The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act made a number of changes designed to increase the availability of lifetime income options in defined contribution retirement plans, such as 401(k) plans. Among those changes was a new fiduciary safe harbor for choosing an annuity provider, including an “in-plan” annuity-type product. Although this provision may not have received as much attention due to the COVID-19 pandemic, plan sponsors and committees should be aware of the new safe harbor option, particularly in light of the upcoming requirement to provide lifetime income disclosures to participants, which is set to become effective later this year (discussed here).

Background

Sponsors of defined contribution plans have had the option to include a lifetime annuity option within their plan, even prior to the SECURE Act. However, the selection of an annuity provider is a fiduciary decision, which raises the possibility of fiduciary liability in certain circumstances, such as if the annuity provider becomes unable to pay, possibly years down the road.

Although the Department of Labor (“DOL”) provided guidance in 2008 on how plan sponsors can meet fiduciary obligations when selecting an annuity provider, many plan sponsors were concerned that the guidance was too vague to mitigate the fiduciary risk of making this selection. As a result, historically, most plan sponsors have decided not to offer an annuity in their defined contribution plans.

SECURE Act Safe Harbor

The SECURE Act allows plan fiduciaries to reduce the risk of adding a lifetime annuity option and selecting an annuity provider by following the steps in the statutory safe harbor. The SECURE Act safe harbor includes elements from the 2008 safe harbor, but changes some of the more concerning provisions, such as the requirement that the fiduciary appropriately conclude at the time of selection that the insurer could make all future payments.

Under the new safe harbor, a fiduciary will be deemed to have met the applicable ERISA requirements if the fiduciary completes the following steps:

• Search. The fiduciary must engage in an objective, thorough, and analytical search for the purpose of identifying insurers from which to purchase annuity contracts.
• Review. The fiduciary must consider both the insurer’s financial capability to meet its obligations and the cost, including fees and commissions, of the annuity contract in relation to the benefits and product features of the contract and administrative services to be provided under the contract.
• Determination. The fiduciary must conclude that both (1) at the time of selection, the insurer is financially capable of satisfying its obligations under the annuity contract, and (2) the relative cost of the annuity contract is reasonable. Importantly, with respect to determination (1), a fiduciary is deemed to have considered the financial capability of the insurer, if the fiduciary obtains certain written representations from the insurer related to its compliance with specific regulatory requirements. With respect to determination (2), the SECURE Act explicitly states that this requirement does not mean that a fiduciary must select the lowest cost insurance contract.

There are a number of nuances and caveats related to the financial representations and the satisfaction of the safe harbor requirements. However, the new safe harbor provides broad fiduciary protection for a plan sponsor or committee that meets – and appropriately documents – its compliance with the requirements. Note that, in addition to complying with the safe harbor requirements, plan sponsors may also want to encourage additional participant education pertaining to the value of a lifetime annuity.