Future Regulation Holds the Key for Lifetime Income Options in DC Plans

The safe harbor provision in the Retirement Enhancement and Savings Act would safeguard plan sponsors from liability issues stemming from any losses from the insurer’s ability to meet financial obligations.
Art by Kyle Smart

Art by Kyle Smart

As 2018 comes to a close, the retirement industry offers lists of what plan sponsors and providers may expect as the new year rolls in. One, as the industry saw early in March, includes the bipartisan-supported, comprehensive yet widespread bill involving potential retirement reforms—otherwise known as the Retirement Enhancement and Savings Act (RESA).

While the bill contains many provisions regarding retirement plans, one aspect—the safe harbor provision—would add a fiduciary safe harbor to plan sponsors for the selection of lifetime income providers in retirement plans. Michael Kreps, principal at Groom Law Group, says the proposed provision answers concerns from employers about an insurance company’s inability to pay an annuity, while requiring plan sponsors to review considerations prior to offering the lifetime income options, in order to avoid fiduciary liability.

“What they were concerned about was what they had to do with the insurer’s ability to pay,” he says. “They were worried that if they put annuities in a plan and then the insurer wouldn’t be able to pay many years later, the plan sponsor could be liable.”

According to Kreps, plan sponsors fear that if they offered in-plan annuities, but the insurer was not be able to complete the financial obligation, or pay for the annuity, they could be held liable for the outstanding annuity, and possibly sued by plan participants. While several pieces of guidance have been issued to avoid possibly unsafe annuity purchases, including a 2008 Department of Labor (DOL) safe harbor provision and a 2015 Field Assistance Bulletin (FAB), the 2018 proposed regulation is the only one that would safeguard plan sponsors from liability issues stemming from any losses from the insurer’s ability to meet financial obligations.

Major differences among these regulations include how plan sponsors can effectively vet financially stable insurance companies. The 2008 DOL provision required plan sponsors to conduct objective, thorough and analytical searches for select providers, consider engaging with experts to evaluate providers, and “appropriately conclude” that the insurer would be able to fulfill all future payments. This requires an extensive and at times meticulous process for plan sponsors—who may have little experience—to carry out successfully.

“The current guidance requires employers to conduct an exhaustive financial appraisal of annuity providers,” says Roberta Rafaloff, vice president of Institutional Income Annuities at MetLife. “An appraisal that most companies have neither the resources nor the expertise to perform.”

While the 2015 FAB recognized a majority of the 2008 DOL considerations—aside from an instruction requiring plan sponsors to understand the reasonableness of fees—the safe harbor provision of RESA differentiates itself by including protection for plan sponsors acting as liable fiduciaries.

Additionally, whereas RESA mandates plan sponsors to obtain several indications of an insurer’s financial good standing, including a report indicating the insurer is not under supervision by the state and has not been for the past seven years, the previous FAB stated that plan sponsors were “only responsible for relying on information about the insurer available at the time of the selection of the annuity.”

“With respect to the insurer’s ability to pay, [the safe harbor provision of RESA] also lays out a few things that plan sponsors need to consider,” adds Kreps. “This includes a written report from the insurer stating that the insurer is licensed to issue the contract and received audited financial statements in accordance with state law.”

Another feature of the provision measures a provider’s credit worthiness, to see whether the entity has completed financial obligations in the past, Kreps says.

Next: The future of safe harbors

An Employee Benefit Research Institute (EBRI) report found almost half (48%) of workers are either very or somewhat interested in annuities. However, a MetLife survey showed less than 10% of employers currently offer these solutions to their participants. Rafaloff credits this lack of enthusiasm to current DOL guidance, which limits protection for employers. 

“[It] creates barriers for businesses looking to offer retirement income options to their employees. Plan sponsors are looking for common sense guidance,” she says.

Employers believe the DOL should offer safe harbor provisions in order to expand lifetime income options to their plan participants. Rafaloff adds how in the MetLife study, 92% of DC plan sponsors agreed on the importance for the DOL to provide a workable safe harbor for annuity carrier selection criteria.

Moving forward, should RESA be applied in 2019 or in the future, the retirement industry can expect an uptick in annuity purchases, says Rafaloff.

“The legislation will help enhance employer-sponsored retirement plans by removing regulatory obstacles and expanding access to lifetime income solutions,” she says. “We believe the safe harbor provision in RESA will significantly advance the adoption and availability of annuities within DC plans.”

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