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SECURE and 2.0’s efforts to open up the availability of defined contribution plan balances for personal emergencies, including the establishment of those goofy PLESA accounts, really have their roots in what was-at the time- a pair of thoughtless  changes made to the Code under Tax Reform Act of 1986 (the “86 Act). Even then, those particular changes (in what was otherwise a massive retirement law package) were not received well by the plan sponsor community.

Prior to 1986, the first 6% of a participant’s s after tax deferrals into a 401(k) plan were excluded from the ACP test. This actually encouraged plans to offer this arrangement to all of their employees, as it effectively permitted the highly compensated employees to place greater sums into the plan while benefitting lower paid employees. It did so by affording employees free access to their plan after-tax deposits (assuming the “aging” rule was met) without having to suffer a formal “hardship.”  This meant that participants could save larger amounts to their plans, knowing that funds were easily available for “routine” expenses. Back then, plans also typically matched those after-tax deposits -which even further encouraged savings for those who could not afforded to lock up their funds.

Even better,  when the participant sought to withdraw those after-tax amounts, those in-service withdrawals were treated as withdrawing tax basis first. This had the effect of participant receiving back their after-tax contributions without tax, to be used for any number of personal purposes not covered by the hardship distribution rules.

Unfortunately, the ‘86 Act changed all of that. First, the 6% exclusion of after tax contributions from the ACP test was eliminated, removing employers’ incentive to offer after tax programs. Then to add insult to injury, any withdrawal of after tax contributions from the plan were treated in the same manner as the withdrawal of elective deferrals or employer contributions: the “basis” calculations were done on a pro-rata basis. This meant that after-tax withdrawals would be now subject to the same tax basis computation as the withdrawal of employer pre-tax contributions or elective deferrals.

Fast forward to the SECURE  and SECURE 2.0, where extreme efforts were made to allow participants to withdraw funds under personally exigent circumstances which otherwise created financial difficulties,  but did not fall into the category of a formal plan hardship. Though this was all done in the name of trying to entice participation in 401(k) plans by increasing access of  lower propensity savers to defer into a defined contribution plan, it has resulted in a plethora of  horribly complicated rules which are not being widely used. 

In hindsight, where the view is (of course) 20-20, what SHOULD have happened was a re-institution of some version of those pre-86 rules. They served us well back then. 

I actually encourage taking a look at my blog of a few years back on Asimov’s view of these sorts of matters, called the MMNC, the Minimum Necessary Change, which speak to the value of simplicity in such circumstances…

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Engineering, analytical and operations. These are the three distinct and dynamic categories (“stacks”, perhaps?) of knowledge into which the lifetime income markets seem to be organizing itself-out of necessity, I would argue.

We’ve known for a very long time that transforming defined contribution plans into vehicles which facilitate the accumulation and distribution of income guarantees (think, for example, of 403(b) plans-whose tile is even revealing: “Taxation of Employee Annuities…”) has different demands than those plans which have been simply used to accumulate wealth. Yes, defined contribution retirement plans have always demanded a unique blending of ERISA, tax, securities and insurance laws, but these new lifetime income programs now require application of all of those rules in ways unfamiliar to most-even for the typical, variable annuity based 403(b) plan.

Policymakers and regulators have been working at adjusting existing regulatory schemes in order to do so, without having to resort to developing yet another plan type. I think they have largely been successful, in part by adjusting relevant rules applicable to terminating defined benefit arrangements.

Which leads to my comment about these “stacks” of expertise. As lifetime income programs are beginning to become more widely accepted and used in the retirement plan space, retirement plan professionals have needed to concurrently develop the knowledge to support their clients. What we’re finding is that it is not necessary to garner comprehensive familiarity with everything that’s involved in these programs in order to provide the support clients need.

