Fiduciary Duty a Factor in Pension Risk Transfers

Pension risk transfers (PRTs) are, at their core, financial transactions. But there are other important factors to keep in mind when contemplating and conducting a PRT—among them, fiduciary responsibility. 

With PRTs heating up lately, a discussion of how fiduciary duty factors in may be timely.  

Fiduciary Duty and PRTs 

So how does fiduciary duty relate to PRTs? Allison Wielobob, General Counsel of the American Retirement Association, offers her take.

“ERISA fiduciaries have to be mindful of a large collection of risks when considering a pension risk transfer transaction,” says Wielobob. “The textual basis for their broad duties is in Section 404(a) of ERISA, which requires plan fiduciaries to discharge their duties solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan,” she adds. 

“A transfer also has to be consistent with the plan’s investment policy statement,” Wielobob continues. “Finally,” she says, “plan fiduciaries have to be mindful of potential self-dealing prohibited transactions that can arise. For example, if the plan sponsor owns the insurer to which a risk is transferred – there is potential a conflict of interest. Significantly, the same liability attendant to fiduciary duties in other contexts applies to these transactions.”

DOL Attention and Guidance 

Aon its Pension Risk Transfer 2023 Mid-Year Update notes that regulators are paying attention to the recent growth in PRTs. Not only that, they observe, SECURE 2.0 calls on the DOL to review the standards it set for such transactions and determine whether they need to update the guidance they have issued. Aon further reports that the DOL is conducting that review, and is to report to Congress about it by New Year’s Eve.

Wielobob takes a look at Department of Labor (DOL) Interpretive Bulletin (IB) 95-1, which concerns the fiduciary standards under ERISA when selecting an annuity provider for a pension plan. 

“In pension risk transfers, aka, ‘de-risking’ transactions, a plan sponsor transfers some or all of the risk associated with pension liabilities to another party. Though there are a multitude of names for these events, they generally include: contracts for longevity reinsurance , buy-ins, and buy-outs,” she says. 

“In its settlor capacity, the plan sponsor may be focused on getting a good price in a transfer transaction. But a plan sponsor engaging in a pension risk transfer, it is still an ERISA fiduciary, and is required to act prudently and in the best interests of the plan's participants and beneficiaries,” notes Wielobob. She continues, “The Department of Labor has always maintained that the selection of an annuity provider for purposes of benefit distributions is a fiduciary decision. Applied to a pension risk transfer, this means it too would have to be accomplished in a manner consistent with DOL guidance. Wearing its fiduciary hat, the sponsor wants a strong insured promise that it believes will be honored. The fiduciary’s job is to ensure that its counterparty will be able to honor its obligation.” 

Wielobob says that “29 CFR 2509-95-1 (IB 95-1) provides guidance on the factors that a plan sponsor should consider when selecting an annuity provider, such as the provider's financial strength, experience, and investment policies.” Further, she notes, “IB 95-1 also emphasizes the importance of due diligence and ongoing monitoring of the annuity provider. The risk transfer industry’s working assumption seems to be that IB 95-1 applies to risk transfers or that it is as close to real guidance that they have. In 2013, the ERISA Advisory Council recommended that the DOL confirm that IB 95-1 applies to any purchase of an annuity from an insurer as a distribution of benefits under a defined benefit plan, not just purchases coincident with a plan termination.”

Action Steps

Aon calls it “critical” that plan fiduciaries  conduct a PRT review of annuity providers, in order to ensure that annuities “are placed with financially strong insurers with adequate participant protections.”

Wielobob argues that plan fiduciaries will want to consider the appropriateness of PRTs in light of:

• the particular plan’s funding status and benefit obligations;
• the cost of the transaction and its impact on plan participants' benefits, including potential risks; and
• the financial stability of the annuity provider (Interpretive Bulletin 95-1 provides factors for fiduciaries’ consideration).