IRI Says DOL Proposal Could Disrupt Annuity Inclusion in Retirement Plans

According to the Insured Retirement Institute, the Department of Labor proposal to withdraw a regulatory safe harbor for the selection of annuity providers for benefit distributions from individual account retirement plans could lead to sponsor reluctance to include such options in retirement plans.

In comments filed yesterday, the deadline to comment on the proposed rule, the IRI stated the DOL action could “unintentionally lead to reluctance in offering lifetime income options, which would be contrary to the goals of the SECURE Act and SECURE 2.0 in promoting guaranteed retirement income.”

The regulatory safe harbor was established under the Pension Protection Act of 2006. It provides fiduciaries a broad standard for evaluating and selecting both annuity providers and annuity contracts, while the statutory safe harbor enacted under the Setting Every Community Up for Retirement Enhancement Act of 2019 primarily addresses the financial viability of insurers.

In July, the DOL proposed to eliminate various rules it deemed redundant and no longer necessary, with the stated purpose of “[improving] the daily lives of the American people by reducing unnecessary, burdensome, and costly Federal regulations.” One of these was the regulatory safe harbor stemming from the Pension Protection Act of 2006. The proposal will become rule on September 2, “unless significant adverse comments are received by July 31.”

Currently, retirement plan fiduciaries responsible for selecting benefit distribution annuity providers for defined contribution plans may follow one of two safe harbors.

Groom Law Group notes that, per the Pension Protection Act of 2006, the DOL developed a regulatory safe harbor setting forth the issues a fiduciary generally should consider when selecting an annuity for a defined contribution plan.

The SECURE Act then added a statutory safe harbor under the Employee Retirement Income Security Act’s Section 404(e), largely to help fiduciaries meet their obligation to assess the financial capability of the insurer, which is a condition of the 2008 regulatory safe harbor.

“The two safe harbors were intended to work together, so they both remained on the books affording fiduciaries the opportunity to take a ‘belt and suspenders’ approach by satisfying both safe harbors should they wish,” Groom stated.

According to the IRI, by maintaining both safe harbors, fiduciaries are afforded the ability to follow either the statutory or regulatory compliance pathway, which means sponsors can select which standards are better suited to the sponsor’s plan design, participant demographics and product offerings.

“Retaining the Regulation’s safe harbor will help ensure that fiduciaries have access to well-understood and time-tested guidance,” wrote Emily Micale, the IRI’s director of regulatory affairs. “Many plan sponsors and service providers have developed internal procedures, oversight processes, and fiduciary practices based on the safe harbor framework established by the Regulation. These standards continue to provide value by reinforcing prudent selection criteria, promoting consistent practices, and reducing ambiguity in the application of ERISA’s fiduciary duties.”

“IRI strongly supports efforts to ensure that regulatory standards are clear, consistent, and supportive of retirement income security. Retaining the Regulation’s safe harbor would serve these goals and avoid unnecessary disruption to fiduciary practices that are currently working effectively,” Micale concluded.