Art by June KimThe Obama Administration views how people draw down their retirement
savings to be just as important as encouraging them to save in the first place.
Consistent with this view, it is particularly concerned with the risk that
retirees will outlive their assets and wishes to mitigate this risk by motivating
plan sponsors and participants to annuitize retirement benefits.
If a DC plan sponsor is interested in offering lifetime
income options, it can do so on a voluntary basis, taking one of three
approaches. First, participants can be directed to external annuities outside
of the plan. Just as retirees can roll over their 401(k) plan account balance
to an individual retirement account, they may also roll them over to an
individual retirement annuity, leaving the selection of the IRA provider up to
Second, if the sponsor of a defined contribution plan wants
to be more proactive, it can provide, inside the plan, a group annuity that
gives participants both investment and distribution options.
Finally, the plan sponsor can offer an annuity distribution
option within the plan pursuant to which a plan fiduciary selects the annuity
provider. When a participant retires, his or her entire account balance is used
to pay the purchase price of a distribution annuity, either immediate or
deferred, and the annuity contract is distributed to the participant.
Choosing an annuity provider is a fiduciary function,
governed by such Employee Retirement Income Security Act (ERISA) standards of
conduct as prudence and loyalty. Uncertainty over the scope and duration of
this duty has made some sponsors reluctant to offer distribution annuities, but
in Field Assistance Bulletin (“FAB”) 2015-02, issued this past July, the Department
of Labor (DOL) has attempted to clarify certain issues in order to eliminate
In 2008, the DOL released a safe harbor specifically for DC
plans providing distribution annuities, with five components:
- The plan sponsor or other plan fiduciary must
observe general procedural prudence by engaging in an objective and analytical
search to identify and select the annuity provider. This search must avoid
improper influences, such as self-dealing and conflicts of interest;
- The plan fiduciary must use the information it
has gathered to assess the annuity provider’s ability to make all future payments
under the annuity;
- The plan fiduciary must also consider the
annuity’s cost (i.e., fees and
commissions) in relation to benefits and services under the annuity;
- The plan fiduciary must then draw appropriate
conclusions regarding points two and three based on the information obtained
through this process as of the time of the selection; and
- And, finally, expert advice must
be sought, as necessary.
FAB 2015-02 indicates that the DOL is considering amendments
to the safe harbor and offers some immediate clarifications.
The FAB reiterates that a fiduciary is not required to
review the appropriateness of its conclusions with respect to an annuity
contract once it has been purchased for a specific participant or beneficiary. It
goes on to note that the periodic review requirement does not mean that a
fiduciary must review the initial decision to retain an annuity provider every
time a participant or beneficiary elects an annuity as a distribution. While
regular, periodic reviews would be expected a more rapid response might be
required if annuitants have submitted complaints about untimely payments or
insurance rating agencies have downgraded an annuity provider’s rating.
The FAB also considers the duration of a plan fiduciary’s
monitoring duty in the context of two factual examples, the first involving an
immediate annuity and the second a longevity annuity option that does not begin
providing income until a specified date that is 10 to 15 years after
retirement). In the first example, the fiduciary periodically reviews the
provider of the immediate annuities, but at some point replaces this product
with a more competitive annuity from another provider. The FAB concludes that
the fiduciary’s monitoring obligation with respect to the first provider ends
when the plan stops offering its product.
Similarly, in the example involving the longevity annuity,
the FAB indicates that the duty to monitor the provider ends when longevity
annuities from that provider are no longer offered as a distribution option by
The FAB will be helpful to some plan sponsors and their
advisers, but more assurance may be needed to convince many more that they
would not be exposing themselves to additional liability by offering
distribution annuities through their plans.
Marcia S. Wagner is
an expert in a variety of employee benefits and executive compensation issues,
including qualified and non-qualified retirement plans, and welfare benefit
arrangements. She is a summa cum laude graduate of Cornell University and
Harvard Law School and has practiced law for 28 years. Wagner is a frequent
lecturer and has authored numerous books and articles.