Can Congress Help Change Sponsors’ Take on In-Plan Annuities?

Experts believe the annuity provider selection safe harbor provision in the Retirement Enhancement and Savings Act could limit fiduciary liability for plan sponsors offering guaranteed income in their DC plans.
Art by Kyle Smart

Art by Kyle Smart

As the retirement industry looks ahead to 2019, advocates and analysts will be keeping a close eye on the Retirement Enhancement and Savings Act, known fondly by the industry as “RESA.”

The bipartisan legislation was introduced back in March 2018 by Senators Orrin Hatch, R-Utah, and Ron Wyden, D-Oregon. RESA includes a proposal for pooled employer plans (PEPs), also called open multiple employer plans (MEPs). The sweeping legislation would treat open MEPs as one plan under the Employee Retirement Income Security Act (ERISA) and roll back the “one bad apple” rule to prevent one participating employer from disqualifying the whole plan.

The bill also includes a proposal to require lifetime income estimates at least annually on participants’ retirement plan statements, along with a proposed fiduciary safe harbor for the selection of lifetime income providers for individual account retirement plans. According to Michael Kreps, principal at Groom Law Group, there is a lot of attention being paid to the MEP provisions of RESA, but he says plan sponsors are also very interested in the annuity safe harbor idea.

Simply put, plan sponsors continue to worry about their liability stemming from the selection of an annuity provider within their DC plan.

“They are worried that if they put annuities in a plan and then the insurer wouldn’t be able to pay many years later, the plan sponsor could be liable,” Kreps explains.  

He says plan sponsors are typically hesitant to offer in-plan annuities due to fears that an insurer would not be able to complete the financial obligation, or pay for the annuity. They fear this could result in the employer being held liable for the outstanding annuity, and possibly being sued by plan participants. Kreps points out that regulators and legislators have taken some steps to ease plan sponsors’ concerns—for example by presenting a framework for assessing annuity providers in the retirement plan context—but many sponsors still feel a more specific and stronger safe harbor is needed in this area.

“The current guidance requires employers to conduct a pretty exhaustive financial appraisal of annuity providers,” says Roberta Rafaloff, vice president of institutional income annuities at MetLife. “This can be an appraisal that most companies have neither the resources nor the expertise to perform on their own.”

Participants Don’t Share Sponsors’ Concerns  

Industry research shows defined contribution (DC) plan participants are interested in longevity insurance, even as plan sponsors continue to be nervous about offering workers income solutions without a safe harbor provision. An Employee Benefit Research Institute (EBRI) report found almost half (48%) of workers are either very or somewhat interested in annuities. However, a MetLife survey showed less than 10% of employers currently offer these solutions to their participants.

Rafaloff credits this lack of enthusiasm to current regulatory guidance, which limits protections for employers.

“The system creates barriers for businesses looking to offer retirement income options to their employees. Plan sponsors are looking for commonsense guidance,” she says.

Surveys show employers believe Congress and regulators should institute safe harbor provisions in order to expand lifetime income options available to plan participants. Rafaloff observes how, in a MetLife study, 92% of DC plan sponsors agreed on the importance for the DOL to provide a workable safe harbor for annuity carrier selection criteria.

Moving forward, should RESA be passed in 2019 or in the future, the retirement industry can expect an uptick in annuity purchases, says Rafaloff.

“The legislation will help enhance employer-sponsored retirement plans, such as 401(k) plans, by removing regulatory obstacles and expanding access to lifetime income solutions,” she says. “We believe the safe harbor provision in RESA will significantly advance the adoption and availability of annuities within DC plans.”