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EBSA Final Rules

Selection of Annuity Providers--Safe Harbor for Individual Account Plans   [10/7/2008]
[PDF]
FR Doc E8-23427
[Federal Register: October 7, 2008 (Volume 73, Number 195)]
[Rules and Regulations]               
[Page 58447-58450]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07oc08-7]                         

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

RIN 1210-AB19

 
Selection of Annuity Providers--Safe Harbor for Individual 
Account Plans

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Final rule.

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SUMMARY: This document contains a final regulation that establishes a 
safe harbor for the selection of annuity providers for the purpose of 
benefit distributions from individual account plans covered by title I 
of the Employee Retirement Income Security Act (ERISA). This regulation 
will affect plan sponsors and fiduciaries of individual account plans 
and the participants and beneficiaries covered by such plans. Also 
appearing in today's Federal Register is a final rule amending 
Interpretive Bulletin 95-1 to limit the application of the Bulletin to 
the selection of annuity providers for defined benefit plans.

DATES: This final rule is effective on December 8, 2008.

FOR FURTHER INFORMATION CONTACT: Janet A. Walters or Allison E. 
Wielobob, Office of Regulations and Interpretations, Employee Benefits 
Security Administration, U.S. Department of Labor, Washington, DC 
20210, (202) 693-8510. This is not a toll-free number.

SUPPLEMENTARY INFORMATION:

A. Background

    On September 12, 2007, the Department published an interim final 
regulation (72 FR 52004) limiting the scope of Interpretive Bulletin 
95-1, relating to the selection of annuity providers, to defined 
benefit plans, as directed by section 625 of the Pension Protection Act 
of 2006 (the PPA) (Pub. L. 109-280, 120 Stat. 780). On the same date, 
the Department published a proposed rule (72 FR 52021) that would 
establish a safe harbor for the selection of annuity providers for 
individual account plans. The Department received 10 comment letters in 
response to its request for comments. Set forth below is an overview of 
the final rule and the public comments submitted on the proposed rule. 
A final rule amending Interpretive Bulletin 95-1 also appears in 
today's Federal Register.

B. Overview of Final Rule and Comments

    As discussed below, the substance of the final rule is very similar 
to the Department's proposed rule. The Department, however, has made 
changes to the proposed rule that clarify and simplify the safe harbor 
conditions, consistent with the suggestions of the commenters.

Scope of the Final Rule

    Although restructured to simplify and clarify the rule, paragraph 
(a)(1) of Sec.  2550.404a-4 of the final rule, like the proposed rule, 
describes the scope of the regulation. As described in paragraph (a)(1) 
of the final rule, the regulation establishes a safe harbor for 
satisfying the fiduciary duties under section 404(a)(1)(B) of ERISA in 
selecting an annuity provider and contract for benefit distributions 
from an individual account plan. Paragraph (a)(1) also includes a 
reference to Sec.  2509.95-1 for guidance concerning the selection of 
annuity providers for defined benefit plans.
    Several commenters expressed concerns about a safe harbor 
structure. Some suggested that a safe harbor is inconsistent with the 
prudent person standard and that the prudent person standard alone 
would more effectively reduce impediments to annuities as a

[[Page 58448]]

distribution option under an individual account plan.
    Other commenters asserted that the regulation should explicitly 
state that the generally applicable fiduciary standards apply outside 
the safe harbor and that a fiduciary can discharge its fiduciary duties 
in ways other than those prescribed by the regulation. In this regard, 
some commenters expressed concerns that fiduciaries may believe that 
they must meet the safe harbor conditions in order to satisfy their 
fiduciary duties if the regulation is not clearly identified as a safe 
harbor. Others argued that the safe harbor has the effect of 
establishing a heightened standard of review for the selection and 
monitoring of annuities that is unduly stringent and has limited 
relevance to many annuity investment and distribution options.
    After careful consideration of these comments, the Department 
continues to believe that the safe harbor criteria will be useful to 
many plan fiduciaries when selecting annuity providers and contracts. 
The Department agrees, however, that a clearer statement concerning the 
nature of the safe harbor would be beneficial. Accordingly, the 
Department has modified paragraph (a) of the safe harbor to add new 
subparagraph (a)(2), clarifying that the regulation does not establish 
minimum requirements or the exclusive means for satisfying the 
responsibilities under section 404(a)(1)(B) of ERISA with respect to 
the selection of an annuity provider or contract for benefit 
distributions. Further, in an effort to minimize confusion concerning 
the scope of the safe harbor, as well as to simplify the regulation 
generally, the Department has eliminated paragraph (b) of the proposal, 
which discussed the general fiduciary standards of section 404(a)(1).

