The National Association of Insurance Commissioners (NAIC) is expected to appoint a group to work with federal agencies on persuading plan sponsors to accept that annuity providers are financially sound so they can meet Department of Labor (DOL) safe harbor and fiduciary requirements. A similar group has been in existence.
The new ERISA Retirement Income Working Group contemplated by the NAIC’s Life Insurance (A) and Annuities Committee would work with representatives of the DOL, the White House Council of Economic Advisors (CEA), the U.S. Department of the Treasury and any other appropriate federal agencies, in coordination with the NAIC Government Relations Leadership Council, according to a recent draft of the Life (A) Committee’s charges.
The goal is to ease plan sponsors concerns with annuities and their companies so they can feel like they are acting properly and prudently as fiduciaries, as the DOL safe harbor guidance requires.
Insurers would love to have lifetime guaranty and other annuity products become more of a suite of offerings in 401(k) plans but the DOL is of course interested in the solvency of the annuity providers.
“ERISA requires fiduciaries to engage in a prudent process, which entails gathering and assessing relevant information and making a rational decision based on that information. But what if the committee just selects a well-regarded insurance company that has a long history of providing annuity benefits to thousands of annuitants?,” asks an article by Frederick Reish and Bruce L. Ashton, partners at Drinker Biddle, Los Angeles.
Evaluating insurance companies can be done, Reish suggests, by looking at their regulation, the company’s ratings over time and commitment to annuities — if they are lifetime income guarantee, as assessed by the number of guaranteed income contracts and total assets in guarantees.
The plan fiduciary must comply with — and feel comfortable with — a number of safe harbor conditions including analysis, ability to make future payments and outside expert help, if needed, and to protect itself from liability.
There is still 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 few years now, the DOL and 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 accounts by facilitating access to, and use of, lifetime income products.
The NAIC has long been considering options that would help employers become more comfortable with the soundness of the annuity providers.
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.