The Department of Labor has issued proposed regulations and a new interim final rule regarding the selection of annuities by defined contribution plans. This new guidance was issued in response to a directive in the Pension Protection Act of 2006. The new rules and guidance should make the selection of an annuity a more viable option for defined contribution plans.
In 1995, the DOL issued guidance relating to the selection of annuity providers for purposes of pension plan distributions. In general, this rule provided that plans must select the safest annuity available, unless under the circumstances it would be in the participants’ and beneficiaries’ interest to do otherwise.
In 2002, the DOL said that the safest available annuity rule would apply to both defined benefit and defined contribution plans.
The PPA directed the DOL to issue new regulations clarifying that the selection of an annuity as an optional form of distribution is not subject to the safest available annuity standard, but is subject to other applicable fiduciary standards.
The interim final rule simply amends the 1995 guidance to provide that the safest available annuity rule is applicable only to defined benefit plans. This rule is effective Nov. 12, 2007.
The proposed regulations provide safe harbor rules on the fiduciary considerations when a defined contribution plan selects an annuity provider and contract. The fiduciary requirements are met if the fiduciary:
(1) Engages in an objective, thorough and analytical search when it identifies and selects providers from which to purchase annuities.
(2) Determines either that the fiduciary had, at the time of the selection, the appropriate expertise to evaluate the selection or that the advice of a qualified, independent expert was needed.
(3) Gives appropriate consideration to information sufficient to assess the ability of the annuity provider to make all future payments under the annuity contract.
(4) Considers the cost of the annuity contract in relation to the benefits and administrative services provided under the contract.
(5) Concludes that, at the time of the selection, the annuity provider is financially able to make all future payments under the annuity contract and the cost of the annuity contract is reasonable in relation to the benefits and services to be provided under the contract.
(6) In the case of an annuity provider selected to provide multiple contracts over time, periodically reviews the appropriateness of that particular annuity provider. A fiduciary is not required to review the appropriateness of an annuity provider with respect to an annuity contract purchased for an individual participant or beneficiary.
For the purposes of items (3) and (4) above, a fiduciary must consider information pertaining to the following:
(1) The ability of the annuity provider to administer the payments of benefits under the annuity to the participants and beneficiaries and to perform other applicable services in connection with the annuity;
(2) The cost of the annuity contract in relation to the benefits and administrative services provided under the contract, taking into account the amount and nature of fees and commissions.
(3) The annuity provider’s experience and financial expertise in providing annuities of the type selected or offered.
(4) The annuity provider’s level of capital, surplus, and reserves available to make payments under the annuity contract;
(5) The annuity provider’s ratings by insurance ratings services and a consideration given to whether an annuity provider’s ratings demonstrate or raise questions regarding the provider’s ability to make future payments under the contract.
(6) The structure of the annuity contract and benefit guarantees provided, and the use of separate accounts to underwrite the provider’s obligations.
(7) The availability and extent of additional protection through state guaranty associations.
(8) Any other information that the fiduciary knows or should know would be relevant.
The interim final rule is published in the Federal Register at 72 Fed. Reg. 52004. The proposed regulations were published in the Federal Register at 72 Fed. Reg. 52021.
Joseph F. Stenken, J.D., CLU, ChFC, is an assistant editor with Tax Facts, a publication of the National Underwriter Company. He can be reached via email at .