Selection of Annuity Providers–Safe Harbor for Individual Account Plans

SUMMARY: This document contains a final regulation that establishes a safe harbor for the selection of annuity providers for the purpose of benefit distributions from individual account plans covered by title I of the Employee Retirement Income Security Act (ERISA). This regulation will affect plan sponsors and fiduciaries of individual account plans and the participants and beneficiaries covered by such plans. Also appearing in today's Federal Register is a final rule amending Interpretive Bulletin 95-1 to limit the application of the Bulletin to the selection of annuity providers for defined benefit plans.

EFFECTIVE DATE: This final rule is effective on December 8, 2008.

FOR FURTHER INFORMATION CONTACT: Janet A. Walters or Allison E. Wielobob, Office of Regulations and Interpretations, Employee Benefits Security Administration, U.S. Department of Labor, Washington, DC 20210, (202) 693-8510. This is not a toll-free number.

SUPPLEMENTARY INFORMATION: On September 12, 2007, the Department published an interim final regulation (72 FR 52004) limiting the scope of Interpretive Bulletin 95-1, relating to the selection of annuity providers, to defined benefit plans, as directed by section 625 of the Pension Protection Act of 2006 (the PPA) (Pub. L. 109-280, 120 Stat. 780). On the same date, the Department published a proposed rule (72 FR 52021) that would establish a safe harbor for the selection of annuity providers for individual account plans. The Department received 10 comment letters in response to its request for comments. Set forth below is an overview of the final rule and the public comments submitted on the proposed rule. A final rule amending Interpretive Bulletin 95-1 also appears in today's Federal Register .

B. Overview of Final Rule and Comments

As discussed below, the substance of the final rule is very similar to the Department's proposed rule. The Department, however, has made changes to the proposed rule that clarify and simplify the safe harbor conditions, consistent with the suggestions of the commenters.

Scope of the Final Rule

Although restructured to simplify and clarify the rule, paragraph (a)(1) of SEC 2550.404a-4 of the final rule, like the proposed rule, describes the scope of the regulation. As described in paragraph (a)(1) of the final rule, the regulation establishes a safe harbor for satisfying the fiduciary duties under section 404(a)(1)(B) of ERISA in selecting an annuity provider and contract for benefit distributions from an individual account plan. Paragraph (a)(1) also includes a reference to SEC 2509.95-1 for guidance concerning the selection of annuity providers for defined benefit plans.

Several commenters expressed concerns about a safe harbor structure. Some suggested that a safe harbor is inconsistent with the prudent person standard and that the prudent person standard alone would more effectively reduce impediments to annuities as a distribution option under an individual account plan.

Other commenters asserted that the regulation should explicitly state that the generally applicable fiduciary standards apply outside the safe harbor and that a fiduciary can discharge its fiduciary duties in ways other than those prescribed by the regulation. In this regard, some commenters expressed concerns that fiduciaries may believe that they must meet the safe harbor conditions in order to satisfy their fiduciary duties if the regulation is not clearly identified as a safe harbor. Others argued that the safe harbor has the effect of establishing a heightened standard of review for the selection and monitoring of annuities that is unduly stringent and has limited relevance to many annuity investment and distribution options.

After careful consideration of these comments, the Department continues to believe that the safe harbor criteria will be useful to many plan fiduciaries when selecting annuity providers and contracts. The Department agrees, however, that a clearer statement concerning the nature of the safe harbor would be beneficial. Accordingly, the Department has modified paragraph (a) of the safe harbor to add new subparagraph (a)(2), clarifying that the regulation does not establish minimum requirements or the exclusive means for satisfying the responsibilities under section 404(a)(1)(B) of ERISA with respect to the selection of an annuity provider or contract for benefit distributions. Further, in an effort to minimize confusion concerning the scope of the safe harbor, as well as to simplify the regulation generally, the Department has eliminated paragraph (b) of the proposal, which discussed the general fiduciary standards of section 404(a)(1).

Safe Harbor

Paragraph (b) of SEC 2550.404a-4 of the final rule sets forth the conditions of the safe harbor. While the conditions for relief under the final safe harbor regulation are essentially the same as those contained in the proposal, some changes have been made to the ordering and language of the conditions for purposes of clarifying and simplifying the overall regulation.

As with the proposal, the first condition for safe harbor relief is that the plan fiduciary engage in an objective, thorough and analytical search for the purpose of identifying and selecting providers from which to purchase annuities. See paragraph (b)(1) of SEC 2550.404a-4 of the final rule. Consistent with other guidance from the Department, this process must avoid self dealing, conflicts of interest or other improper influence, and should, to the extent feasible, involve consideration of competing annuity providers.

