DOL Provides Safe Harbor Annuity Clarification


In 2008, the U.S. Department of Labor amended The Pension Protection Act of 2006 to establish Safe Harbor Rules for the selection of annuity providers for defined contribution plans. The details were intended to provide fiduciaries with clear “safe harbor conditions for the selection and monitoring of annuity providers and annuity contracts for benefit distributions,” according to the DOL’s recent Field Assistance Bulletin No. 2015-02.

However, many employers are still unclear on the rules, which has made some plan providers reluctant to offer lifetime annuity income distributions to their employees. “Confusion or lack of clarity regarding the nature and scope of fiduciary responsibilities to act prudently in making, monitoring and reviewing annuity selections under a defined contribution plan could lead plan sponsors or their advisors in some instances to overestimate or otherwise misunderstand the duration or extent of those fiduciary responsibilities,” the report explains.

The Bulletin hopes to clear up misconceptions and confusion by outlining the key fiduciary rules and requirements. As in all instances, ERISA requires fiduciaries to make decisions “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

Accordingly, the same fiduciary prudence applies to the selection and monitoring of an annuity provider, and the decision-making 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,” according to the Bulletin. The ruling has the following ramifications as outlined by the Bulletin:

  • The periodic review requirement in the 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.
  • If a “red flag” about the provider or contract comes to the fiduciary’s attention between reviews, the fiduciary would need to examine the information to determine whether an immediate review is necessary, or, depending on the facts and circumstances, the fiduciary may need to conduct an immediate review.
  • The guidance in this Bulletin is limited to the selection and monitoring of annuity providers for benefit distributions from defined contribution plans. Accordingly, the Department of Labor and U.S. Treasury Department have issued separate regulations and other guidance clarifying applicable rules and facilitating the offering and selection of lifetime income under retirement plans.

Citing case law, the Bulletin notes that a fiduciary acting within ERISA guidelines and regulations cannot be judged through a “hindsight” lens. Plan sponsors must act prudently with Safe Harbor Rules for the selection of annuity providers for defined contribution plans by taking the following steps:

  • Conduct an objective annuity provider search, with no self-dealing or conflicts of interest
  • Assess annuity provider’s ability to make future payments
  • Evaluate fees and commissions in relation to the benefits and services
  • Consult with compliance experts when necessary
  • Periodically review the annuity provider’s ability to make future payments under the annuity contract, and the associated costs given the benefits and services to be provided.

As with all Safe Harbor and general retirement plan rules and regulations, employers are encouraged to meet with an advisor and seek additional outside help as necessary.