Sláinte! to Mr. Hauser and Company at the DOL. OK, admittedly I’m still recovering from our recent trip to Ireland where, yes, I attempted to drive on their country “roads.” “Sláinte is one of the Gaelic terms for Cheers! And, yes, that is a pint from the Blind Piper in County Kerry.
The DOL just published its first serious guidance on supporting lifetime income with the publication of FAB 2015-2, guidance which is very necessary for the success of the Qualified Longevity Annuity Contracts, as well as DC lifetime income income.
The FAB is an initial, but substantial, step in addressing one of the most pressing of the ERISA issues related to providing lifetime income from defined contribution plans: concerns by employers and their advisors regarding the potential of a substantial “tail” of liability related to buying an annuity. Who wants to purchase an annuity if some 30 years after the purchase of an annuity, an insurer becomes insolvent while the annuity is in its payout stage, after which the fiduciary can be held liable for that long ago decision?
Addressing this “fiduciary anxiety,” the DOL helpfully described the manner in which ERISA’s six-year statue of limitations serves to restrict the “window of liability” related to those purchases.
The DOL also discussed the manner in which it views that the ongoing obligation to monitor a chosen annuity vendor will apply. The fiduciary will need to periodically review the chosen insurer, but will not need to do so before the purchase of each annuity. The obligation to review ceases should annuities no longer be able to be purchased under the plan or, with regard to any particular carrier, that carrier’s annuities cease to be an option under the plan.
It is also very helpful that the distribution of the annuity was recognized as a distribution option under the plan.
Through two simple examples using the QLAC type of annuity upon which the Treasury has issued guidance, the DOL stated that:
“Thus, for example, if the plaintiff bases his or her claim on the imprudent selection of an annuity contract to distribute benefits to a specific participant, the claim would have to be brought within six years of the date on which plan assets were expended to purchase the contract.”
This helps forms the basis upon which much more work can now be done. Next up will be guidance on a safe harbor, for the steps the fiduciary should take in choosing an annuity carrier. This is a project upon which the DOL is currently working. The FAB gave an important clue regarding the DOL’s approach to that ‘work-in-progress,” which is likely to help shape that safe harbor:
“Consistent with this statutory language, the prudence of a fiduciary decision is evaluated with respect to the information available at the time the decision was made – and not based on facts that come to light only with the benefit of hindsight. The conditions of the Safe Harbor Rule embody this general principle of fiduciary prudence. A fiduciary’s selection and monitoring of an annuity provider is judged based on the information available at the time of the selection, and at each periodic review, and not in light of subsequent events.”
This will be a critical element of the safe harbor, demonstrating that what is required is prudence, not prescience, as I had noted in a previous blog.
Evan Giller and I testified before the ERISA Advisory Council this past May, where we suggested the DOL work to ease fiduciary anxiety with this sort of guidance. We also suggested in the Testimony the factors which a safe harbor should require-noting that the burden to provide the information should be on the insurers in a competitive circumstance. Let the insurers’ poke at the accuracy of their competitors’ data; and let the fiduciary rely upon that.
You may find our written Testimony with its specifics related to what should be sought by the fiduciary helpful.
As with the Treasury’s guidance in Rev Rule 2012-3, this will help form the fundamental basis for making lifetime income work.