In my often long conversations with other professionals working their way through these matters, it really does appear that these three stacks are shaping up:

  • Engineering. Not many professionals need to know all of the pieces that go into developing a lifetime income program. If you are interested in putting out a new kind of lifetime income program, however, you’ll need a few engineers to do so. An old friend of mine once labelled the list we developed of all the pieces necessary to make a new program idea work the “aircraft carrier.” Those professionals working with plans and participants need not be familiar with the details of what is on that “aircraft carrier.” For example, who really needs to know the nuances of using individual insurance applications versus a master or group app, and the impact of who owns the policy? The engineer, however, does.
  • Operational. The operator bears the brunt of the work of the engineer. These are, generally speaking, the recordkeepers, custodians, TPAs and financial institutions who are trying to implement, and integrate into their existing services the (sometimes seemingly “harebrained”) engineers’ package. Those professionals are more focused on the pieces that fit into their own software and participant facing utilities, rather than the entirety of the design. The middleware provider is a good example of such services in the market today, a critical role until these integration processes become more normalized.
  • Analytical. The analyst is probably the key to making anything really becoming usable: they need to know enough of details of the program design and operation to being able to assess if any particular program or its outcomes meets the client’s needs or fiduciary standards. They also have to figure out how to sensibly compare these disparate programs.

Each of these stacks seems to be developing their own dialect and focus. An interesting case in point is the manner in which SECURE’s “annuity safe harbor” is approached by each stack. From discussions I’ve had, it seems as if each stack has a different sort of take on how it fits within their own responsibilities. It’s not a particularly big deal for the engineer, who is only concerned that the insurance company has processes in place to draft and update the safe harbor notice; the operator has a bit of a heavier lift, concerning themselves with the logistics of the delivery; but it becomes a very serious matter for some analysts, who can bear the brunt of assessing it, monitoring its implementation, and figuring how it applies to any particular client. As you could guess, this engenders a lot more serious attention for the analysist than for the engineer.

I also note that these stacks crossover from time to time.

Their importance lies in two circumstances, I think. The first is that the this really is making it clear that no one needs to know everything about any lifetime income program, and that, for example, analysts can be confident that they don’t have to know everything about a program in order to successfully assist their clients. The second is for those of us who educate on these programs. The audience is critical: an analyst’s knowledge needs are vastly different than that of the operator. Using this kind of model, we can finally fashion sensible educational efforts.

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Business Wire published a news release today announcing the new strategic relationship between Securian Financial and Custodia Financial regarding Custodia’s Retirement Loan Protection (RLP) program—”a first-of-its-kind, in-plan feature that helps safeguard employees’ retirement savings by automatically protecting 401(k) loans from default when job loss, disability or death occurs.” It is a program a number of us have developing over the past decade or so, and is one of those innovative product developments efforts that takes awhile to gain traction in this market (think, for example, of things like DC lifetime income programs; 403(b) open architecture programs; individual FIAs designed for DC plans, among others, all of which first encountered resistance). Significant parts of the retirement industry can be uniquely resistant to innovative programs which are unfamiliar to the market.

There is a particular cynicism for insurance based products, like RLP, because of a commonly held belief that insurance companies and products, by their nature, are designed to use their large financial leverage to take advantage of the consumer. Some of this negative reaction, admittedly, can be soundly based in some horrid insurance sales practices, high commissions and the lack of transparency in product fees. We have been successful in minimizing much of these concerns over the years in products uniquely designed for retirement programs. It is not widely recognized, however, that the pooling of risks with others (which can only be accomplished by insurance companies or governments) is the performance of a critical societal function. Properly priced insurance, for which a reasonable risk charge is fairly levied, spreads the cost of catastrophic individual risks between many, lessening any individual’s risk into a manageable, definable exposure. In my personal view, insurance is one of the few industries where both good business and good stewardship can actually cross paths.

A few years back, I wrote a blog describing the nature of the RLP program. I invite you to take a look at it, as this news release may generate some questions for you from your clients or decision makers. One of the key misconceptions that RLP has had to deal with is the notion that a loan from a 401(k)/403(b)/457(b) plan is simply a participant “borrowing from themselves.” You’d be surprised at the number of well considered attorneys have actually raised this point with me. Take a look at the rules: as I pointed out in that past blog, a DC plan loan is legally a commercial transaction between the plan (which is actually the lender) and the participant. The plan takes a commercially reasonable lien on the participants plan account if the participant defaults. RLP provides an alternative to the exercise of that lien-it ether pays off the loan upon death or disability, or delays the imposition on the lien following involuntary termination until the participant can gather up resources to repay the loan-without the attendant taxes and penalties.

