The Employee Benefits Security Administration (EBSA) has released interim final and proposed regulations to comply with the Pension Protection Act of 2006 (P.L. 109-280; PPA) annuity provider selection provisions. Previously, both defined benefit and defined contribution plans were required to meet the “safest available annuity standard” in selecting an annuity provider to distribute benefits. The interim final regulations require only defined benefit plans offering an annuity option to meet the higher “safest available annuity” standard. The proposed regulations provide a new safe harbor applicable to annuity provider selection by fiduciaries of defined contribution individual plan accounts, such as 401(k) plan accounts.
Final regs limit “safest available annuity” standard to DB plans
In 1995, EBSA issued Interpretive Bulletin 95-1 (CCH Pension Plan Guide ¶19,972C), which provided six factors that should be considered by fiduciaries in evaluating an annuity provider’s claims paying ability and creditworthiness. The choice of an annuity provider for annuities from defined benefit plan benefits was required to meet the “safest available annuity standard” under the Interpretive Bulletin. Fiduciaries were subject to all otherwise applicable fiduciary standards, including the duty to act prudently and solely in the interest of the plan’s participants and beneficiaries. A portion of the Interpretive Bulletin was incorporated into the ERISA regulations at CCH Pension Plan Guide ¶14,746B.
Subsequently, EBSA expressed the view that the general fiduciary principles set forth in the Interpretive Bulletin applied equally to defined benefit and defined contribution plans (see ERISA Advisory Opinion No. 2002-14A at CCH Pension Plan Guide ¶19,989I ). Defined contribution plan fiduciaries were, therefore, bound by the same fiduciary standards of care as defined benefit plans and were required to use the six factors from the Interpretive Bulletin to analyze an annuity provider’s claims paying ability and creditworthiness.
In 2005, a Working Group on Retirement Distributions & Options, which had been created by the ERISA Advisory Council, concluded that participants and beneficiaries in defined contribution plans faced too much risk in receiving lump sum payments. The Council recommended that EBSA revise the Interpretive Bulletin to facilitate the availability of annuity options in defined contribution plans.
Furthermore, the PPA directed the Secretary of Labor to clarify that the selection of an annuity contract as an optional form of distribution from an individual account plan is not subject to the “safest available annuity standard” under the Interpretive Bulletin, but is subject to all otherwise applicable fiduciary standards. The interim final regulations, accordingly, limit the application of the Interpretive Bulletin to defined benefit plans.
Proposed regs provide safe harbor for DC plans
The proposed regulations provide a safe harbor for the selection of annuity providers for the purpose of benefit distributions from individual account plans such as 401(k) plans. “The new safe harbor rules will help fiduciaries in prudently choosing annuity providers for distributions from their 401(k)-type plans,” said Bradford P. Campbell, Assistant Secretary of Labor for EBSA.
Consistent with the requirements generally applicable to the selection of service providers, the proposed regulations would require the fiduciary to engage in an objective, thorough, and analytical search for the purpose of identifying and selecting providers from which to purchase annuities. The fiduciary responsible for the selection of the annuity provider would have to consider information sufficient to assess the ability of the annuity provider to make all future payments under the annuity contract.
Specifically, the proposed regulations provide guidance regarding how a fiduciary can meet the requirements of the safe harbor. For example, the regulations address the consideration of:
- the ability of the annuity provider to administer the payment of benefits under the annuity to participants and beneficiaries;
- the cost of the annuity contract in relation to the benefits and administrative services being offered;
- the annuity provider’s experience and financial expertise in providing annuities of the type selected or being offered;
- the structure of the annuity contract and benefits provided and the use of separate accounts to underwrite the provider’s benefit obligations;
- the annuity provider’s level of capital, surplus, and reserves available to make payments under the annuity contract;
- the annuity provider’s rating by insurance rating services; and
- the availability of additional protections through state guaranty associations and the extent of their guarantees.
Comments on the proposed regulations must be submitted by November 13, 2007 to the Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5669, U.S. Department of Labor, 200 Constitution Avenue, N.W., Washington, DC 20210, Attention: Annuity Regulation; or via the Internet to http://www.regulations.gov.
Reprinted with permission. © CCH