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The administration promotes lifetime income streams similar to payouts from a defined benefit pension
The Obama administration is taking further measures to encourage employers, as plan sponsors, to add an annuities option within their 401(k) and other defined contribution plans. Annuities are designed to provide participants with a lifetime income stream similar to payouts from a defined benefit pension plan.
The administration’s recent activity includes new guidance clarifying the safe harbor from litigation for employers that select annuity providers, intended in part to answer questions that arose after the IRS, in July 2014, issued a final rule on purchasing annuities within defined contribution plan accounts.
Last year’s final rule specifically applies to qualifying longevity annuity contracts (QLACs), which are a type of deferred income annuity that typically begin payouts after age 70½--when required minimum distributions from traditional 401(k) plans must generally begin—and continues throughout the retiree’s life.
Under the rule, a 401(k) or similar plan may permit participants to use up to 25 percent of their account balance or (if less) $125,000 to purchase a QLAC, with the dollar limit adjusted for cost-of-living increases in $10,000 increments. The QLAC’s value is excluded from the percentage of account value that must be withdrawn each year beginning at age 70½, but payments from the annuity must begin no later than the first day of the month after the retiree turns 85.
The final rule, however, was not the final word, and on July 13, 2015, in conjunction with the White House Conference on Aging, the Department of Labor (DOL) issued further guidance in its Field Assistance Bulletin (FAB) 2015-02, focusing on an employer’s liability when selecting and monitoring annuity providers.
ERISA’s Statute of Limitations
FAB 2015-02 addresses the annuity selection safe harbor for plan sponsors in terms of the application of the Employee Retirement Income Security Act’s (ERISA's) statute of limitations for claims relating to annuity selection. It clarifies that:
• An employer's fiduciary duty to monitor the solvency of the insurance company providing the annuity generally ends when the plan no longer offers the annuity as a distribution option, not when the insurer finishes making all promised payments.
• The ERISA’s statute of limitations period for fiduciary breach claims should be applied to the purchase of annuities by defined contribution plans, so that an action for a breach of fiduciary duty may not be brought after one of the following (whichever occurs first):
-- Six years after the date of the last action that was a part of the violation or, in the case of an omission, the latest date that the fiduciary could have remedied the violation.
-- Three years after the earliest date the participant or beneficiary had actual knowledge of the breach.
• If fraud or concealment of a breach is involved, an action may not be brought later than six years after the breach was discovered.
In other words, absent fraud or concealment, a participant or beneficiary must base claims on actions or omissions that occurred within the six years before the lawsuit.
“The guidance should encourage more employers to offer lifetime income annuities as a benefit distribution option in their 401(k)-type plans,” states an analysis by Buck Consultants. Nevertheless, “It remains to be seen whether clarity about fiduciary responsibility will spur more offerings of annuities from defined contribution plans. And if more annuity products are made available, it’s unclear whether plan participants will actually opt to lock in a retirement income as is hoped.”
A benefits brief from Groom Law Group noted that many issues remain unsettled. “Some plan fiduciaries and insurance companies will find the guidance in the FAB helpful to the extent a defined contribution plan offers an immediate annuity distribution option (e.g., joint and survivor or single life annuity) or a qualified longevity annuity contract option,” Groom’s attorneys observed. “Unfortunately, however, the FAB does not address how the safe harbor applies when the fiduciary selects an insurance company that provides other guaranteed lifetime income options or features in a defined contribution plan, such as deferred income annuities that may not be a QLAC, guaranteed minimum income benefit features, and guaranteed lifetime withdrawal benefit features.”
The attorneys concluded, “Presumably, DOL will address the application of the safe harbor to a broader array of guaranteed lifetime income products in a future rulemaking.”
Stephen Miller, CEBS, is an online editor/manager for SHRM.
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