Trust Officer's Advice to Plans Considering Buying Group Annuities: Document Everything

In implementing a policy for prudently selecting and purchasing a group annuity in which to transfer plan obligations, defined benefit plan fiduciaries need to document everything, a trust company official and employee benefits plan lawyer said.

William E. Ryan III, managing director and chief fiduciary officer with Evercore Trust Co. in New York, told Bloomberg BNA on April 1 that documentation is a key element in the annuity selection prudence process. He said that fiduciaries should document not only the questions they ask insurers, but the insurers' answers, the fiduciaries' conclusions reached from the plan's research—in detail—and even the negotiations the plan has with the insurer over the annuity contract's terms.

Ryan's look at the issue comes at a time when there has been a significant increase in de-risking activity among defined benefit plans, particularly plans' purchase of insurance company annuities that enable plans to transfer some or all of their plan obligations.

A recent report by the LIMRA Secure Retirement Institute said buyout sales of group pensions more than doubled in 2014 to $8.5 billion, from $3.8 percent the previous year.

Ryan said increases in de-risking activity over the past three years have been due, at least in part, to stock market gains and interest rate increases that have enabled plans to better afford the purchase of annuities without requiring large additional plan contributions from their plan sponsors.

Traditional De-Risking Strategies

During a session of a March 31 Practising Law Institute seminar, Pension Plan Investments 2015: Current Perspectives, Ryan said that all three traditional ways of de-risking, or minimizing the impact of plans' funding status on plan sponsors' balance sheets, have been increasing. These include:

  • liability driven investment (LDI), in which plans invest in fixed-income vehicles that provide an income stream that more closely matches the plan's actual and anticipated payment liabilities,
  • lump-sum payments to retirees, and
  • group annuities purchased from insurance companies.

Ryan said that plans that use any of these activities are involved in fiduciary activity requiring strict adherence to prudence standards under the Employee Retirement Income Security Act.

Excerpted from a story that ran in Pension & Benefits Daily (04/01/2015)

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