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

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.”