Paragraph (b)(2) of the final rule, consistent with the proposal, requires that the fiduciary appropriately consider information sufficient to assess the ability of the annuity provider to make all future payments under the annuity contract.

Paragraph (b)(3), requires that the fiduciary appropriately consider the cost of the annuity contract, including fees and commissions, in relation to the benefits and administrative services to be provided under the contract. This paragraph is also consistent with the proposal, except that a reference to "fees and commissions" has been added to emphasize their importance to the fiduciary's decision making process.

Paragraph (b)(4), also like the proposal, requires that the fiduciary appropriately conclude 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.

Paragraph (b)(5) provides that, if necessary, the fiduciary should consult with an appropriate expert or experts for purposes of complying with the requirements of the safe harbor as set forth in paragraph (b). The proposal included as a condition that a fiduciary appropriately determine either that he or she had, at the time of the selection, the appropriate expertise to evaluation the selection of an annuity provider or that the advice of a qualified, independent expert was necessary. A number of commenters expressed concern that this requirement, as framed, would require all employers to engage independent experts to conduct an analysis of the provider and contract, even those that believed they had the requisite knowledge to make a prudent decision. Commenters believed this would be a particularly onerous requirement for small employers. As modified, the regulation makes clear that engaging an independent expert is not required in all cases. Rather, whether and to what extent, if at all, an expert may be needed is a determination to be made by the plan fiduciary taking into account what, if any, assistance the fiduciary needs to satisfy the conditions in paragraphs (b)(1)-(4) of the regulation.

Paragraph (c)(2) of the proposed regulation provided additional guidance concerning what information a fiduciary should consider in meeting the requirements for the safe harbor. A number of commenters argued that the provisions of paragraph (c)(2) were duplicative, confusing and unnecessary. The Department agrees that the paragraph, as part of the safe harbor, is not necessary and, in some instances, may be confusing. Accordingly, the final safe harbor does not include the listing of supplemental considerations set forth in paragraph (c)(2) of the proposal.

The Department believes that the general safe harbor conditions in the final regulation will be more useful for fiduciaries. Further, although an annuity provider's ratings by insurance ratings services are not part of the final safe harbor, in many instances, fiduciaries may want to consider them, particularly if the ratings raise questions regarding the provider's ability to make future payments under the annuity contract. The Department also believes that some information regarding additional protections that might be available through a state guaranty association for an annuity provider also would be useful information to a plan fiduciary, even if limited to that information which is generally available to the public and easily accessible through such associations, state insurance departments, or elsewhere.

Time of Selection

Commenters expressed concern that plan fiduciaries would have to comply with the conditions of the proposed safe harbor merely because they offered investment options through an annuity contract, without regard to whether a participant or plan fiduciary actually exercised the annuity feature of the contract. If so, commenters argued, investment products offered by insurers would be subject to what they perceived as a different, if not higher, fiduciary standard than that applied to the selection of other investment products. The Department does not intend, by virtue of the safe harbor, to establish different fiduciary standards for the selection of investment products. Rather, the safe harbor conditions apply solely to a fiduciary's decision to purchase a distribution annuity for an individual account plan. To clarify this point, the final regulation includes a new paragraph (c) that affords plan fiduciaries flexibility concerning when they must meet the safe harbor conditions in order to take advantage of the safe harbor. Paragraph (c)(1) of the final regulation provides that, under the safe harbor, the time of selection may be the time that the fiduciary selects the annuity provider and contract for distribution of benefits to a specific participant or beneficiary. Paragraph (c)(2) provides, in the alternative, that the fiduciary may meet the safe harbor conditions when the fiduciary selects an annuity provider to provide annuity contracts at future dates to participants or beneficiaries, provided that the selecting fiduciary periodically reviews the continuing appropriateness of the conclusion that 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, taking into account the factors described in paragraphs (b)(2), (3) and (5) of SEC 2550.404a-4 of the final rule. For purposes of paragraph (c)(2), a fiduciary is not required to review the appropriateness of this conclusion with respect to any annuity contract purchased for any specific participant or beneficiary.

--This is a summary of a Federal Register article originally published on the page number listed below--

Final rule.

CFR Part: "29 CFR Part 2550"

RIN Number: "RIN 1210-AB19"

Citation: "73 FR 58447"

Federal Register Page Number: "58447"

"Rules and Regulations"