DOL Finalizes Fiduciary Safe Harbor for Selection of DC Plan Annuity Providers

The U.S. Department of Labor (DOL) has finalized regulations establishing a safe harbor for the selection of an annuity provider and purchase of annuity contracts for defined contribution (DC) plans. The final regulations simplify the safe harbor proposed in September 2007 and clarify that the safe harbor is an optional means of satisfying the fiduciary standards of the Employee Retirement Income Security Act (ERISA). The regulations took effect Dec. 8, 2008.

The final rules provide a safe harbor process for meeting ERISA’s prudent-person standard with respect to the purchase of an annuity contract from an insurer for distribution to a plan participant. The safe harbor is intended to encourage DC plan sponsors to offer annuity payment options under the plan. The way it works is the plan uses the proceeds of the participant’s current account balance to purchase the annuity contract and then distributes it directly to the participant. To meet the safe harbor requirements, the fiduciary must:

1. Engage in an objective, thorough and analytical search for an annuity provider.

2. Consider sufficient information to assess the provider’s financial ability to make all future payments under the contracts.

3. Consider the cost (including fees and commissions) of the benefits and services provided under the contract.

4. Ensure that the contract costs are reasonable in view of the benefits and services provided.

5. Consult with an appropriate expert or experts for purposes of compliance with the safe harbor conditions.

The fiduciary may choose whether to meet the safe harbor conditions: (1) when selecting a provider and contract for distribution to a specific participant or beneficiary, or (2) when selecting a provider to make annuity contracts available to participants and beneficiaries in the future. For future contracts, the fiduciary must periodically revisit steps 2-5 above.