Guest Article

(From the September 17, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

DOL Releases Defined Contribution Plans from "Safest Annuity Available" Standard

Responding to a statutory mandate, the Department of Labor on September 11, 2007 announced 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 September 12, 2007 issued interim final rules (72 FR 52004) to satisfy this mandate, as well as a proposed safe harbor for defined contribution plan fiduciaries to follow when selecting annuity providers and contracts (72 FR 52022).

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 for many policymakers who worry about retirees outliving their savings. The "safest annuity available" standard almost certainly is a reason defined contribution plans do not offer annuities, but it is not the only reason. Still, Congress apparently concluded it is enough of a reason to justify addressing the issue in the PPA.

Specifically, PPA § 625 directs 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 --

The statutory deadline was August 17, 2007, the one year anniversary of the PPA's enactment.

DOL Action

The DOL's interim final rule satisfies the PPA's first requirement by amending Interpretive Bulletin 95-1 to specify 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 change is effective beginning November 13, 2007.

The DOL's proposed regulations would satisfy the PPA's second requirement by stating defined contribution plan fiduciaries must satisfy the ERISA § 404(a)(1) fiduciary standards when selecting annuity providers "... in connection with a benefit distribution, or a benefit distribution option made available to participants and beneficiaries under the plan." As summarized by the proposed regulations, 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." Additionally, 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."

But the proposed regulations would go farther than merely summarizing the basic fiduciary standards and reasserting those standards apply when a defined contribution plan fiduciary is selecting an annuity provider and purchasing an annuity, which has never been in question. The proposed regulations also would establish a safe harbor defined contribution plan fiduciaries could use to satisfy ERISA § 404(a)(1)(B) in these circumstances. This proposed safe harbor would be available if the fiduciary:

For purposes of meeting the requirements of paragraphs (iii) and (iv), the fiduciary must consider information pertaining to the following:

Effective Dates

As noted, the interim final rules are effective beginning November 13, 2007. The proposed regulations would become effective 60 days after being published in final form in the Federal Register. The DOL is accepting comments on both the interim final rules and the proposed regulations until November 13, 2007.

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, Taina Edlund 202.879.4956, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.