What is also often ignored is the simple fact a plan loan is an investment of the plan, to which fiduciary standards will apply. RLP also addresses this particular risk. It also has the advantage of the cost of the coverage being a cost of the loan program, and therefore of the plan, which can be structured to utilize amounts in the now-notorious forfeiture account….

Innovation still lives in this market, and often serves us all well.

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The DOL’s most recent advisory opinion, 2025-04, helpfully affirms two separate legal principles upon which many of the defined contribution lifetime income programs being offered in the market currently rely. The AO is also very useful in the manner in which DOL describes one very specific program, the LIS program offered by Alliance Bernstein, offering a useful framework for the outlining of other (even dissimilar) programs.

The first issue only applies to the direct purchase by a plan of annuities as part of a “managed account” QDIA within a plan, often referred to as “in-plan annuities.” These insurance products are actually purchased and owned by the plan itself, unlike a number of offerings in the market where the Collective Investment Trust-not the plan-buys and owns the annuity, for which this AO should have little direct affect.

The AO specifically validated that in-plan annuities can be used as part of an in-plan QDIA managed account as long as its purchase is also in compliance with all of the other QDIA managed account rules rules. The most important of these QDIA rules for the fiduciary’s consideration in this circumstance is the one which restricts the managed account’s (which includes the annuity) imposition of restrictions, fees, or expenses on the participant’s transfer or withdrawal of funds from the QDIA in the first 90 days of deposit. This means that the fiduciary will need to affirm that the annuity selected for use in the QDIA doesn’t impose market value adjustments or surrender charges for withdrawals in those first 90 days.

The second part of the AO affirms the manner in which the 3(38) investment manager rules apply to the insurer and product selection by the managed account manager. Where the advisor making the selections has been appointed as a manager under 3(38), all of those advantages related to fiduciary liability will flow through to the employer-including, I would think, the verification of compliance with that 90 day rule, above. The AO specifically also notes availability of the two annuity safe harbors, and that they will apply to that 3(38)’s insurer and product selection if all of the requirements of those safe harbors are met. EBSA’s specific reference to those two, distinct, safe harbors is notable, given its recent withdrawal of the withdrawal of one of those safe harbors.

This clarity helps, as fiduciaries continue to build confidence in selecting lifetime income programs. By the way, a tip of the hat to both Michael Kreps, who counseled on, and succinctly drafted, the advisory opinion request; and to Jeff Turner and EBSA staff in their handling of the issue.

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403(b) plans and lifetime income programs suffer a similar malady: both sorts of arrangements operate in a sort of “exception” environment, where they rely upon atypical application of the standardized qualified plan rules in order to effectively work. This means that these programs are not typically amenable to broad and sweeping policy statements of the sort which are often issued by senior government leaders. This leadership challenge, by the way, is not limited to gov’t policy leaders. I have been privy to a number of glaring business examples over the years where corporate leaders have also become enamored by a concept, which then fails miserably where the “details” of implementing such grand ideas have to meet reality.

So it seems to be with Executive Order 14330, which seeks to “Democratize” ERISA retirement plan investments, by making it simpler for participant directed defined contribution plans to offer things like private equity interests to plan participants as DIAs.

To say that this particular government efforts is causing some consternation amongst ERISA plan fiduciaries is probably an understatement as-among other concerns- it raises the concern for the lack of something as simple as appropriate benchmarking against with to measure such decisions. This then, of course, gives rise to fears of class action lawsuits and related costs of fiduciary insurance.

For the 403(b) fiduciary, however, the “exception” environment in which they operate serves to alleviate some of the consternation facing other DC fiduciaries. This is because that, without a statutory change, 403(b) investments are still limited to annuity contracts and custodial accounts holding mutual fund investments. None of these will support the typical private equity investment.

Even should the proposed 403(b) CIT legislation ever pass, it would likely still be insufficient to support private equity investments from being held by most 403(b) plans. This is because the proposed CIT modifications still require that the PE investment be held as part of an 81-100 collective trust. The legal structure of the collective trust is anathema to the manner in which the PE investment is typically structured and operates, which rely on the condition and decisions of each individual plan. Even should somehow someone contrive a “solution” to this challenge, it would necessarily rely upon a contorted process.