Safe Harbor

    Paragraph (b) of Sec.  2550.404a-4 of the final rule sets forth the 
conditions of the safe harbor. While the conditions for relief under 
the final safe harbor regulation are essentially the same as those 
contained in the proposal, some changes have been made to the ordering 
and language of the conditions for purposes of clarifying and 
simplifying the overall regulation.
    As with the proposal, the first condition for safe harbor relief is 
that the plan fiduciary engage in an objective, thorough and analytical 
search for the purpose of identifying and selecting providers from 
which to purchase annuities. See paragraph (b)(1) of Sec.  2550.404a-4 
of the final rule. Consistent with other guidance from the Department, 
this process must avoid self dealing, conflicts of interest or other 
improper influence, and should, to the extent feasible, involve 
consideration of competing annuity providers.
    Paragraph (b)(2) of the final rule, consistent with the proposal, 
requires that the fiduciary appropriately consider information 
sufficient to assess the ability of the annuity provider to make all 
future payments under the annuity contract.
    Paragraph (b)(3), requires that the fiduciary appropriately 
consider the cost of the annuity contract, including fees and 
commissions, in relation to the benefits and administrative services to 
be provided under the contract. This paragraph is also consistent with 
the proposal, except that a reference to ``fees and commissions'' has 
been added to emphasize their importance to the fiduciary's decision 
making process.
    Paragraph (b)(4), also like the proposal, requires that the 
fiduciary appropriately conclude that, at the time of the selection, 
the annuity provider is financially able to make all future payments 
under the annuity contract and the cost of the annuity contract is 
reasonable in relation to the benefits and services to be provided 
under the contract.
    Paragraph (b)(5) provides that, if necessary, the fiduciary should 
consult with an appropriate expert or experts for purposes of complying 
with the requirements of the safe harbor as set forth in paragraph (b). 
The proposal included as a condition that a fiduciary appropriately 
determine either that he or she had, at the time of the selection, the 
appropriate expertise to evaluation the selection of an annuity 
provider or that the advice of a qualified, independent expert was 
necessary. A number of commenters expressed concern that this 
requirement, as framed, would require all employers to engage 
independent experts to conduct an analysis of the provider and 
contract, even those that believed they had the requisite knowledge to 
make a prudent decision. Commenters believed this would be a 
particularly onerous requirement for small employers. As modified, the 
regulation makes clear that engaging an independent expert is not 
required in all cases. Rather, whether and to what extent, if at all, 
an expert may be needed is a determination to be made by the plan 
fiduciary taking into account what, if any, assistance the fiduciary 
needs to satisfy the conditions in paragraphs (b)(1)-(4) of the 
regulation.
    Paragraph (c)(2) of the proposed regulation provided additional 
guidance concerning what information a fiduciary should consider in 
meeting the requirements for the safe harbor. A number of commenters 
argued that the provisions of paragraph (c)(2) were duplicative, 
confusing and unnecessary. The Department agrees that the paragraph, as 
part of the safe harbor, is not necessary and, in some instances, may 
be confusing. Accordingly, the final safe harbor does not include the 
listing of supplemental considerations set forth in paragraph (c)(2) of 
the proposal.
    The Department believes that the general safe harbor conditions in 
the final regulation will be more useful for fiduciaries. Further, 
although an annuity provider's ratings by insurance ratings services 
are not part of the final safe harbor, in many instances, fiduciaries 
may want to consider them, particularly if the ratings raise questions 
regarding the provider's ability to make future payments under the 
annuity contract. The Department also believes that some information 
regarding additional protections that might be available through a 
state guaranty association for an annuity provider also would be useful 
information to a plan fiduciary, even if limited to that information 
which is generally available to the public and easily accessible 
through such associations, state insurance departments, or elsewhere.

Time of Selection

    Commenters expressed concern that plan fiduciaries would have to 
comply with the conditions of the proposed safe harbor merely because 
they offered investment options through an annuity contract, without 
regard to whether a participant or plan fiduciary actually exercised 
the annuity feature of the contract. If so, commenters argued, 
investment products offered by insurers would be subject to what they 
perceived as a different, if not higher, fiduciary standard than that 
applied to the selection of other investment products. The Department 
does not intend, by virtue of the safe harbor, to establish different 
fiduciary standards for the selection of investment products. Rather, 
the safe harbor conditions apply solely to a fiduciary's decision to 
purchase a distribution annuity for an individual account plan. To 
clarify this point, the final regulation includes a new paragraph (c) 
that affords plan fiduciaries flexibility concerning when they must 
meet the safe harbor conditions in order to take advantage of the safe 
harbor. Paragraph (c)(1) of the final regulation provides that, under 
the safe harbor, the time of selection may be the time that the 
fiduciary selects the annuity provider and contract for distribution of 
benefits to a specific

