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DOL clarifies annuities in 401(k)s, kind of

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The Department of Labor has issued new guidance in a field assistance bulletin to clarify existing safe harbor rules for immediate and deferred annuities in defined contribution plans.

The new guidance comes as the DOL is in the process of considering amendments to safe harbor regulations issued in 2008.

Those safe harbor standards said a plan trustee satisfies their fiduciary obligations under the Employee Retirement Income Security Act if they appropriately consider “information sufficient to assess the ability of the annuity provider to make all future payments under the contract,” among other safe harbor provisions relating to ERISA’s self-dealing, conflict-of-interest and reasonable fee provisions.

But questions as to a sponsor’s ongoing obligation to assess insurance companies’ ability to meet future obligations have been raised since the safe harbor was issued in 2008, and consequently encouraged some sponsors to shy away from offering annuity options in plan menus, at a time when the DOL and Department of Treasury have coordinated to encourage to the use of lifetime income options in plan design.

While the new bulletin, issued on the day the White House hosted its Conference on Aging, does not amend the 2008 safe harbor, it does address the “time of selection” clause in the regulation.

Read: Obama doubles down on DOL fiduciary rule

A sponsor is required to assess an insurance company’s future viability at the time the annuity products are selected for the investment lineup.

That assessment is based on the information available to sponsors at the time of selection of the annuities, “and not based on facts that come to light only with the benefit of hindsight,” according to language in the DOL’s new field bulletin.

Periodic reviews of the annuity selections are also required under the safe harbor rules, but the guidance is clear that sponsors don’t have to engage in the review of a product every time a participant selects the option from an investment menu.

The bulletin also clearly states that plan fiduciaries are no longer required to monitor an annuity provider after that company’s products are removed from a lineup.

That’s an important distinction, because plan participants may continue to receive payments from an annuity provider after a sponsor removes its product from a lineup.

Neither the original 2008 safe harbor or the recent bulletin give specific time frames for when, or how often a sponsor is required to review an annuity provider under ERISA’s on-going monitoring requirements, an issue highlighted in the recent unanimous Supreme Court decision in Tibble v. Edison.

That decision confirmed sponsors’ ongoing duty to monitor investments under ERISA, but it did not issue specific terms for how frequently sponsors need to review investments to satisfy ERISA’s requirements.

In the DOL’s most recent bulletin, it said, “the frequency of periodic reviews to comply with the safe harbor rule depends on the facts and circumstances.”

Ratings agency downgrades, or complaints from participants about delayed annuity payments are examples cited by the DOL’s bulletin that could trigger a sponsor to review its relationship with an insurance company.

But at least one pension expert thinks that with the DOL’s bulletin, the agency will only add to the sponsors’ fiduciary ambiguity over annuities, and potentially dissuade more sponsors from adopting them.

“The department may think that their action encourages lifetime income annuities in 401(k) plans, but I think it does precisely the opposite. I think it makes clear that, if you’re worried about fiduciary duty, the way to avoid it is to stop offering annuities,” said Josh Gotbaum, former director of the Pension Benefit Guaranty Corp., in an interview with Bloomberg.