The purchase of annuities can be used to settle some or all of a defined benefit plan’s benefit obligations when a plan sponsor concludes settling the obligations is an appropriate way to address the obligations and related impacts on the plan sponsor’s balance sheet. The decision to settle pension obligations is a non-fiduciary decision of the plan sponsor, while the selection of the insurer or insurers and the contract structure is a fiduciary decision. In a plan termination, the purchase of annuities satisfies all of the plan’s benefit obligations as the insurance carrier assumes responsibility for all liabilities. In other instances, the purchase of annuities can be used to settle the benefits for a subset of plan participants such as current retirees. In a spin-off termination, assets and liabilities for the participants to be annuitized are spun off, then the spun-off plan is terminated and annuities are purchased. In an annuity buy-out, there is no termination, but the plan purchases annuities for a subset of participants and transfers all related obligations to the insurer.
It is also possible for a plan to invest in an annuity contract while retaining the obligation to pay participants (an annuity buy-in), but this has been less prevalent of late, since the primary driver of annuitization has been the desire of plan sponsors to settle pension liabilities.
In any case, the selection of an annuity provider in connection with benefit distributions is a fiduciary act governed by the fiduciary standards of section 404(a)(1) of ERISA, including the duty to act prudently and solely in the interest of the plan’s participants and beneficiaries.
The Department of Labor, in its Interpretive Bulletin 95-1 (“IB 95-1”), provides that plan fiduciaries must take steps calculated to obtain the safest available annuity and must conduct an objective, thorough and analytical search for purposes of identifying providers from which to purchase annuities. It goes on to set forth six factors that should be considered by fiduciaries in evaluating a potential provider’s claims paying ability and creditworthiness. IB 95-1 emphasizes that the selection must be made in the interest of participants, not the plan sponsor. Although some courts have said the purchase of the safest available annuity may not be necessary, they still have emphasized that fiduciaries must act in the interest of participants and prevent conflicting interests from entering the decision-making process.
Congress amended ERISA to make clear that the safest available annuity standard does not apply to annuity purchases made available to participants in defined contribution plans. The DOL has issued separate guidance for those plans.
What We Do
Fiduciary Counselors assumes full fiduciary responsibility for the selection of an insurance carrier(s) to provide the annuity. Delegating full fiduciary responsibility to an independent fiduciary is intended to remove any real or perceived conflict of interest and show the selection was indeed completed in a manner that protects the interests of plan participants and beneficiaries and is consistent with DOL guidance on this matter.
As independent fiduciary, benefit security is of paramount importance in all situations; however, the size of the annuity purchase will ultimately determine whether a potential insurer will entertain certain features such as a separate account and whether transaction specific documents will be negotiated. A smaller transaction would most likely use a standard annuity agreement while, for the larger transaction, a complex definitive purchase agreement and group annuity contract would be negotiated for that single transaction.
In any case, Fiduciary Counselors, working with experts in the insurance industry, will analyze the available options, represent the interests of plan participants, ensure compliance with the fiduciary standards of ERISA, and make a determination that the annuity selection is consistent with the DOL guidance found in IB 95-1.
We have served as the independent fiduciary for eleven annuity purchases totaling approximately $12.0 billion for plans including:
– Verizon ($7.5 billion)
– Bristol-Myers Squibb ($1.4 billion)
– Visteon ($350 million)
– Enron ($245 million)
In 2015, in addition to JCPenney, we have served as independent fiduciary for three annuity purchases totaling $1.3 billion. Our experience covers annuity purchases smaller than those listed, including purchases below $5 million. We are highly qualified to handle annuity purchases of any size.
Fiduciary Counselors has experience in ensuring that the placement of annuities is handled in a manner consistent with the applicable provisions of ERISA and the guidance of the DOL’s IB 95-1. We welcome the opportunity to discuss any situation in greater detail. Please contact us if you’d like to explore our solutions.