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.