DOL Seeks to Boost DC Lifetime Income Annuities

Diamonds may be forever, but apparently fiduciary liability for choosing annuities in a DC plan is not.

That’s likely the most significant takeaway for advisors and plan sponsors from Field Assistance Bulletin (FAB) 2015-02. In that document, acknowledging that “confusion or lack of clarity” about the nature and scope of fiduciary liabilities in choosing annuities in a DC plan, the Labor Department has attempted to provide both. The FAB outlines not only the parameters for such decisions, but also some examples on how the prudence standard is to be applied to the selection and monitoring of annuities — and a reminder about ERISA’s six-year statute of limitations, and how it is applied in these circumstances.

The publication of the FAB was announced as being part of a “broader initiative designed to increase awareness and availability of lifetime income options in defined contribution plans.” The Labor Department said that the guidance “…should encourage more employers to offer lifetime income annuities as a benefit distribution option in their 401(k)-type plans.”

SOL ‘Limits’

The FAB explains that actions by participants and beneficiaries against plan fiduciaries under ERISA for breaches of duty in connection with the purchase of annuities — including the imprudent selection and monitoring of annuity providers — are subject to the applicable limitations periods in ERISA Section 413. This section provides that an action for a breach of fiduciary duty may not be brought after the earlier of:

1. six years after the date of the last action which constituted a part of the violation or, in the case of an omission, the latest date on which the fiduciary could have cured the violation; or
2. three years after the earliest date on which the plaintiff had actual knowledge of the breach.
In the case of fraud or concealment of a breach, an action may not be brought later than six years after the breach was discovered. Absent fraud or concealment, these provisions mean that a plaintiff must base his or her claims on actions or omissions that occurred within the six years preceding the lawsuit.

Thus, the FAB explains, “if the plaintiff bases his or her claim on the imprudent selection of an annuity contract to distribute benefits to a specific participant, the claim would have to be brought within six years of the date on which plan assets were expended to purchase the contract.”

Time of Selection

The FAB outlines the process to be undertaken by DC plan fiduciaries in selecting annuities in order to satisfy the requirements of the safe harbor, and explaining that a key date in determining the application of ERISA’s statute of limitations is the “time of selection,” which in this context is either:

1. the time that the annuity provider and contract are selected for distribution of benefits to a specific participant or beneficiary; or
2. the time that the annuity provider is selected to provide annuities as a distribution option for participants or beneficiaries to choose at future dates.

The Labor Department notes that the FAB is intended to provide guidance regarding these issues (including the application of ERISA’s statute of limitations to claims relating to annuity selection) and to assist the Employee Benefits Security Administration’s national and regional offices in responding to questions from employers and other interested parties.