As I noted in my last blog, details of the way in which regulations apply are critically important, even in the application of broader policy. To this end, it is these details which can help ease the anxiety of the 403(b) fiduciary.

A side note: this article was written without any use of AI, though I’ve little doubt that this information will soon end up in an AI program near you without, of course, any attribution…

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As part of the DOL’s efforts under Executive Order 14192, titled Unleashing Prosperity Through Deregulation (90 FR 9065, Feb. 6, 2025), the Department undertook to withdraw two seemingly innocuous annuity regulations which, by any cursory review, appeared to have outlived their usefulness. I would suspect that most of us didn’t give those withdrawals a second glance.

Innocuous, however, those actions were not. The two regulations not only laid out some serious technical groundwork for the current DC lifetime income programs but-as the affected stakeholders pointed out to the DOL-they are actually still in use. Fortunately, this caught the attention of a number of my old colleagues in the industry, who were able to make the point to the DOL that withdrawal of these regs could actually be disastrous, and lead to some pretty serious ramifications. This then led to the DOL’s withdrawal of those withdrawals.

There are valuable lessons about DC lifetime income programs we can all draw from the DOL’s miscalculations about the continuing efficacy of annuity regulations. I think each reinstated regs is worth a quick look, as each of them provide what I think are different, and meaningful, lessons on the lifetime income’s “Learning Curve” I discussed in my January blog:

The long tail of annuities. My “favorite” of the reinstated regs is 29 CFR 2550.401c-1, the “Harris Trust” Reg. It is actually my favorite because it is the issue which first got me seriously involved in the activities of the American Council of Life Insurers, where I eventually chaired its Pension Committee. In one of those cases now seemingly long forgotten, the Supreme Court ruled in John Hancock Mutual Life Insurance Co. v. Harris Trust & Savings Bank, 510 U.S. 86 (1993) that, under certain circumstances, the assets of an insurance company’s general account which back certain annuity guarantees can actually be treated as an ERISA plan’s “plan assets.” Technically the issue involved the definition of what constituted a “guaranteed benefit policy.” That SCOTUS decision was so disruptive to the annuity industry that Congress directed the DOL to write a reg which would “grandfather” any annuity contract issued on or before December 31, 1998, which met certain conditions in order to prevent insurance company assets from being subject to ERISA’s fiduciary rules.

The “Harris Trust” reg was the result of these efforts. DOL sought to withdraw this reg, stating that because “the regulation is limited to Transition Policies issued on or before December 31, 1998, it is not likely that any Transition Policies remain in effect.” Given that annuities can be inter-generational, it’s a serious misjudgment to assume that annuities merely 37 years old would not still be in effect. This long tail of annuities is one of the reasons why state insurance law imposes such substantial reserving requirements. Preventing its withdrawal was critical for the insurance industry. By the way, it is really the “Harris Trust” efforts which led to insurers generally removing their discretion in the calculation of any “Market Value Adjustment” under annuities sold to DC plans.

Details matter. The Department also sought to withdraw the existing “annuity safe harbor” regulations under 29 CFR 2550.404a-4. It’s reasoning for doing so was that the “annuity safe harbor” under the Secure Act’s ERISA 404(e) obviated the need for the existing reg as “an unnecessary and inefficient alternative [to 404(e)] and may inadvertently be a trap for the unwary;” that the new 404(e) “provides a more streamlined, less costly safe harbor than the (existing) regulation, but with the same level of safe harbor relief;” that “removing the regulatory safe harbor also eliminates situations in which a plan fiduciary might waste time and resources in analyzing and comparing the pros and cons of the two safe harbors to determine which safe harbor is best;” and that “the continued existence of the current safe harbor could mislead interested parties into believing that no other safe harbor exists or that there are benefits to using the regulatory safe harbor rather than the statutory safe harbor.”

Putting aside whether or not that assessment is accurate or just some new sort of bureaucratic babble, the DOL withdrawal effort overlooked a key detail: the existing safe harbor applies to both the selection of the insurer as well as the selection of the actual annuity product. The new 404(e) annuity safe harbor, in contrast, only applies to the selection of the insurer, not the annuity product. This sensibly lead to the withdrawal of the withdrawal.

