On October 22, the chairmen of two Senate committees sent a letter expressing concern about defined benefit plan “de-risking” strategies. The letter, which was addressed to the Department of Treasury, Department of Labor, PBGC, and the Consumer Financial Protection Bureau, expressed particular concern with de-risking strategies that transfer pension risks and liabilities away from plan sponsors and onto insurers and participants.
Pension plan “de-risking” most often refers to the newsworthy steps taken recently by certain large employers (such as General Motors, Ford, Verizon, and Motorola Solutions) to reduce their pension liabilities by transferring their legacy pension obligations to an insurance company through the purchase of a group annuity contract, and offering lump sum distributions to certain terminated, vested participants. However, the term de-risking also includes many other effective strategies, including making simple modifications to plan design and revisiting how the defined benefit plan’s assets are invested. What is common to all de-risking strategies, however, is that there are many technical and practical issues that all plan sponsors and plan fiduciaries need to consider, from proper documentation, to appropriate third-party agreements, to employee communications.
The October 22 letter encourages the agencies to develop specific regulatory policies related to de-risking, even though, we note, most of these concerns are already addressed under existing law. The letter suggested that agencies (i) require participants and the government to receive advance notice of any de-risking, (ii) establish standards for plan sponsors choosing an annuity provider, (iii) require disclosures to retirees who are considering a lump sum distribution, and (iv) scrutinize which activities should be permissible without a full plan termination.
Winston & Strawn is one of the few firms that has real experience advising plan sponsors and fiduciary committees on the full spectrum of de-risking strategies and related fiduciary issues, and we continue to monitor all of these important developments.