Ever since defined contribution plans have come to dominate the retirement plan landscape, both plan sponsors and policymakers have grappled with how to help employees take a lifetime’s worth of savings and convert it into a sustainable source of retirement income. One way to help participants meet retirement income needs is to integrate guaranteed income products into defined contribution plan lineups. Fiduciaries have expressed concern, however, about potential liability they may face for the selection of annuity providers. The SECURE Act, signed into law by President Donald Trump on December 20, 2019, may help allay those concerns.
The US Department of Labor tried its hand at allaying these concerns back in 2008, with the adoption of a regulatory “safe harbor” at 29 CFR § 2550.404a-4 to protect fiduciaries selecting guaranteed retirement income contracts. The 2008 regulation, however, did not end up making fiduciaries feel all that “safe” as several of the conditions of the safe harbor contained somewhat vague standards.
Section 204 of the SECURE Act, which creates Section 404(e) of ERISA, provides much more certainty on how the required conditions can be satisfied. A fiduciary will be deemed to satisfy its obligations in selecting an insurer for a guaranteed retirement income contract if it engages in an “objective, thorough, and analytical search for the purposes of identifying insurers.”
Then, once the fiduciary has identified those insurers, it must consider their financial capabilities to satisfy their obligations under the guaranteed retirement income contract and conclude that the insurer is financially capable of satisfying those obligations. This is where the SECURE Act arguably puts some real “safety” into the safe harbor by providing that a fiduciary will be deemed to satisfy those requirements if it obtains specified written representations from the insurers in question.
The fiduciary must also consider the costs of the guaranteed retirement income contract in relation to the benefits and product features provided and then conclude that the cost is reasonable. The SECURE Act does not offer specific representations that can be obtained to satisfy this condition (as it does for the insurer’s financial capabilities), but Section 404(e)(3) of ERISA provides that nothing in Section 404(e) requires a fiduciary to select the lowest cost contract.
Section 404(e) also provides comfort that a fiduciary does not have an obligation to review the appropriateness of a selection of a guaranteed income contract after the contract has already been purchased—only at the time of purchase or the time of selection of a contract to provide benefits at a future date.
There are already signs of increased interest in building lifetime income components into defined contribution plan investment options based on this new provision. The specific forms these products take remains to be seen, but we would expect that plan fiduciaries previously reluctant to take the plunge on lifetime income may now be more willing to do so, assuming they can find products that meet their objectives. If that comes to pass, Section 204 of the SECURE Act will be owed much of the credit.