Corporate executives are bracing for regulatory judgment calls on how they handle derisking through lump-sum payments and annuity purchases, lobbyists say.
Plan executives have been closely watching the Labor Department's ERISA Advisory Council, which has spent much of the year looking at lump sums and annuities and considering ways to improve regulatory oversight of the practices. Council members represent diverse interests, including employers, unions, retiree advocates, lawyers and insurers.
That effort culminated with recommendations presented Nov. 5 to Assistant Secretary Phyllis Borzi, who heads the Employee Benefits Security Administration. The council stopped short of recommending a formal rule-making process.
Instead, council members recommended the Department of Labor consider ways to develop more explicit guidance for plan executives and more disclosure for employees on how the derisking strategies are calculated and implemented, and what is their potential impact on participants.
“That's the balancing act,” said Craig Rosenthal, a partner in Mercer's retirement risk and finance practice in New York, who works with companies that already have derisked, or are considering it now, primarily through offering lump sums. “If the additional guidance became too burdensome, then I think the sponsors would have to rethink whether it's worthwhile.”
The council heard testimony in September and October on whether the DOL should provide for a notice and comment period before issuing additional guidance in several key areas. One is the distinction between when an employer is deciding to derisk and the fiduciary responsibilities of the plan sponsor when carrying out the transactions. Another is whether to expand rules for how plan sponsors select the safest annuity, and a third is what type of participant disclosures are needed before electing lump-sum distributions.
The council also recommended that DOL officials:
nclarify that the rules for selecting annuities, known as Interpretive Bulletin 95-1, apply to any annuity purchase, not just those made for a plan termination, and consider developing safe harbors for those purchases;
nprovide at least 90 days' disclosure for lump-sum offerings within a specific window, similar to plan termination notices, to allow participants to compare their options; and
nprovide education and outreach to plan sponsors on their options and consider collecting transaction data.
Careful to balance the need for immediate guidance on some issues and the importance of public input before any major legal changes are made, council members felt it best to let EBSA officials figure out the next steps. They agreed, however, that any changes should only be made prospectively.
“We certainly heard a lot of different perspectives, and we worked hard to achieve balance,” said Richard Turner, who chaired the advisory council's derisking issue group.
“Hearing those perspectives really underscored the value of the process that we went through. We tried to focus on areas where plan sponsors, plan participants and the voluntary system as a whole could benefit from additional guidance,” said Mr. Turner, who is vice president and general counsel of the Variable Annuity Life Insurance Co. in Houston. “We encourage people to read the (council's)report” when it comes out in early 2014.
Employer advocates, who worry DOL officials would err on the side of protecting participants from possible missteps or abuses, were disappointed to lose their bid for a formal process of notice and comment.
“Changing rules without full public vetting is not good policy,” and can have “immediate, harmful effects,” said Lynn Dudley, senior vice president of policy for the American Benefits Council in Washington.
Ms. Dudley said her group will work with the EBSA and other stakeholders to continue the dialogue with regulators.