We are making progress along that learning curve.

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If any company in the United States wants to sell you a guarantee that- in return for a premium- they will make monthly payments to you for as long as you are alive, that company simply needs a license from a state to do so.

This really-not-so-simple requirement actually has massive implications. Licensure is a critical cog in a system which has provided financial and retirement security for millions of Americans for generations, and for good reason. Achieving and maintaining this status is anything but simple, of course.

Approaching two hundred years or so in the making have been those state law-based regulatory requirements which are imposed on companies before they are licensed to make what would otherwise seem to be an outrageous guarantee of monthly payments for the rest of your life. These rules governing the amount, investment, secure handling, reporting and auditing of assets backing those guarantees issued by licensed insurers have resulted in a robust regulatory scheme governing the capital which backs these guarantees.

The system is far from perfect, for sure. Even now, the states are struggling with the manner in which to appropriately deal with offshore private capital of insurers, and the impact of this growing practice on the credibility of these guarantees; and there are serious public policy concerns about whether the state guarantee association structures (which effectively “insure the insurers”) is adequate. In addition to the regulatory imperfections, there likely are few among us who haven’t had horrible experiences in dealing with insurance companies. Then, abusive sales practices have always haunted the industry; the industry has not been particularly adept at transparency; and any ERISA standards by which to assess, compare and monitor the appropriateness of the particular terms of any these guarantees which are purchased by retirement plans are but in the developmental stages.

But we need look no further back than the MEWA debacles of recent decades to see what happens when privately issued “benefit promises” are not protected by this regulatory scheme. Think about those unscrupulous promoters who used ERISA to avoid the financial reserves requirements otherwise imposed by states on health insurers as a condition of maintaining their license to issue critical insurance guarantees. When circumstances turned against those promoters who had promised an “unreserved for” benefit (as the actuaries will tell you that circumstances inevitably will), hundreds of thousands of participants in these plans were left devastated after paying for “health insurance” which ultimately was not there when they needed it the most.

For all of its deficiencies, this regulatory scheme still well governs the reserving, secure handling, and investment of the $5.7 trillion in the general account assets of US life insurers (as of the end 2024, according to the ACLI 2024 Life Insurers Fact Book) which (among other things) backs up the lifetime income promises utilized by defined contribution plans.

There are serious implications for the retirement plan industry related to this state of affairs. The raw power and impact of $5.7 trillion in accumulated assets and their proper management cannot be ignored by the industry, especially given the likelihood that, ultimately, millions of ERISA plan participants may well be relying upon this massive pool for their retirement security. Successfully regulated capital is critical to retirement security in the U.S., and is a matter to which the non-insurance industry’s serious attention cannot long be avoided.

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Executive’s Life’s 1991 collapse made a mockery of the insurance company rating system. Just months prior to its demise, S&P had given that insurer its highest rating (AAA, “Extremely strong capacity to meet financial commitments”) and Moody’s was awarding it one of their highest ratings at a1. An excellent review of this debacle was published by the GAO in 1992, for those interested in that sort of background. Effectively, though Executive Life had established sufficient insurance reserves to qualify for those high ratings, the ratings companies (and, for that matter, the state insurance commissions) failed to give sufficient weight to the fact that those reserves were made up of junk bonds of, shall we say, dubious value.

There have been at least three notable downstream (though much delayed) effects resulting from this failure which should be of interest to the retirement community. The first was Dodd Frank’s 2010 virtual banning of the use of any financial ratings in the federal regulatory system, including their use in establishing fiduciary standards under ERISA. The second was the eventual establishment in 2011 by the NAIC-after, embarrassingly, some two decades of consideration-of the Risk Based Capital (RBC) standards governing the investments of life insurance companies, a standard which arguably could have prevented Executive Life’s collapse. The third was the establishment of the insurance company ERISA safe harbor for fiduciaries under the Secure Act, upon which fiduciaries can now rely in the absence of any adequate rating system.

