DOL provides safety guidance for plan sponsors seeking annuity-funded retirement plans

Alongside the IRS’ announcement last week to increase contribution caps to 401(k) plans, the Department of Labor issued guidance that will ease plan sponsors’ abilities to offer annuities as part of their retirement plans.

Lauding the agency’s move, the Institutional Retirement Income Council, a DC-based nonprofit retirement advocacy group, says the letter will calm the minds of some plan sponsors choosing something other than typical, conservative mutual funds for retirement investments.

“The DOL’s information letter discussing deferred annuities as part of Qualified Default Investment Alternatives and the annuity selection safe harbor also can provide significant comfort to plan sponsors,” says IRIC President William Charyk.

Also see: IRS increases allowable 401(k) contribution levels

Some significance in the letter can be seen in the DOL’s broader view on QDIAs and its allowance of a product that has an annuity feature to it, he said.

The agency isn’t saying retirement investments have to be accumulation- only vehicles, Charyk said, and says there were some concerns in using options that allowed for employees to convert their savings into an annuity … that it would somehow slip outside the safe harbor.

“For someone to effectively sue you,” he adds, “they would have to show that you were pretty negligent and violated the DOL rules when you chose that as your QDIA.”

According to the letter, under the annuity selection safe harbor, the selection of an annuity provider and contract for benefit distributions from an individual account plan satisfies the requirements of ERISA if the fiduciary:

• Engages in an objective, thorough and analytical search for the purpose of identifying and selecting providers from which to purchase annuities.
• Appropriately considers information sufficient to assess the ability of the annuity provider to make all future payments under the annuity contract.
• Appropriately considers the cost (including fees and commissions) of the annuity contract in relation to the benefits and administrative services to be provided under such contract.
• Appropriately concludes that, at the time of the selection, the annuity provider is financially able to make all future payments under the annuity contract and the cost of the annuity contract is reasonable in relation to the benefits and services to be provided under the contract.
• If necessary, consults with an appropriate expert or experts for purposes of meeting these conditions.

“If employers wish to consider retirement income products, they might become guardedly optimistic that if they found one they really liked and it fit the other criteria, it would be a good fit for QDIA,” Charyk added. “My guess is there may be other inquiries about other sorts of retirement income products besides this deferred annuity, but it was the first one that talked about annuities and I think it was something people were interested in hearing.”