WASHINGTON - Plan fiduciaries are expected to get guidance from the Department of Labor on how to purchase the safest available annuity for plan participants.
The interpretive bulletin, expected to be released in today's Federal Register, is a response to the 1991 Executive Life Insurance Co. debacle. It is expected to say that plan fiduciaries should purchase the safest available annuity for participants unless it is in the participants' best interest to do otherwise.
"When an annuity is purchased, that's a fiduciary decision like any other, but unlike a decision to make an investment, you're making one decision that will ensure whether the participant is going to be paid or not," said Assistant Secretary of Labor Olena Berg.
The bulletin will be retroactive to Jan. 1, 1975, when the Employee Retirement Income Security Act generally became effective. Ms. Berg said the department decided to issue an interpretive bulletin rather than a regulation because the General Accounting Office had recommended the department issue some sort of guidance to help fiduciaries comply with ERISA in choosing a provider.
"This is not a new standard .*.*. it's our judgment that (what's in the interpretive bulletin) has always been the standard" in selecting an annuity provider, Ms. Berg said. "We're trying to clarify what we think the fiduciary standard has been. So the question is, did (the plan fiduciary) meet the appropriate standards" when it chose an annuity provider.
Ms. Berg stressed there are no bright line tests plan fiduciaries can use in determining the safest available annuity provider, but the interpretive bulletin lists criteria plan fiduciaries should follow to help find the safest available provider.
Ms. Berg said the plan fiduciary should not rely solely on credit ratings of annuity providers but also consider:
The quality and diversification of the annuity provider's investment portfolio;
The size of the annuity provider relative to the proposed contract;
The annuity provider's capital and surplus;
The annuity provider's lines of business and indications of exposures to liabilities;
The structure of the annuity contract and its guaranty, such as the use of a separate account; and
The availability of added protections, through state guaranty associations, and the extent of the guaranty.
Sources said employers and insurers were greatly concerned that the "safest available annuity" phrase would indicate that plan fiduciaries could only choose one provider even if two were equally safe.
But Ms. Berg said that after making a thorough search, a plan fiduciary might conclude it is possible to have more than one safe annuity provider.
"This is where we thought the (interpretive bulletin) would be helpful," Ms. Berg said. "Because there was a concern that, in some situations, you could find more than one" safe annuity provider.
There also may be limited situations in which it may not be best to purchase the safest available annuity. When the annuity is only marginally safer but disproportionately more expensive than its competition, the participants and beneficiaries might have to bear a significant proportion of the increased cost.
"In that case, you have to look at the overall interests of the plan participants," Ms. Berg said.
The interpretive bulletin will apply to annuities purchased in termination situations, and when the employee leaves the company and the employer replaces the individual pension benefit with an annuity purchased from an insurer, but not in cases where the annuity is purchased for plan investment purposes, Ms. Berg said.
Most experts said the interpretive bulletin is unnecessary because it isn't a timely reaction to the Executive Life Co. collapse. Executive Life invested in high-risk junk bonds in the 1980s to provide for annuities. When the investments went sour,
Executive Life went bankrupt and benefits initially paid were cut 30%. Some employers made up the shortfall voluntarily, while others agreed to do so as part of settlements made with the Labor Department.
After Executive Life failed, the Labor Department sued a number of employers who purchased Executive Life annuities after terminating their overfunded pension plans.
The Labor Department alleged employers breached their fiduciary duties in purchasing Executive Life annuities; these lawsuits have provided the guidance needed, said Steve Kraus, chief counsel for pensions with the American Council of Life Insurance, Washington.