DOL Limits Plans’ QLAC Monitoring Responsibility

In a move designed to encourage companies and retirement plan sponsors to offer employees more annuity choices as a lifetime income distribution, the U.S. Department of Labor has clarified clauses pertaining to the selection and monitoring of annuity providers.

Employers had raised concerns about the Safe Harbor Rule’s “time of selection” standard, which guides fiduciary decisions based on information available at the time a decision is made.

Employers and plan sponsors were concerned that the time of selection standard clashed with the broader mandate within the Employee Retirement Income Security Act (ERISA), which calls for plan sponsors to monitor and review fiduciary decisions.

Under the Safe Harbor Rule, in the case of immediate annuities, an employer’s obligation to periodically review an annuity provider ends when the employer or plan sponsor stops offering annuities from that same provider, said DOL Director of Regulations and Interpretations John J. Canary, in a Field Assistance Bulletin posted to the department’s website last month.

In the second example governing deferred annuities, as long as a retirement plan offers participants the option to purchase a qualifying longevity annuity contract (QLAC) at retirement from an annuity provider, the employer must periodically review the annuity provider, Canary said.

The duty to monitor the annuity company ends, however, when the QLAC is no longer offered as a distribution option, he also said.

Canary’s guidance is outlined in Field Assistance Bulletin No. 2015-02 and contains the subject heading “Selection and Monitoring under the Annuity Selection Safe Harbor Regulation for Defined Contribution Plans.”

Offering retirement plan participants lifetime income distribution choices within defined contribution plans has gained popularity in recent years as millions of Americans, responsible for funding their own retirement, look to supplement their savings and Social Security.

As a result, annuities are starting to appear more frequently as a retirement plan option and last year the Treasury Department authorized companies to offer QLACs with retirement plans.

Canary said clarifications were necessary because monitoring and reviewing annuity selections under a defined contribution plan could cause employers, plan sponsors or their advisors to “overestimate or otherwise misunderstand the duration or extent of those fiduciary responsibilities.”

DOL estimates there are 638,390 defined contribution retirement plans in the U.S., the bulk of which are 401(k) plans, covering more than 88 million participants, according to the American Benefits Council.

Defined contribution plans held $6.8 trillion in assets at the end of last year, according to the Investment Company Institute.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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