ERISA Advisory Council Meeting Roundup: Annuities

Witnesses urged the Department of Labor June 13 to facilitate the use of annuities as lifetime income options at an ERISA Advisory Council meeting on examining income replacement for retirees with defined contribution plans, but stated that fiduciary duties relating to annuities remain uncertain.

“Annuities are important because they protect against long life,” said Olivia S. Mitchell an economist at the Pension Research Council and Boettner Center for Pensions and Retirement Security at the University of Pennsylvania's Wharton School in Philadelphia. “Half of people will outlive their life expectancy,” she said.

Mitchell suggested strategies for maximizing the value of annuities, including purchasing multiple annuities in different states and purchasing annuities around age 70.

However, uncertainty about fiduciary duties associated with annuities may prevent plan sponsors from encouraging plan participants to purchase them, said Michael L. Hadley, a partner with Davis & Harman in Washington.

Concerns exist among plan sponsors “that, in the unlikely event that an insurer is insolvent, the fiduciaries of the plan that originally offered that provider's annuity will be liable for not foreseeing the future,” Hadley said in his written testimony. But he also said that “there's really no reason that these concerns should exist.”

The Employee Retirement Income Security Act “requires prudence, not prescience,” Hadley said. “The law is not and should not be turning plan fiduciaries into stop-loss guarantors,” he said.