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CCH® PENSION — 09/30/10

Employer Groups Urge Agencies To Address Fiduciary Concerns In Crafting Lifetime Income Rules

from Spencer’s Benefits Reports: In a joint Labor/Treasury Department hearing on lifetime income options in defined contribution plans, witnesses representing the American Society of Pension Professionals and Actuaries (ASPPA), the ERISA Industry Committee (ERIC), and the American Benefits Council urged the Agencies to adopt safe harbor rules that would shield employers from fiduciary liability in the selection of an annuity provider.

The joint hearing of the Treasury Department and the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) was held on September 14 and 15.

“Meaningful Safe Harbor” Needed, Says ASPPA

The “primary barrier” to the availability of lifetime income options in defined contribution plans centers on fiduciary liability in the selection and monitoring of these offerings, as well as issuer solvency, according to Sheldon H. Smith, president of ASPPA. As a result, he said, most employers favor the safe path of requiring a lump-sum distribution of assets to avoid these issues. Consequently, the rollover of the distributions results in a “leakage” of assets from the retirement system, which if not dispersed could be leveraged to provide savings throughout retirement.

In his testimony, Mr. Smith called for the establishment of a broad safe harbor for annuities and alternative products that extends beyond current regulations. A “meaningful safe harbor,” he explained, would provide plan fiduciaries—particularly fiduciaries to small business retirement plans—the ability to rely on solvency determinations made by EBSA and Treasury through a listing of providers rated by federal and/or state regulators. “We urge DOL and Treasury to ensure that these rules are neither burdensome nor expensive, thereby reducing the obstacles plans sponsors face in offering lifetime income options to their participants,” Mr. Smith added.

ERIC Urges Agencies To Focus On Educating Participants

Allison Klausner, assistant general counsel (benefits) for Honeywell International Inc., testifying on behalf of ERIC, urged the Agencies “to embark on an educational initiative to help employees and retirees understand the potential benefits and risks of investing in annuity contracts, as well as address employers’ fiduciary concerns.” Ms. Klausner explained that over the past decade there has been a significant movement away from defined benefit (DB) arrangements to defined contribution (DC) plans, resulting in employees having greater responsibility for their retirement planning decisions. She noted that most participants choose lump-sum distributions rather than annuities or installments, subjecting themselves to the risk of overspending or outliving their retirement savings.

Ms. Klausner warned, however, that, “[m]ajor employers would like to help employees but are concerned that any assistance that they provide will expose them to fiduciary liability under ERISA—that no good deed will go unpunished.” She said that the DOL should clarify that employers can aid employees in choosing a distribution option without subjecting themselves to fiduciary liability and litigation. She urged the DOL to establish a “genuine safe harbor” under the regulation regarding the selection of annuity providers to make benefit distributions from DC plans. She suggested that a genuine safe harbor be based on objective and uniformly applicable criteria, such as approval of a provider by an independent fiduciary that meets criteria specified by the DOL or the issuer’s receipt of a given rating by one or more rating agencies approved by the DOL.

Benefits Council Asks For Clear Fiduciary Guidance

“As employers, we welcome the development of public policies that would facilitate the design of new lifetime income options that are less complex and have lower costs than available today,” said Janet Boyd, director of government relations for The Dow Chemical Company, testifying on behalf of the American Benefits Council. Ms. Boyd’s testimony focused on two key concerns contributing to the cost and complexity for employer benefit plan sponsors with regard to the provision of lifetime income products: (1) fiduciary issues and (2) disclosure and education.

Under current law, “the selection of an annuity provider is fraught with potential missteps that could result in continued liability for the plan sponsor well into the future,” Ms. Boyd said. To rectify this, she continued, “Plan sponsors need clear, simple fiduciary guidance allowing them to make lifetime income options available to plan participants without risking a significant increase in potential fiduciary liability.”

Ms. Boyd said that the Agencies should encourage, but not require, defined contribution plan sponsors to provide illustrations of how account balances translate into lifetime payments at age 65 by publishing model disclosures that, if used, would not give rise to fiduciary liability. “The Council also is a strong proponent of financial literacy education and agrees with the agencies that educating participants on the management and spend down of retirement assets is a crucial goal, as an increasing number of baby boomers approach retirement,” said Ms. Boyd. However, plan sponsors who want to educate their employees on the benefits of lifetime income and other management and spend down concepts “may be deterred by the lack of guidance on how to provide appropriate education in this area without triggering fiduciary liability,” Ms. Boyd added.

For more information, visit http://www.dol.gov/ebsa/regs/cmt-1210-AB33.html.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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