Selecting An Annuity Provider: Part III
In earlier newsletters, we discussed two of the key issues for selecting an insurance company to provide guaranteed income for retirees under 401(k) and other defined contribution plans. We explained that the process is not inherently different from - or more difficult than - other fiduciary decisions (for example, selecting investment products or providers). We pointed out that the DOL safe harbor regulation is helpful, but does not give specific guidance on what information should be reviewed. We described some of the information a plan committee or other fiduciary should consider, noting that a plan committee does not need to predict the future, but instead just needs to make an informed, prudent decision.
In this article, our focus is again on the fiduciary process of selecting an insurance company.
But first, why should a plan consider offering a lifetime income guarantee? By "lifetime income guarantee," we mean an annuity (or other product provided by an insurance company) that guarantees a stream of payments for the life of a retired participant, and possibly his or her spouse. The reason to offer a guarantee is to eliminate, or at least reduce, the risk that a retiree will outlive the money in his or her plan account or rollover IRA. Elements of this risk include the possibility of living longer than expected, market downturns at the "wrong" time, the impact of withdrawing retirement funds too quickly and the erosion of critical decision-making capacity as the retiree ages. A guarantee of payment for life addresses those risks.
How should a committee select an insurance company? ERISA requires fiduciaries to engage in a prudent process, which entails gathering and assessing relevant information and making a rational decision based on that information. But what if the committee just selects a well-regarded insurance company that has a long history of providing annuity benefits to thousands of annuitants? In one case, then Appeals Court Judge Antonin Scalia (now Supreme Court Justice Scalia) said that "[e]ven if a trustee failed to conduct an investigation before making a decision, he is insulated from liability if a hypothetical prudent fiduciary would have made the same decision anyway."1 In other words, if other fiduciaries would have chosen that insurance company after engaging in a prudent process, the committee making the same choice - but without conducting an investigation - would not be exposed to liability.
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