[Code of Federal Regulations]

[Title 29, Volume 9]

[Revised as of July 1, 2006]

From the U.S. Government Printing Office via GPO Access

[CITE: 29CFR2509.95-1]



[Page 364-366]

 

                             TITLE 29--LABOR

 

 CHAPTER XXV--EMPLOYEE BENEFITS SECURITY ADMINISTRATION, DEPARTMENT OF 

                                  LABOR

 

PART 2509_INTERPRETIVE BULLETINS RELATING TO THE EMPLOYEE RETIREMENT 

INCOME SECURITY ACT OF 1974--Table of Contents

 

Sec.  2509.95-1  Interpretive bulletin relating to the fiduciary standard 

under ERISA when selecting an annuity provider.



    (a) Scope. This Interpretive Bulletin provides guidance concerning 

certain fiduciary standards under part 4 of title I of the Employee 

Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. 1104-1114, 

applicable to the selection of annuity providers for the purpose of 

pension plan benefit distributions where the plan intends to transfer 

liability for benefits to the annuity provider.

    (b) In General. Generally, when a pension plan purchases an annuity 

from an insurer as a distribution of benefits, it is intended that the 

plan's liability for such benefits is transferred to the annuity 

provider. The Department's regulation defining the term ``participant 

covered under the plan'' for certain purposes under title I of ERISA 

recognizes that such a transfer occurs when the annuity is issued by an 

insurance company licensed to do business in a State. 29 CFR 2510.3-

3(d)(2)(ii). Although the regulation does not define the term 

``participant'' or ``beneficiary'' for purposes of standing to bring an 

action under ERISA Sec.  502(a), 29 U.S.C. 1132(a), it makes clear that 

the purpose of a benefit distribution annuity is to transfer the plan's 

liability with respect to the individual's benefits to the annuity 

provider.

    Pursuant to ERISA section 404(a)(1), 29 U.S.C. 1104(a)(1), 

fiduciaries must discharge their duties with respect to the plan solely 

in the interest of the participants and beneficiaries. Section 

404(a)(1)(A), 29 U.S.C. 1104(a)(1)(A), states that the fiduciary must 

act for the exclusive purpose of providing



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benefits to the participants and beneficiaries and defraying reasonable 

plan administration expenses. In addition, section 404(a)(1)(B), 29 

U.S.C. 1104(a)(1)(B), requires a fiduciary to act with the care, skill, 

prudence and diligence under the prevailing circumstances that a prudent 

person acting in a like capacity and familiar with such matters would 

use.

    (c) Selection of Annuity Providers. The selection of an annuity 

provider for purposes of a pension benefit distribution, whether upon 

separation or retirement of a participant or upon the termination of a 

plan, is a fiduciary decision governed by the provisions of part 4 of 

title I of ERISA. In discharging their obligations under section 

404(a)(1), 29 U.S.C. 1104(a)(1), to act solely in the interest of 

participants and beneficiaries and for the exclusive purpose of 

providing benefits to the participants and beneficiaries as well as 

defraying reasonable expenses of administering the plan, fiduciaries 

choosing an annuity provider for the purpose of making a benefit 

distribution must take steps calculated to obtain the safest annuity 

available, unless under the circumstances it would be in the interests 

of participants and beneficiaries to do otherwise. In addition, the 

fiduciary obligation of prudence, described at section 404(a)(1)(B), 29 

U.S.C. 1104(a)(1)(B), requires, at a minimum, that plan fiduciaries 

conduct an objective, thorough and analytical search for the purpose of 

identifying and selecting providers from which to purchase annuities. In 

conducting such a search, a fiduciary must evaluate a number of factors 

relating to a potential annuity provider's claims paying ability and 

creditworthiness. Reliance solely on ratings provided by insurance 

rating services would not be sufficient to meet this requirement. In 

this regard, the types of factors a fiduciary should consider would 

include, among other things:

    (1) The quality and diversification of the annuity provider's 

investment portfolio;

    (2) The size of the insurer relative to the proposed contract;

    (3) The level of the insurer's capital and surplus;

    (4) The lines of business of the annuity provider and other 

indications of an insurer's exposure to liability;

    (5) The structure of the annuity contract and guarantees supporting 

the annuities, such as the use of separate accounts;

    (6) The availability of additional protection through state guaranty 

associations and the extent of their guarantees. Unless they possess the 

necessary expertise to evaluate such factors, fiduciaries would need to 

obtain the advice of a qualified, independent expert. A fiduciary may 

conclude, after conducting an appropriate search, that more than one 

annuity provider is able to offer the safest annuity available.

    (d) Costs and Other Considerations. The Department recognizes that 

there are situations where it may be in the interest of the participants 

and beneficiaries to purchase other than the safest available annuity. 

Such situations may occur where the safest available annuity is only 

marginally safer, but disproportionately more expensive than competing 

annuities, and the participants and beneficiaries are likely to bear a 

significant portion of that increased cost. For example, where the 

participants in a terminating pension plan are likely to receive, in the 

form of increased benefits, a substantial share of the cost savings that 

would result from choosing a competing annuity, it may be in the 

interest of the participants to choose the competing annuity. It may 

also be in the interest of the participants and beneficiaries to choose 

a competing annuity of the annuity provider offering the safest 

available annuity is unable to demonstrate the ability to administer the 

payment of benefits to the participants and beneficiaries. The 

Department notes, however, that increased cost or other considerations 

could never justify putting the benefits of annuitized participants and 

beneficiaries at risk by purchasing an unsafe annuity.

    In contrast to the above, a fiduciary's decision to purchase more 

risky, lower-priced annuities in order to ensure or maximize a reversion 

of excess assets that will be paid solely to the employer-sponsor in 

connection with the termination of an over-funded pension plan would 

violate the fiduciary's duties under ERISA to act solely in the interest 

of the plan participants and beneficiaries. In such circumstances, the 

interests of those participants and beneficiaries who will receive 

annuities lies in receiving the safest annuity available and other 

participants and beneficiaries have no countervailing interests. The 

fiduciary in such circumstances must make diligent efforts to assure 

that the safest available annuity is purchased.

    Similarly, a fiduciary may not purchase a riskier annuity solely 

because there are insufficient assets in a defined benefit plan to 

purchase a safer annuity. The fiduciary may have to condition the 

purchase of annuities on additional employer contributions sufficient to 

purchase the safest available annuity.

    (e) Conflicts of Interest. Special care should be taken in reversion 

situations where fiduciaries selecting the annuity provider have an 

interest in the sponsoring employer which might affect their judgment 

and therefore create the potential for a violation of ERISA Sec.  

406(b)(1). As a practical matter, many fiduciaries have this conflict of 

interest and therefore will need to obtain and follow independent expert 

advice calculated to identify those insurers with the



[[Page 366]]



highest claims-paying ability willing to write the business.



[60 FR 12329, Mar. 6, 1995]