DOL Clarifies Annuity Selection Safe Harbor Regulation

A regulation issued by the Department of Labor (DOL) in 2008 regarding the selection of annuity providers under defined contribution (DC) plans (safe harbor rule) provides plan fiduciaries with safe harbor conditions for the selection and monitoring of annuity providers and annuity contracts for benefit distributions.

However, in Field Assistance Bulletin 2015-02, the DOL says a recurring comment about the safe harbor rule is that employers remain unclear about the scope of their fiduciary obligations with respect to annuity selection under defined contribution plans. In particular, questions continue to be raised about how to reconcile the “time of selection” standard in the safe harbor rule—which embodies the general principle that the prudence of a fiduciary decision is evaluated under the Employee Retirement Income Security Act (ERISA) based on the information available at the time the decision was made—with ERISA’s duty to monitor and review certain fiduciary decisions.

According to the bulletin, “the time of selection” means:

• the time that the annuity provider and contract are selected for distribution of benefits to a specific participant or beneficiary; or
• the time that the annuity provider is selected to provide annuities as a distribution option for participants or beneficiaries to choose at future dates.

The DOL notes that the safe harbor rule provides that when an annuity provider is selected to offer annuities that participants may later choose as a distribution option, the fiduciary must periodically review the continuing appropriateness of the conclusion that the annuity provider is financially able to make all future payments under the annuity contract, as well as the reasonableness of the cost of the contract in relation to the benefits and services to be provided. The fiduciary is not, however, required to review the appropriateness of its conclusions with respect to an annuity contract purchased for any specific participant or beneficiary. 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.

According to the bulletin, the frequency of periodic reviews to comply with the safe harbor rule depends on the facts and circumstances. For example, if a "red flag" about the provider or contract comes to the fiduciary's attention between reviews (e.g., a major insurance rating service downgrades the financial health rating of the provider or several annuitants submit complaints about a pattern of untimely payments under the contract), the fiduciary would need to examine the information to determine whether an immediate review is necessary.

The guidance in the bulletin is limited to the selection and monitoring of annuity providers for benefit distributions from DC plans. But the DOL notes that it and the Department of the Treasury are engaged in a joint initiative to encourage the prudent consideration, offering, and use of lifetime income alternatives, including annuities, in retirement plans. The DOL is considering guidance about fiduciary selection and monitoring of annuity providers and contracts that are offered as investment options under DC plans as part of its project.