EBSA clarifies fiduciary duty in selecting, monitoring annuity providers for benefit distributions from DC plans

The Employee Benefits Security Administration (EBSA) has issued guidance clarifying the duty of fiduciaries in selecting and monitoring annuity providers to distribute benefits from 401(k) and other defined contribution (DC) plans under the annuity selection safe harbor provided in ERISA Reg. §2550.404a-4. Specifically, the guidance addresses concerns about liability by clarifying that an employer’s fiduciary duty to monitor an annuity provider generally ends when the plan no longer offers annuities from the annuity provider as a distribution option, not when the annuity provider finishes making all promised payments.

Background

In 2008, EBSA released regulations that provided a safe harbor for the selection of annuity providers by DC fiduciaries for benefit distributions. EBSA explains that it has received comments indicating that employers are still unclear about the scope of their fiduciary duties with respect to annuity selection under DC plans. Questions continue to be raised about how to reconcile the “time of selection” standard in the regulations with ERISA’s duty to monitor and review fiduciary decisions. For purposes of the safe harbor regulations, the “time of selection” means: (1) the time that the annuity provider and contract are selected for distribution of benefits to a specific participant or beneficiary; or (2) the time that the annuity provider is selected to provide annuities as a distribution option for participants or beneficiaries to choose at future dates. EBSA notes that questions have risen concerning (2) above. The fiduciary is not required to review the appropriateness of its conclusions with respect to an annuity contract purchased for any specific participant or beneficiary (i.e., (1) above). EBSA is concerned that this lack of clarity could lead plan sponsors to overestimate or otherwise misunderstand the extent of their fiduciary obligations, which in turn could create disincentives for plan sponsors to offer their employees an annuity as a lifetime distribution option.

Selecting/monitoring annuities

EBSA notes that, under ERISA §404, the prudence of a fiduciary decision is evaluated with respect to the information available at the time the decision was made – and not based on facts that come to light only with the benefit of hindsight. The conditions of the safe harbor are in line with this general principle of fiduciary prudence. Thus, 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.

EBSA clarifies that the periodic review requirement in the safe harbor regulations does not mean that a fiduciary must review the prudence of retaining an annuity provider each time a participant or beneficiary elects an annuity from the provider as a distribution option. The frequency of periodic reviews to comply with the safe harbor regulations, however, does depend on the facts and circumstances. If, for example, it comes to a fiduciary’s attention that a major insurance rating service downgrades the financial health rating of the provider, the fiduciary would need to determine whether an immediate review is necessary.

Two examples are provided by EBSA – one involving an immediate annuity and the other concerning a longevity annuity. For the immediate annuity that participants can elect when they retire, the employer’s obligation to periodically review the annuity provider ends when the employer stops offering annuities from that annuity provider as a distribution option. As to the longevity annuity, EBSA concludes that as long as the plan continues to offer participants the option to purchase a qualifying longevity annuity at retirement from the selected annuity provider, compliance with the safe harbor regulations requires the employer to periodically review the annuity provider. The duty to monitor ends when qualifying longevity annuities from the annuity provider are no longer offered as a distribution option.

ERISA’s statute of limitations

EBSA also addresses the statute of limitations under ERISA §413 concerning fiduciary liability for the selection of annuity providers and annuity contracts. ERISA §413 provides that an action for a breach of fiduciary duty may not be brought after the earlier of (a) six years after the date of the last action which constituted a part of the violation or, in the case of an omission, the latest date on which the fiduciary could have cured the violation, or (b) three years after the earliest date on which the plaintiff had actual knowledge of the breach. EBSA explains that, under ERISA §413, “a plaintiff must base his or her claims on actions or omissions that occurred within the six years preceding the lawsuit. Thus, for example, if the plaintiff bases his or her claim on the imprudent selection of an annuity contract to distribute benefits to a specific participant, the claim would have to be brought within six years of the date on which plan assets were expended to purchase the contract.”

State-sponsored retirement savings programs

EBSA has also issued a fact sheet in conjunction with the July 13, 2015 White House Conference on Aging hosted by President Obama that, besides briefly describing the clarification of the annuity selection safe harbor regulations, states that President Obama has directed the Department of Labor (DOL) to develop a regulation to support the growing number of states trying to promote broader access to retirement saving opportunities for America’s workers. The regulations, which will be proposed by the end of 2015, will clarify how states can move forward with state-sponsored retirement savings programs, including with respect to requirements to automatically enroll employees and for employers to offer coverage, in ways that are consistent with federal laws governing employee benefit plans. The DOL has a safe harbor regulation that provides that payroll deduction individual retirement accounts (IRAs) in private-sector workplaces are not ERISA-regulated employee benefit plans, so long as certain conditions are met. The new regulation for state-sponsored programs can address whether the state initiatives fit within the above safe harbor, while mitigating the ERISA preemption risk for states, employers, and others involved in state savings initiatives.

Source: EBSA Field Assistance Bulletin No. 2015-02. EBSA Fact Sheet – White House Conference on Aging.

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