The availability of annuity options under defined contribution plans has increased in recent years due to the shift from defined benefit to defined contribution plans. Fiduciaries, however, are often concerned with potential claims and lawsuits that could result from the decision to offer an annuity. Over the past several years, the U.S. Department of Labor (DOL) and Internal Revenue Service (IRS) have issued guidance to address these concerns and assist plan sponsors in satisfying their fiduciary obligations with respect to the selection and monitoring of annuity providers.
On July 13, 2015, the Department of Labor issued Field Assistance Bulletin (FAB) 2015-02, which clarifies and interprets a safe harbor under DOL Regulation Section 2550.404a-4 for fiduciaries when selecting an annuity provider for a defined contribution plan. Under the safe harbor, a fiduciary has an obligation to prudently select an annuity provider and prudently conduct periodic reviews of the annuity provider. FAB 2015-02 clarifies that a fiduciary does not have an obligation to periodically review an annuity provider after the plan stops offering an annuity distribution option.
Compliance with the safe harbor requirements satisfies a fiduciary’s obligation to prudently discharge his or her duties in accordance with Employee Retirement Income Security Act of 1974, as amended (ERISA) Section 404(a)(1)(B). The safe harbor rule is satisfied if the plan’s fiduciary:
Engages in an objective, thorough and analytical search for the purpose of identifying and selecting providers from which to purchase annuities. This process must avoid self-dealing, conflicts of interest or other improper influence and should, to the extent possible, involve consideration of competing annuity providers;
Appropriately considers information sufficient to assess the ability of the annuity provider to make all future payments under the annuity contract;
Appropriately considers the cost (including fees and commissions) of the annuity contract in relation to the benefits and administrative services to be provided under such contract;
Appropriately concludes 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; and
If necessary, consults with an appropriate expert or experts for purposes of compliance with these provisions.
FAB 2015-02 clarifies a fiduciary’s responsibilities under the safe harbor regulations when selecting and monitoring an annuity provider. It provides that a fiduciary’s prudent selection and monitoring of an annuity provider is judged based on the information available at the time of selection and at each periodic review, rather than on subsequent events. The fiduciary is also not required to review the appropriateness of its conclusions with respect to an annuity contract purchased for any specific participant or beneficiary.
FAB 2015-02 offers guidelines for satisfying the selection and monitoring requirements under the safe harbor rule:
The periodic review requirement does not mean that a fiduciary must review the prudence of retaining an annuity provider each time a participant or beneficiary elects to receive a distribution in the form of an annuity from the selected annuity provider.
The frequency of periodic reviews depends on the facts and circumstances. For example, a fiduciary may have an obligation to conduct an immediate review if he or she knows that the annuity provider is not making annuity payments or that a major insurance rating service downgraded the annuity provider.
Cessation of Duty to Monitor
FAB 2015-02 also provides the time at which a fiduciary’s duty to monitor an annuity provider ends. A fiduciary’s monitoring responsibility with respect to a particular annuity provider ends when a plan stops offering annuities from that annuity provider. This could occur if a plan replaces an annuity provider or stops offering an annuity distribution option.
FAB 2015-02 includes two examples for illustrative purposes. In the first example, the plan offers an immediate annuity offered by an annuity provider as a distribution option. The fiduciary’s duty to monitor ends when the fiduciary stops offering annuities from the annuity provider. In the second example, the plan includes a qualifying longevity annuity contract as a distribution option. Participants may purchase the annuity by making premium payments. Annuity payments commence at a specified time after a participant retires or when the participant turns 80 or 85. The fiduciary duty to monitor ends when qualified longevity annuities from the annuity provider are no longer offered as distribution options.
Statute of Limitations
FAB 2015-02 clarifies the statute of limitations applicable to a breach of fiduciary duty claim for imprudently selecting or monitoring an annuity provider. An action for a breach of fiduciary duty may not be brought after the earlier of (a) six years after the date of the last action which constituted a part of the violation or, in the case of an omission, the latest date on which the fiduciary could have cured the violation, or (b) three years after the earliest date on which the plaintiff had actual knowledge of the breach. FAB 2015-02 states, for example, that a claim for imprudently selecting an annuity contract would have to be brought within six years of the date on which plan assets were expended to purchase the contract. The statute of limitations does not continue running while a participant receives annuity payments.
The proliferation of annuity distribution options in defined contribution plans and the application of the duty to monitor them are still developing. Plan fiduciaries should be aware of the risks associated with offering an annuity distribution option in a defined contribution plan as well as the safe harbor framework established by the DOL to assist plan sponsors in satisfying their fiduciary obligations in the selection and monitoring of annuity providers.