Duty to monitor Annuity Provider ends after annuity product no longer available as a plan distribution option

In 2008, the Department of Labor (“DOL”) issued regulations providing guidance on a plan fiduciary’s duties in selecting and monitoring annuities offered as a plan distribution option in 401(k) and other defined contribution plans. Despite the regulations, there continues to be confusion regarding the nature and scope of fiduciary responsibilities to act prudently in making, monitoring and reviewing annuity selections under a defined contribution plan. Therefore, the DOL issued additional guidance on this issue.  

Similar to selecting other plan investments, choosing an annuity provider is a fiduciary function, subject to ERISA’s standards of prudence and loyalty.  The current regulations provide a safe harbor rule that is satisfied if the plan’s fiduciary:

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1. 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;
2. Appropriately considers information sufficient to assess the ability of the annuity provider to make all future payments under the annuity contract;
3. 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;
4. Appropriately concludes that, at the time of the selection [emphasis added], 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
5. If necessary, consults with an appropriate expert or experts for purposes of compliance with these provisions.

The same requirements apply whether the annuity is being purchased for a specific participant for current distribution or offered as an under the plan for later selection by a plan participant.

The New DOL guidance clarifies that fiduciary’s selection and monitoring of an annuity provider is judged based on the information available at the time of the selection, and at each periodic review, and not in light of subsequent events. The periodic review requirement in the DOL’s safe harbor rule does not mean that a fiduciary must review the prudence of retaining an annuity provider each time a participant or beneficiary elects an annuity from the provider as a distribution option.  The frequency of periodic reviews to comply with the Safe Harbor Rule depends on the facts and circumstances. In general, absent information that would alert a fiduciary to a potential problem, review of the annuity provider should at the same time as the review of other plan investment option.

The DOL also clarified the applicability of the statute of limitation applicable to actions by participants and beneficiaries against plan fiduciaries under ERISA for breaches of duty in connection with the purchase of annuities,including the imprudent selection and monitoring of annuity providers.

Many employers are considering offering immediate and/or deferred annuity contracts as distribution options and the government encourages that option as a way to assure lifetime retirement benefits. Plans that offer the option to purchase annuity contracts will welcome the DOL’s clarifications.