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DOL Safe Harbor Clarification for Lifetime Guarantees Sought by NAIC, Life Insurers

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The National Association of Insurance Commissioners (NAIC) and the life insurance industry are trying to persuade a U.S. Department of Labor (DOL) advisory group — and the DOL — that state insurance regulators have a sound, conservative financial solvency regulatory regime that protects consumers in an effort to get annuity products, especially guaranteed lifetime income/withdrawal products, a safe harbor under ERISA’s fiduciary rules.

There is currently ambiguity surrounding the application of ERISA’s fiduciary rules to the selection of insurers and guaranteed lifetime income options, severely hampering life insurers’ inclusion of these products in defined contribution plans and creating concern among fiduciaries.

For a couple of years now, the DOL and the Department of the Treasury have been reviewing rules under ERISA and the plan qualification rules under the Internal Revenue Code to determine whether and, if so, how, the agencies could bolster the retirement security of participants in employer-sponsored retirement plans and in individual retirement arrangements (IRAs) by facilitating access to, and use of, lifetime income products. 

The NAIC is considering options that would help employers become more comfortable with the soundness of the annuity providers included in the DOL safe harbor as part of the tasks of a new working group.

At its summer national meeting in Atlanta, John Canary of the DOL’s Employee Benefits Security Administration (EBSA) provided an overview of the DOL lifetime income initiatives and areas where EBSA believes the DOL’s initiative intersects with the working group’s examination of contingent deferred annuities by the NAIC Contingent Deferred Annuity (A) Working Group.

Life insurers are banking on these GLWBs (guaranteed lifetime withdrawal benefits) products as an important strategic element in plan portfolios to provide certainty of needed income in retirement as people live longer, but there has been concern about insurers’ abilities to have the reserves necessary to meet the long-term obligations on these products. As life expectancy increases, ensuring income through retirement is crucial, the industry and regulators all agree, and they are trying hard to convince regulators of plan options to reduce obstacles for lifetime income products.

The NAIC, in recent testimony before the Advisory Council on Employee Welfare and Pension Benefit Plans, gave assurances of state regulatory supervision under the NAIC’s risk-based capital system, market conduct exams to protect consumers and model laws addressing suitability of annuity sales. The NAIC also addressed concerns about how states deal with troubled companies and how, in the event of an insolvency,  the state receivership laws give policyholders priority over most claimants, while state guaranty funds cover an insured’s financial obligation to policyholders, annuitants, beneficiaries and third party claimants up to statutory limits. 

The NAIC had been asked by the Council to “provide an overview of state insurance regulators’ oversight of the life insurance and annuities industry” to the panel. 

“Life insurance companies are subject to stringent laws and regulations, and state insurance regulators have broad authorities to identify and address issues before they threaten an insurer’s solvency or otherwise pose an issue for the protection of policyholder interests,” testified Julie Mix McPeak, commissioner of commerce and insurance for the State of Tennessee and chair of the NAIC’s Life Insurance and Annuities (A) Committee.

The strength of the state regulatory system “was evident during the financial crisis. While hundreds of banks failed, less than 20 insurers became insolvent. The system’s fundamental tenet is to protect policyholders by ensuring the solvency of the insurer and its ability to pay insurance claims,” Commissioner McPeak testified.

Life insurers say that if the experts on insurance solvency — the state insurance regulators with their army of actuaries — sign off on them, that should be good enough to make fiduciaries comfortable, and that the DOL should clarify the current safe harbor regulation to make sure it applies to these products.“We believe that the current safe harbor regulation should be clarified to ensure its application to the broadest array of guaranteed lifetime income products, such as guaranteed minimum withdrawal benefits, and sufficiently broad to encourage, rather than chill, innovation, as providers work to develop new products in response to employee concerns and preferences,” Srinivas Reddy, senior vice president, institutional income for Prudential Retirement testified before the Advisory Council on Aug. 30.

The hearing was titled “Examining Income Replacement During Retirement Years in a Defined Contribution Plan System.”

The Advisory Council, whose duties are to advise the Secretary and submit recommendations regarding the Secretary’s functions under ERISA, is chaired by Mildeen Worrell, former senior benefits tax counsel, U.S. House of Representatives Committee on Ways and Means.

Worrell said in a brief interview that the Council was sympathetic to fiduciaries’ reluctance to include these lifetime guarantee options without a perceived safe harbor in order that insurers can include living benefits riders in their annuity products without being liable in the future for their decisions, as long as they are made at the time when an insurer is in good standing. She said that some feel the fiduciary is being asked to meet an impossible standard, and that there are requests to revisit the same harbor to provide more clarity. Worrell said she could not comment on how a recommendation would be developed other than to say that the Council was sensitive to the issue and sympathetic.  

The Aug. 30 hearing centered around seeing if the time is right to encourage employer-sponsored plans and their fiduciaries to focus on de-cumulation, after focusing on accumulation in defined contribution plans for so long. Calls for the retirement income phase of the plans to be examined and developed further, so that the aging population who holds these plans don’t outlive their retirement, is a clarion cry for much of the retirement services industry.

The Council consists of 15 members appointed by the Secretary of Labor, each of whom must be qualified to appraise the programs instituted under ERISA. Three members are representatives of employee organizations (at least one of whom represents an organization whose members are participants in a multi-employer plan). Three members are representatives of employers. Three members are representatives of the general public. There is one representative each from the fields of insurance, corporate trust, actuarial counseling, investment counseling, investment management and accounting. The insurance representative is Richard Turner (2011-2013), deputy general counsel of the Variable Annuity Life Insurance Company (VALIC), based in Houston.

The NAIC had already created a working group in the spring to evaluate the solvency and consumer protections appropriate for contingent deferred annuities and added that GLWB (Guaranteed lifetime withdrawal benefit) products merit similar evaluation by the new working group. CDAs are said to resemble GLWB riders with variable annuities

Canary said the consumer protection issues being discussed by the NAIC group have some parallels to the issues the DOL is examining regarding the application of fiduciary duties to individuals that sell or make recommendations regarding annuities and other lifetime income products to ERISA plans and plan participants, according to NAIC minute notes.

Canary said many commenters have suggested that the DOL reexamine, and possibly revise, that safe harbor. He said a concern raised by these individuals relates to the safe harbor’s condition that the fiduciary must “appropriately consider” and “appropriately conclude” that the “annuity provider is financially able to make all future payments under the annuity contract.” 

Canary noted that the commenters essentially recommended replacing this condition with a different standard, such as whether the insurance carrier is licensed to do business in a particular state or minimum number of states. He said some commenters maintained that proof of licensure should satisfy the safe harbor on the theory that state insurance regulators examine solvency as part of the state licensing process.

Canary said, accordign to the NAIC minutes, that he received many comments backing state insurance requirements and financial standards.

EBSA is evaluating these comments and believes that the ERISA issues in this area intersect with issues the CDA is exploring regarding state insurance regulation of these products, the NAIC minutes said.

EBSA is interested in an ongoing dialogue with the NAIC, and the CDA Working Group in particular, on areas where the DOL’s lifetime income initiative intersects with issues being examined by the NAIC, Canary told the group in Atlanta.


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