The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, 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 Oklahoma is representative of a common question related to defined benefit plan buyouts. The advisor asked:
“What is a pension buyout, and what is the impact to plan participants?”
Highlights of Discussion
- A pension buyout is a financial transaction between a defined benefit plan and an insurance company. In a buyout, the defined benefit plan's fiduciaries transfer assets and liabilities from the plan to an outside insurance company. The insurance company then assumes the responsibility for paying the benefit obligations for the plan and charges a fee for this service. Kimberly-Clarke is an example of a large buyout.
- The guidelines that plan fiduciaries must follow when selecting an annuity provider for their defined benefit plans are detailed in DOL Interpretive Bulletin (IB) 95-1. Sponsors of DB plans should refer to IB 95-1 and obtain the advice of a qualified, independent expert when making an annuity provider selection.
- IB 95-1 states 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:
— The employer has ended its responsibility and liability for benefit payments to them;
— Their benefit payments are no longer protected by the Pension Benefit Guaranty Corporation (a federal entity that insures the retirement benefits payable from private sector DB plans);
— 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;
— Should an insurance company prove insolvent, the corresponding state, life and health insurance guaranty association will provide a safety net for the state's policy holders. Coverage is coordinated on a state-by-state basis, so policyholders should contact their state’s association with any questions or concerns. The National Organization of Life & Health Insurance Guaranty Association maintains a web site with a drop-down menu listing all of the state association websites.
- The legitimacy of shifting a defined benefit plan's liabilities to an outside insurance carrier has been tested in the courts (See Lee v. Verizon Communs., Inc., 2014 U.S. Dist. LEXIS 50083, 58 Employee Benefits Cas. (BNA) 2149, 2014 WL 1407416 (N.D. Tex. Apr. 11, 2014.) The conclusion was, 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 the Employee Retirement Income Security Act of 1974 (ERISA).
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.
The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.
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