DOL Reports to Congress on Considerations for Pension Plan Fiduciaries Choosing an Annuity Provider

July 02, 2024

On June 24, 2024, the DOL released a report to Congress regarding Interpretive Bulletin 95-1 (the bulletin), which addresses ERISA fiduciary obligations of defined benefit (pension) plan sponsors when they select an annuity provider. The report was issued pursuant to Section 321 of the SECURE 2.0 Act, which directed the DOL to determine whether the bulletin’s guidance required amendment and to assess any risks to plan participants associated with an annuity provider selection. 

Pension plans promise participants a specific benefit (e.g., monthly payment) at retirement based upon a formula set forth in the plan. Plan sponsors are generally responsible for ensuring their plan contributions and related investment income are sufficient to pay the promised benefits. However, a sponsor can purchase an annuity contract to transfer liability for all or some of the plan’s payment obligations to the insurer issuing the annuity. The annuity purchase in this context is referred to as a “pension risk transfer” or a “de-risking” transaction. 

In 1995, the DOL issued the bulletin to provide guidance to plan sponsors regarding their ERISA fiduciary duties as applied to the selection of an annuity provider in a pension risk transfer or de-risking transaction. The bulletin provides that plan fiduciaries must take steps calculated to obtain the safest annuity available unless, under the circumstances, it would be in the interest of the participants and beneficiaries to do otherwise. Fiduciaries must conduct an objective, thorough, and analytical search to identify and select annuity providers. 

The bulletin emphasizes that fiduciaries should not rely solely on insurance ratings to assess an annuity provider’s claims-paying ability and creditworthiness; rather, fiduciaries should consider the following six factors, among others: 

1. The quality and diversification of the annuity provider’s investment portfolio.
2. The size of the insurer relative to the proposed contract.
3. The level of the insurer’s capital and surplus.
4. The lines of business of the annuity provider and other indications of an insurer’s exposure to liability.
5. The structure of the annuity contract and guarantees supporting the annuities, such as the use of separate accounts.
6. The availability of additional protection through state guaranty associations and the extent of their guarantees. 

Furthermore, plan fiduciaries who lack the necessary expertise to evaluate these factors should obtain the advice of a qualified, independent expert. 

The DOL conducted a broad review of the bulletin, which included a study of historical and legal developments and current market trends. The DOL’s report observes that in 2022, pension risk transfer annuity purchases reached an all-time high with transactions totaling $52 billion in premiums. The report also notes the increase in private equity involvement with life and annuity insurers, including with respect to pension risk transfers, and questions whether this trend presents increased risk to participants (i.e., the annuitants). 

Additionally, the DOL conducted more than 40 stakeholder meetings with representatives of organized labor, employer groups, and insurance companies, among others. The attendees expressed a range of opinions as to whether amendments to the bulletin were warranted. Although some believed the guidance remained appropriate, others indicated that significant changes are necessary to protect participants’ interests. Stakeholders advocating for changes believed the bulletin should focus plan fiduciaries’ attention on risks related to an insurance company’s ownership structure, including private equity interests, and the extent to which an insurer relies upon non-traditional and potentially riskier investments and liabilities as well as offshore and/or captive reinsurance, among other items. 

Based on its review, which included consultation with the ERISA Advisory Council, the DOL concluded that the bulletin continues to identify broad factors that are relevant to a fiduciary’s prudent and loyal selection of an annuity provider. However, the DOL indicated they intend to explore the issues raised in their review further to determine whether some of the bulletin’s factors need revision or supplementation and whether additional guidance should be developed. 

Employers that sponsor pension plans, particularly those considering a pension risk transfer, should be aware of the report and their fiduciary obligations with respect to the selection of an annuity provider. They should also monitor for further updates on this issue. 

DOL Report to Congress on Employee Benefits Security Administration’s Interpretive Bulletin 95-1