The Department of Labor issued Field Bulletin 2015-02 in July in an effort to make it easier for plan sponsors to provide participants with annuity distribution options in their retirement plan. Under ERISA, there are safe harbor provisions for sponsors who offer these options, but safe harbor relies on the fiduciary’s prudence in selecting and monitoring annuity providers. The Field Bulletin provides additional guidance on ensuring that the selection and monitoring process meets safe harbor requirements.
The DOL received recurring comments expressing confusion about the scope of fiduciary responsibility when it comes to the “time of selection” standard in the Safe Harbor rule. The Bulletin clarifies that the duty of prudence in selecting an annuity provider is based on the information available at the time of the initial selection, and is not affected by facts that come to light only with the benefit of hindsight. However, fiduciaries are still responsible for ongoing monitoring and periodic review of the annuity provider. While the Bulletin falls short of setting a time table for periodic reviews, it does state that the frequency of those reviews depends on the existing facts and circumstances. It suggests that a fiduciary may need to conduct an immediate review or increase the frequency of its periodic reviews based on any red flags that may come to its attention (such as a major insurance rating service downgrade or complaints about late payments from annuitants). The Bulletin also makes it clear that the duty to monitor an annuity provider ceases once the plan no longer offers annuities from that particular provider. Lastly, the DOL’s Field Bulletin confirms that the statute of limitations for breaches of fiduciary duty in connection with the purchase of annuities, including liability for imprudent selection or monitoring of an annuity provider, commences when plan assets are expended to purchase the contract.
Will we see more plans offer annuity options after this guidance? The DOL and the Department of the Treasury are engaged in a joint initiative to encourage the prudent use of lifetime income alternatives in retirement plans, so it’s likely that the trend to incorporate annuity and annuity-like products in retirement plans will continue to grow, albeit slowly as there are still hurdles for plan sponsors when it comes to the issuer and portability risks of including annuities as plan options.
In addition, it should be noted that the DOL expressly limits its guidance to immediate annuity distribution options and qualified longevity annuity contract (QLAC) options — it does not address how the ERISA safe harbor applies when a plan provides other guaranteed lifetime income options or features in a defined contribution plan. However, the DOL and Treasury are both considering issuing additional future guidance on the selection and monitoring of such offerings as investment options under defined contribution plans.
In the meantime, plan sponsors should work with their advisors to determine if and when annuity options would be a good fit for their plans.
To read the DOL’s complete Field Bulletin 2015-02, visit: