Guest Article

(From the October 13, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

DOL Issues Final Fiduciary Safe Harbor for Annuity Purchases by Defined Contribution Plans

Responding to a statutory mandate, the Department of Labor has issued new rules intended to make annuities a more appealing benefit distribution option for 401(k) and other defined contribution plans. An oft-cited obstacle to defined contribution plans offering annuity options is the DOL's "safest annuity available" rule, which has been applied both to defined benefit and defined contribution plans. However, the Pension Protection Act ("PPA") of 2006 (P.L. 109-280) directed DOL to amend its guidance to clarify the "safest annuity available" rule does not apply to defined contribution plans. The DOL on October 7, 2008 issued final rules (73 FR 58445) to satisfy this mandate, as well as to implement a safe harbor for defined contribution plan fiduciaries to follow when purchasing a distribution annuity (73 FR 58447).

Background

The DOL in 1995 issued Interpretive Bulletin 95-1 to provide guidance on applying ERISA's fiduciary standards to selecting annuity providers. According to the Interpretive Bulletin, "... fiduciaries choosing an annuity provider for the purpose of making a benefit distribution must take steps calculated to obtain the safest annuity available, unless under the circumstances it would be in the interests of participants and beneficiaries to do otherwise." The Interpretive Bulletin appears to be directed towards defined benefit plans, but DOL Advisory Opinion 2002-14A explained the same fiduciary principles apply to defined contribution plan fiduciaries when selecting annuity providers.

ERISA requires defined benefit plans to offer an annuity as the default form of distribution. Defined contribution plans may offer an annuity as an optional form of benefit, but are not required to do so. Many defined contribution plans do not offer an annuity option, which has become a point of concern to many policymakers who worry about retirees outliving their savings. The "safest annuity available" standard likely is a reason defined contribution plans do not offer annuities, but it is not the only reason. Still, Congress apparently concluded it was enough of a reason to justify addressing the issue in the PPA.

Specifically, PPA § 625 directed DOL to "... issue final regulations clarifying that the selection of an annuity contract as an optional form of distribution from an individual account plan to a participant or beneficiary --

DOL last year issued an interim final rule to amend Interpretive Bulletin 95-1 to specifically limit its application to the selection of annuity providers for defined benefit plans. Additionally, DOL issued proposed regulations to establish a fiduciary safe harbor option for defined contribution plan fiduciaries to follow when purchasing a distribution annuity.

DOL Action

The DOL's final amendment to Interpretive Bulletin 95-1 specifies that it applies only "... to the selection of an annuity provider for the purpose of benefit distributions from a defined benefit pension plan ... when the pension plan intends to transfer liability for benefits to an annuity provider." This final amendment to the Interpretive Bulletin is effective beginning December 8, 2008.

The DOL's final safe harbor regulations provide a means by which defined contribution plan fiduciaries can satisfy the ERISA § 404(a)(1)(B) fiduciary standards when selecting "an annuity provider and contract for benefit distributions." In general, ERISA § 404(a)(1)(A) requires fiduciaries to "... discharge their duties with respect to the plan solely in the interest of the participants and beneficiaries" and to "act for the exclusive purpose of providing benefits to the participants and beneficiaries and defraying reasonable plan administration expenses." ERISA § 404(a)(1)(B) states fiduciaries must "act with the care, skill, prudence and diligence under the prevailing circumstances that a prudent person acting in a like capacity and familiar with such matters would use."

This ERISA § 404(a)(1)(B) safe harbor is available if the fiduciary:

The "time of selection" referred to in (iv), above, is either the time the fiduciary selects the annuity provider and contract for distributing benefits to a specific participant or beneficiary, or the time the fiduciary selects an annuity provider to provide annuity contracts at future dates to participants or beneficiaries. However, in the latter circumstance the fiduciary must periodically review the "continuing appropriateness" of the conclusions that the annuity provider is financially able to make all future payments under the contracts and the cost is reasonable in relation to the benefits and services provided.

The final regulations clarify the safe harbor is an optional means for satisfying ERISA § 404(a)(1)(B), and does not "establish minimum requirements or the exclusive means for satisfying these responsibilities."

Effective Dates

As noted, the amendment to Interpretive Bulletin 95-1 is effective December 8, 2008. The final safe harbor regulations are effective on that same date.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2008, Deloitte.