In spite of the resultant lack of value of insurer ratings to the ERISA fiduciary, there still remains a sort of residual impact on fiduciaries arising from the fact that higher ratings are still being pursued by insurers. This impact occurs because one of the key elements attendant to any rating from a rating agency is their assessment of the level of insurance reserves established by the insurer. State laws requires an insurer to establish sufficient “regulated capital” (my term, in reference to those investments of life insurance companies subject to the RBC rules, the value of which now exceeds $9 trillion in the U.S.) to back up that seemingly audacious promise to fund benefit payments decades hence. Though the state laws may establish minimums, insurers may establish greater reserves in order to obtain higher ratings.

The end result of this condition is a subtle but important one for the fiduciary “industry.” It calls for an effort (aside from the assessment of the design of any DC lifetime income program) to understand whether the cost of any high rating of an insurer is worth the impact on the “return” on the policy purchased by the plan. It’s not cheap to maintain the highest ratings offered by the ratings agency, as it requires paying for the maintenance of higher reserves. This can create downward pressure on an insurer’s choice of crediting rates to be offered under annuity polices purchased by plans. The question is then joined: what is the value to the fiduciary in accepting a potentially lower crediting rate in return for choosing an insurer with a higher claims paying rating? Put more directly, is there a value difference in utilizing a company with higher rating, and where-and how- do you draw the line?

Engaging in this sort of highly technical assessment effort will not be for the faint of heart, as there are also other of these sorts of issues lurking in the background which will demand unique quantitative analysis. I would think that the quants performing these services would also be interested in becoming familiar with things like the details of the Risk Based Capital standards, and the current industry and regulators’ efforts at addressing risks related to the growing offshore schemes.

This then suggest to me that there is likely to be a sort of bifurcation in the professional fiduciary market. There will be those who will be able to perform the valuable task of assessing any particular DC lifetime income program for plans or their fiduciaries, identifying any program’s relative advantages and disadvantages. But then there will need to be a limited segment of the industry which has developed the capability to perform the sort of quant analysis suggested above. Though only being part of any overall assessment of any lifetime income program, I would think the questions it addresses eventually becomes an important piece of any ultimate review.

Note: the image included in this blog is from my favorite Dr. Sues book, Bartholomew and The Oobleck. Its a drawing of the magicians coming up from the dungeon, an image I often think of when called upon to do weird technical stuff, like called for in this blog…

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I had to chuckle a bit when I first read Nevin Adam’s excellent (of course) recap of the latest DC class action lawsuit, this one involving JP Morgan Chase Bank’s DC plan’s selection of stable value funds. He noted the complaint alleges that “throughout the Class Period, identical or substantially identical stable value funds with higher crediting rates, and hence lower spreads, were available to the Plan, but were not selected by Defendants.” In trying to make this point, the pleadings offered something called a “comparator chart,” attempting to compare annuity contract based stable value funds.

Image my surprise-and that chuckle- when I saw that about a third of the “funds” listed in that chart included annuity contracts on which I worked for nearly two decades. Having now captured my interest, the merits of the lawsuit aside, that chart and the related allegations reminded of an important lesson when dealing with any annuity: do your homework first or, as my mentor Roger Siske would regularly advise, know what you don’t know.

This advice holds for the fiduciary activity we are seeing in the DC lifetime income market. There are substantial, and critical, efforts in play which will serve to assess the annuity pieces of income programs. As I’m sure those working on these evaluation models have found, assessing annuities is a dynamic process. It involves putting any contract under any particular plan or arrangement in “context.” The designs, terms, crediting rates and the like shift over time and circumstance, and may well apply differently depending on the arrangement.

There’s a couple of examples to make this point. First is the retail fixed index annuity (FIA). This type of contract may well serve the individual “wealth” market, but is mostly inappropriate for use in a retirement plan. However, where an FIA is designed for retirement plans, it offers some of the most efficient vehicles for a plan’s delivery of lifetime income guarantees. So, relying upon details of the retail FIA when assessing a plan-designed FIA is, in my judgement, not “doing the homework.”

Then there’s the notion of an exploring an insurer’s “spread,” an inquiry often made by fiduciary advisors. An insurer’s setting of crediting rates or “bonus” levels (often found in a GLWB) at any particular time can often be dependent on some unusual time-dependent factors. This may include the insurer’s own risk capacity at the time of the setting of the rate (yes, capacity is a real “thing”); the market’s interest rate environment; an insurer’s own “reserving requirements;” or their particular interest (or disinterest) in expanding in certain portions of the market. Translating “spread” (even if you can somehow calculate it uniformly or precisely) is, quite frankly, meaningless for a fiduciary. It tells a fiduciary little about the guarantees being offered. It would be an example, again in my judgement, of not knowing what you don’t know.

