It May be Time to Offer Annuity Options to 401(k) Plan Participants

Theoretically, it sounds like a win situation to allow 401(k) plan participants the ability to transfigure their accumulated retirement savings into an annuity contract which would provide a lifetime income stream.  After all, this just permits participants to transform their 401(k) plan into a pension, therefore, allowing them the advantage of predicting their lifetime income stream.  And if that is the case, why haven’t participants capitalized on annuities?

A Little History

In 2008, a safe harbor rule was implemented by the U.S. Department of Labor (“DOL”) concerning the selection of annuity providers, although sponsors didn’t use it to integrate additional annuity options into 401(k) plans. The majority of plan sponsors have historically been concerned about the fiduciary liability which accompanies the process of selecting an annuity provider.

Turning the tables, a DOL “field assistance bulletin” (“FAB”) was issued last year which clarified the fiduciary standard for the selection process of annuity providers.

A Safety Net

There are five components to selecting annuities within a safe harbor to ensure a plan meets its fiduciary responsibilities:

  1. Participates in an objective, complete and analytical search to identify and select providers from which to purchase annuities;
  2. Takes into account information which is adequate enough to assess the annuity provider’s capability to make all future payments under the annuity contract;
  3. Considers the cost (which includes fees and commissions) of the annuity contract in regards to the provided benefits and administrative services;
  4. Concludes that, at the time of the selection, the annuity provider is financially capable in making all future payments under the annuity contract; and
  5. Compliance with the provisions above, and if necessary, consult with a professional.

According to the FAB, “at the time of selection” denotes that the DOL will assess the prudence of a fiduciary evaluation by using the information that is available at the time the decision was made. If facts become available at a late date, they are not taken into consideration.

Furthermore, the sponsor’s obligation to observe and monitor an annuity provider ends when the sponsor ceases to offer that provider’s products. Therefore, if a sponsor no longer offers an annuity, the sponsor is not held to any amount of fiduciary liability, if the annuity provider whose annuities are used by some of the sponsor’s retirees subsequently fail.

A Long Time

In addition, the ERISA’s six-year statute of limitations was emphasized by the FAB. Under ERISA, an action for a breach of fiduciary duty may not be brought after the earlier of:

  • Six years after the date of the last action that 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
  • Three years after the earliest date on which the plaintiff had actual knowledge of the breach.

Consequently, if a plaintiff sets forth a claim which is centered on the imprudent selection of an annuity contract to disperse benefits to a specific participant, the plaintiff must file the claim within six years of the date on which plan assets were distributed to purchase the contract.

A Look Ahead

The main question is will this elaboration open the door to additional employers offering annuities?  The DOL anticipates additional guidance to be released in the future to further encourage use of annuities in 401(k) plans.

© 2015

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