Education/Advice | Published in June 2012

The Fiduciary’s Role in the Termination of Single Employer

Defined Benefit Plans: A Practical Guide

By PLANSPONSOR staff | June 2012
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De-risking their defined benefit pension plans has become the imperative goal of most plan sponsors. While de-risking takes many forms, the gold standard is termination of the plan and transfer of its liabilities to an insurer by purchase of a buy-out annuity contract.

Once the plan sponsor has decided to terminate the plan, the fiduciary is responsible for implementing the termination in compliance with Employee Retirement Income Security Act (ERISA) and other laws. The fiduciary’s challenge arises from the structural tension between the fiduciary’s ERISA obligations to act only in the best interests of the plan’s participants, and the plan sponsor’s legitimate business goals. The sponsor wants the termination to be cost-effective and swiftly executed within the sponsor’s target interest-rate window. But the fiduciary’s obligation under ERISA is for prudent selection of the buy-out annuity — according to the Labor Department, the “safest available” annuity — under a rigid timetable fixed by law and regulated by multiple government agencies. To resolve the tension between these competing goals, to bring the termination to a successful close as efficiently as possible, and to avoid even a perceived conflict of interest, the fiduciary must have a carefully crafted and well thought out fiduciary process.

The fiduciary is personally liable for any imprudent annuity selection. But the in-house fiduciary is typically broadly indemnified by the plan sponsor. A defective fiduciary process thus can leave both the in-house fiduciary and the plan sponsor contingently exposed to plan liabilities for up to six years after the annuity purchase, and even longer in the case of fraud or concealment.