In Field Assistance Bulletin (FAB) 2015-02, the Department of Labor (DOL) clarified that an employer's fiduciary duty to monitor an insurer's solvency ends when the insurer's annuities are no longer offered as a distribution option in the defined contribution (DC) plan. There had been some concern that confusion about fiduciary responsibilities might have been creating disincentives for plan sponsors to offer annuities in their plans.
The FAB also explains how the DOL will apply the recent Supreme Court decision in Tibble v. Edison International regarding the six-year statute of limitations on selecting an annuity provider for DC plans.1
The guidance is part of the Obama administration's continuing efforts to encourage employers to offer lifetime income annuities as distribution options in their 401(k)-type plans. Only 12% of employers currently offer lifetime income options in their DC plans, and when such options are offered, less than 5% of workers take them, according to research by Towers Watson.2
General discussion and observations
Under the current safe harbor rule for selecting annuity providers, the plan's fiduciary must, among other things, "appropriately conclude that, at the time of the selection [emphasis added by the DOL], the annuity provider is financially able to make all future payments under the annuity contract." The FAB assures fiduciaries that their selection and monitoring of an annuity provider will be judged based on the information available at the time of the selection and at each periodic review — and not in light of subsequent events (or hindsight).
As noted above, under FAB 2015-02, a DC plan fiduciary's duty to assess and monitor the solvency of annuity providers ends when the plan no longer offers that provider's annuity product as a distribution option. This might occur when the annuity provider is replaced or when the plan is properly and effectively amended to eliminate the annuity distribution option.
The guidance also addresses the frequency of periodic reviews of an insurer's solvency. As with many lines drawn by the DOL, review frequency depends on the facts and circumstances. A fiduciary need not review the prudence of retaining an annuity provider each time a participant or beneficiary elects an annuity from the provider as a distribution option, according to the FAB. However, it gives two examples of when an immediate review of an insurer is called for:
- A major insurance rating service downgrades the provider's financial health rating
- An annuitant complains about a pattern of untimely payments
Six-year statute of limitations
The FAB provides that claims for breach of fiduciary duty can arise only while the fiduciary is obligated to monitor the provider. Absent fraud or concealment, claims of fiduciary actions or omissions that are alleged to violate the Employee Retirement Income Security Act (ERISA) generally must be litigated within six years of the act or omission. For example, if a plaintiff based a lawsuit on the imprudent selection of an annuity contract, the claimant would have to bring suit within six years of the date on which plan assets were used to purchase the contract.
The DOL's clarification might prompt some DC plan sponsors who had excluded annuities or qualified longevity annuity contracts (QLACs) because of fiduciary liability to reconsider offering these options in their 401(k) plans. Fiduciaries of plans that include annuities and QLACs should incorporate the two "red flag" examples of circumstances that call for immediate review into their safe harbor rule fiduciary process.