ERISA Advisory Council recommends safe harbor for lifetime income

The ERISA Advisory Council has recommended that the Department of Labor publish guidance confirming that a defined contribution plan fiduciary has safe harbor to appoint an investment manager to select and monitor annuity and other lifetime income providers.

The council made the recommendation in a 2018 report that was finalized and posted to DOL's website last week.

Applying the "fiduciary responsibility scheme of ERISA section 3(38) in which the plan fiduciary only has responsibility for the prudent selection and monitoring of an independent expert would address many plan sponsor concerns about fiduciary liability," the council said.

Jan Jacobson, senior counsel for retirement policy at the American Benefits Council, said the guidance would essentially provide a safe harbor for plan fiduciaries. "Employers in a lot of ways are hesitant to do something new because of the potential fiduciary liability," Ms. Jacobson said. "Employers are getting sued right and left so the concern would be adding something like lifetime income could increase that potential liability."

The American Benefits Council supports adding more fiduciary safe harbors to regulations, such as the one the council recommended, Ms. Jacobson said.

The ERISA Advisory Council also recommended that the DOL amend the qualified default investment alternative rule to address using lifetime income in a QDIA.

To do so, it said changes to the QDIA rule should address the permissibility of including fixed annuities, living benefits and other lifetime income approaches in a QDIA, and address the importance of tailoring QDIA options to affected participants, similar to rules applicable to QDIA balanced funds.

"Specifically, we recommend the department clarify that sponsors may default participants into different options based on participant demographics because plan populations may not be sufficiently similar for a single default to be universally appropriate," the council wrote.

It also said the rule should maintain the current transferability and liquidity requirements, but clarify whether living benefits satisfy these requirements, and address the extent to which charges may be imposed if they have the effect of limiting liquidity and/or transferability.

Moreover, the council said the DOL should encourage plan sponsors to adopt plan design features that "facilitate (lifetime income), including, but not limited to: allowing participants to take ad hoc distributions, enabling installment payments, providing Social Security bridge options and allowing for payment of required minimum distributions."

As the private U.S. retirement system continues to shift more responsibility toward individuals via DC plans and IRAs, more attention has been focused on individuals' asset accumulation and less so on understanding, facilitating and/or educating people on decumulation, the council said in its report.

The recommendations were shaped by the testimony of industry stakeholders over a two-day period in August.