fiduciary’s selection and monitoring of an annuity provider is judged based on the information available at the time of the selection, and at each periodic review, and not in light of subsequent events.”

Although the unanimous Supreme Court decision is plaintiff-friendly, the court declined to articulate what the continuing duty to monitor looks like, leaving the question to lower courts.

The DOL response to Tibble and clarification of the safe harbor provisions “is pernicious” in that it gives sponsors an additional incentive to not offer annuities, Gotbaum said.

“The department may think that their action encourages lifetime income annuities in 401(k) plans, but I think it does precisely the opposite. I think it makes clear that, if you’re worried about fiduciary duty, the way to avoid it is to stop offering annuities,” Gotbaum said.

To contact the reporter on this story: Sean Forbes in Washington at

To contact the editor responsible for this story: Phil Kushin at

Text of Field Assistance Bulletin 2015-02 is at

A copy of the DOL fact sheet is at

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