At the height of summer, the defined contributions wars heat up
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Amidst the summer lull, the Department of Labor (DoL) has issued Field Assistance Bulletin 2015-02, a clarifying document that aims to open the door to the broader use of annuities within defined contribution (DC) plans. While annuities have been allowed within DC plans for some years, a lack of guidance as to fiduciary obligations post sale has tempered sponsor enthusiasm. The bulletin explains that while sponsors are considered under fiduciary obligation at the time of annuity selection and at each periodic review, they will not be held to this standard in the case of specific purchases by a participant or beneficiary. This distinction is important in that it grants significant protection to sponsors, but the DoL leaves significant wiggle room as to the frequency of required reviews. Clearly, published reports of the pending insolvency on an issuing insurer would trigger the need for a review. Otherwise, the degree of diligence that must be exercised by the sponsor post-selection will need to be evaluated on a case by case basis: first by the plan sponsor, presumably, and then by the DoL. This may be a best effort solution to an irreconcilable problem, but such a measured response by the DoL is unlikely to eliminate what it describes as “disincentives for plan sponsors to offer their employees an annuity as a lifetime income distribution.” Plan sponsors have little incentive, in any case, to assume the risks of offering annuities when these are readily available for purchase outside the pre-tax space, and so the DoL will need to aim higher. What is noteworthy here is not so much the narrow scope of the little noticed bulletin, or its limited reach, but the degree to which it signals an acceleration of DoL efforts to clean up the DC business. To a large degree, this acceleration reflects a heightened jockeying for position among regulators and other industry actors with an interest in guiding reform. The recent Supreme Court case of Tibble vs. Edison International, which affirmed the nature of the fiduciary responsibility of plan sponsors to participants on an ongoing basis, appears to have brought issues of power and control to a head. I’ll talk about this in my next post.