It is encouraging to see the work being done in lifetime income assessments, and pleadings like we are seeing in the JP Morgan class action are a reminder of the importance of spending the time and effort to get it right.

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The ongoing Pension Risk Transfer (PRT) litigation poignantly demonstrates the growing importance of the SECURE Act’s “Annuity Safe Harbor” provision to the continuing efforts to design and develop responsive DC Lifetime Income programs.

The PRT plaintiffs claim fiduciary violations of the DOL’s “safest available annuity” (or “SAU”) requirements under DOL Reg 29 CFR 2550.404a–4 by certain DB plan sponsors in their selection of annuity carriers to fund the wind-down of their DB plans. Among other things, that reg required plan fiduciaries to actually “conclude” whether an annuity provider is financially able to make all future payments under the annuity contract.

Those SAU regs actually have a bit of a checkered history, however, when it comes to DC plans. The DOL first applied that rule to DC plans in 2002, which somewhat chilled the development of lifetime income programs for the DC market. Fears arose because it looked very much like there could only be a single insurer which could issue annuities to retirement plans, and that acceptability would be solely reliant on an insurer’s ratings. In any event, the demand that fiduciaries make some sort of prescient determination as to an insurer’s future solvency impaired much of the interest in further developing these programs. It also began a decade’s long legislative effort to “solve” for that problem, eventually resulting in the passage of SECURE’s Annuity Safe Harbor.

At the same time that SAU was being applied to DC plans, a revolution of sorts was occurring in the retail annuity markets. A number of insurers were engaged in efforts to develop sophisticated products which provided more meaningful lifetime income benefits which address the insured’s needs. So-called “living benefits,” like the GLWB, and new types of annuities, like the fixed indexed annuity- each addressing the flaws in both straight life and variable annuities- were becoming available outside of retirement plans. With notable exception, these products were not generally being developed for use with retirement plans.

The potential fiduciary exposure for which SECURE’s Annuity Safe Harbor solved is really about the nature of an insurer’s practices in creating these new types of guarantees. I encourage you to take a look at a blog I posted a few years back called the “Mathematics of the GLWB.” That piece touched on some of the “infrastructure” details which an insurer must employ to be able to provide the sorts of guarantees now being offered in virtually all new DC Lifetime Income programs. For example, the more flexible of these programs must use sophisticated investment hedging programs in order to adequately manage the risks involved with the provision of these specialized guarantees. The unanswered question, prior to SECURE, was what it would take for a fiduciary to make an assessment of such insurers which would meet the SAU standard. Indeed, it was these sorts of concerns which led, in part, to the QLAC requirement using a simple, straight life annuity.

The Annuity Safe Harbor removed this uncertainty, and encouraged a number of insurers to become further active in developing flexible products for the retirement plan market. Effectively, the safe harbor entitles fiduciaries to rely upon the well-developed state regulatory schemes governing insurer solvency. Regardless of what one may otherwise think of state insurance regulators (take a look, for example, at the DOL’s disdain of state insurance authority in the fiduciary rule), there are well developed and generally standardized financial standards which need to be maintained by insurers which seek to issue financial guarantees which can span a generation. While states have been regulating this (generally) well for over a hundred years, there currently is no federal regulator which can effectively govern the financial operation of insurance companies.

It was simply foolhardy to impose that SAU obligation on fiduciaries of private retirement plan fiduciaries, who are not in the business of taking accountability for the operation of a complex and highly regulated financial services company.

Now, it will be challenging, at best, to bring a successful “safest available annuity” claim against those DC fiduciaries in selecting insurers under their DC Lifetime Income programs. This safe harbor does not, of course, provide any protection against the imprudent selection of any given product issued by an insurer, nor does it address the continuing opaqueness issues surrounding many annuity contracts. However, The PRT litigation is showing the enduring value of even the limited protection of the safe harbor.