Selecting an annuity provider for a defined contribution plan may seem more difficult than other fiduciary decisions. In this article, we discuss whether this perception of the fiduciary’s obligation is correct and then identify some of the information a fiduciary should review in making the selection.
In the October 2012 Retirement Income Team newsletter, we discussed the DOL fiduciary safe harbor for selecting an annuity provider for defined contribution plans. We noted that, while the regulation is helpful in describing the fiduciary process, it does not identify specifically what fiduciaries should look at.
As background, under ERISA fiduciaries must act prudently in selecting investments, products and services. This process entails engaging in an "objective, thorough and analytical" process. In this sense, the search for a suitable annuity provider requires the same process as for any other fiduciary decision. The difference is in the information to gather and assess.
But, some people believe that a fiduciary must try to predict whether the insurance company will be able to make all future payments. That is not the case. The DOL regulatory safe harbor says a fiduciary must conclude "that, at the time of selection, the annuity provider is financially able to make all future payments under the annuity contract . . . ." [emphasis added] The fiduciary is not required to predict the condition of the insurance company in the distant future, but instead to reasonably conclude that, as of the date of the selection, the company has the financial ability to make the promised payments.
What information should the fiduciaries review to make that decision? The following is a partial list:
- First, fiduciaries should review the company’s ratings from the relevant rating agencies (S&P, Moody’s, Fitch and AM Best). They should look at the company’s overall financial viability and, where available, its claims paying ability. Fiduciaries should look for consistently high ratings across all of the services.
COMMENT: Ratings information should be available on the company website.
- Second, fiduciaries should look for consistently high ratings over an extended period that covers a number of financial cycles. While there is no general rule for that time period, a review of ratings over 10 to 15 years should ordinarily reflect an insurance company’s condition under different economic conditions.
COMMENT: Information going back more than a few years may not be readily available on the company website. In that case, the fiduciary may need to request the information from the company.
- Finally, fiduciaries should consider information about state insurance guarantees that may be available to protect the participant’s benefits. These state guarantees should pay benefits guaranteed by an insurance company’s general account if the company becomes insolvent, though the amount of coverage varies from state to state.
COMMENT: Insurance companies are subject to legal restrictions on providing this information, but it may be obtained on the website of the National Organization of Life & Health Insurance Guaranty Associations (http://www.nolhga.com.
We have discussed these and other factors in a white paper we published in May 2012 (co-authored with our colleague, Joe Faucher) entitled "Lifetime Income in Defined Contribution Plans: A Fiduciary Approach" (http://www.drinkerbiddle.com/resources/publications/2012/Lifetime-Income-in-Defined-Contribution-Plans Lifetime-Income-in-Defined-Contribution-Plans).