The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Michigan is representative of a common question related to DB plans and annuity providers. The advisor asked:
“General Motors and Verizon are two large firms that have chosen to shift some of their DB pension benefit payment obligations to an outside insurance carrier (through the purchase of group annuity contracts). Is there any guidance on how plan sponsors select an annuity provider under these circumstances and what does that mean for participants?”
Highlights of Recommendations
• Yes, the DOL issued guidance in Interpretive Bulletin (IB) 95-1, which contains the standards to which it will hold plan fiduciaries when selecting annuity providers for distribution purposes for their DB plans. Sponsors of DB plans should refer to IB 95-1 and, unless they possess the necessary expertise to evaluate such factors, obtain the advice of a qualified, independent expert when making an annuity provider selection.
• IB 95-1 states that when a pension plan purchases an annuity from an insurer as a means of distributing benefits, it is intended that “the plan's liability for such benefits is transferred to the insurance company.” Assuming the selection process of the outside insurance company meets the standards of IB 95-1, the transfer of liability from the plan to the insurance company means at least four things for retirees and beneficiaries:
1. The employer has ended its responsibility and liability for benefit payments to them.
2. Their benefit payments are no longer protected by the Pension Benefit Guaranty Corporation (PBGC), the federal governmental entity that insures the retirement benefits payable from private sector DB plans.
3. Any guarantees of payment are based on the financial strength and claims-paying ability of the issuing insurance company, which is solely responsible for all obligations under its policies.
4. Should an insurance company prove insolvent, the corresponding state life and health insurance guaranty association will provide a safety net for the state’s policyholders. For more information, please see the National Organization of Life & Health Insurance Guaranty Associations.
• There is case law that indicates that when plan sponsors follow proper procedures for purchasing annuity contracts from outside insurance carriers to satisfy benefit obligations they are not breaching their fiduciary duty under ERISA.
Conclusion
Shifting benefit payment liability from the plan sponsor to an insurance company carries with it fiduciary liability. The DOL will evaluate the DB plan’s annuity provider selection process against strict fiduciary standards contained in IB 95-1. Plan participants and beneficiaries must be aware of what this shift in liability means for them. Financial advisors who can demonstrate their knowledge of the rules applicable to the prudent selection of a DB plan annuity provider are better positioned to support their plan sponsor and plan participant clientele.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2014 Columbia Management Investment Advisers, LLC. Used with permission.
