Tim Hauser, EBSA’s Deputy Assistant Secretary for Program Operations, mentioned something very striking regarding lifetime income at the annual meeting of the 5 regional TE/GE Councils this past February, something I’ve taken some time to consider. His thoughts, as it turns out, can have a significant impact on the eventual success of the ability of DC plans to provide lifetime income .

We were talking about the DOL’s effort to provide further guidance for DC plan fiduciaries who purchase annuities to provide lifetime income-including QLACs.  What is proving to be the most difficult issue to resolve as we work through the regulatory landscape is the insurer insolvency issue: how do we protect the fiduciary from a participant’s breach of duty claim should an insurer become insolvent years hence, and be unable to the pay the retirement benefit otherwise promised under the annuity?

The insurance industry has repeatedly sought relief and guidance, even to the point of having legislation passed which directed the DOL to provide safe harbor guidance.  The DOL has tried. It has issued a non-exclusive safe harbor on fiduciary standards for the purchase of DC annuities, but even that guidance provides little comfort for sponsors on the long-term risk of insurer insolvency.

Then Tim, being a long-time litigator, suggested the simplest of things. Why, he asked wouldn’t the fiduciary be protected by ERISA’s 6-year statue of limitations under ERISA section 413.

I was actually stunned, mostly by the simplicity and sensibility of his point. A lot of folks, much smarter than myself, have spent serious time in trying to crack this nut. It struck me that this might actually be the answer. Think about it: insurance companies do not become insolvent overnight. There is usually much hand wringing, review, public scrutiny and regulatory action which precedes an insurer’s failure. The public, at least those which follow the financial services world, have long notice of something currently being amiss in an insurer’s balance sheet.  And even when it does go wrong, the other insurers typically cover policyholder losses  through the (admittedly very imperfect) state guaranty associations.

This suggests that a workable fiduciary standard can be reasonably constructed which would not require a crystal ball, or one which relies upon the state bearing that sort of risk as a matter of public policy. I become even more interested when I thought about the non-ERISA cases, where the statute of limitations would be based on contract or fraud, which are often even less than the ERISA six year statute.

Given a six-year risk window, I think we have the tools now to construct a workable standard which addresses the insurer insolvency risk.