[[Page 58449]]

participant or beneficiary. Paragraph (c)(2) provides, in the 
alternative, that the fiduciary may meet the safe harbor conditions 
when the fiduciary selects an annuity provider to provide annuity 
contracts at future dates to participants or beneficiaries, provided 
that the selecting fiduciary periodically reviews the continuing 
appropriateness of the conclusion that the annuity provider is 
financially able to make all future payments under the annuity contract 
and the cost of the annuity contract is reasonable in relation to the 
benefits and services to be provided under the contract, taking into 
account the factors described in paragraphs (b)(2), (3) and (5) of 
Sec.  2550.404a-4 of the final rule. For purposes of paragraph (c)(2), 
a fiduciary is not required to review the appropriateness of this 
conclusion with respect to any annuity contract purchased for any 
specific participant or beneficiary.

C. Effective Date

    This final regulation will be effective 60 days after the date of 
its publication in the Federal Register.

D. Regulatory Impact Analysis

Executive Order 12866 Statement

    Under Executive Order 12866 (58 FR 51735), the Department must 
determine whether a regulatory action is ``significant'' and therefore 
subject to review by the Office of Management and Budget (OMB). Section 
3(f) of the Executive Order defines a ``significant regulatory action'' 
as an action that is likely to result in a rule (1) having an annual 
effect on the economy of $100 million or more, or adversely and 
materially affecting a sector of the economy, productivity, 
competition, jobs, the environment, public health or safety, or State, 
local or tribal governments or communities (also referred to as 
``economically significant''); (2) creating serious inconsistency or 
otherwise interfering with an action taken or planned by another 
agency; (3) materially altering the budgetary impacts of entitlement 
grants, user fees, or loan programs or the rights and obligations of 
recipients thereof; or (4) raising novel legal or policy issues arising 
out of legal mandates, the President's priorities, or the principles 
set forth in the Executive Order. Pursuant to the terms of the 
Executive Order, it has been determined that this action is not 
``significant'' within the meaning of section 3(f) of the Executive 
Order, and, therefore, is not subject to review by OMB.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to Federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C 551 et seq.) and that are likely 
to have a significant economic impact on a substantial number of small 
entities. Section 604 of the RFA requires that the agency present a 
final regulatory flexibility analysis of the publication of the notice 
of final rulemaking describing the impact of the rule on small 
entities. The Department has considered the likely impact of the final 
rule on small entities in connection with its assessment under 
Executive Order 12866, described above, and believes this rule will not 
have a significant impact on a substantial number of small entities.

Paperwork Reduction Act

    This rulemaking is not subject to the requirements of the Paperwork 
Reduction Act of 1995 (44 U.S.C. 301 et seq.), because it does not 
contain ``collection of information'' requirements as defined in 44 
U.S.C. 3502(3). Accordingly, the final rule is not being submitted to 
the OMB for review under the Paperwork Reduction Act.

Congressional Review Act

    This notice of final rulemaking is subject to the Congressional 
Review Act provisions of the Small Business Regulatory Enforcement 
Fairness Act of 1996 (5 U.S.C. 801 et seq.) and therefore has been 
transmitted to the Congress and the Comptroller General for review.

Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4), the final rule does not include any Federal mandate that may 
result in expenditures by State, local, or tribal governments, or 
impose an annual burden exceeding $100 million on the private sector.

Federalism Statement

    Executive Order 13132 (August 4, 1999) outlines fundamental 
principles of federalism and requires Federal agencies to adhere to 
specific criteria in the process of their formulation and 
implementation of policies that have substantial direct effects on the 
States, the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government. This final rule does not have federalism 
implications because it has no substantial direct effect on the States, 
on the relationship between the national government and the States, or 
on the distribution of power and responsibilities among the various 
levels of government. Section 514 of ERISA provides, with certain 
exceptions specifically enumerated, that the provisions of Titles I and 
IV of ERISA supersede any and all laws of the States as they relate to 
any employee benefit plan covered under ERISA. The requirements 
implemented in the final rule do not alter the fundamental provisions 
of the statute with respect to employee benefit plans, and as such 
would have no implications for the States or the relationship or 
distribution of power between the national government and the States.

List of Subjects in 29 CFR Part 2550

    Annuities, Employee benefit plans, Fiduciaries, Pensions.

0
For the reasons set forth in the preamble, the Department amends 
Chapter XXV of Title 29 of the Code of Federal Regulations as follows:

Title 29--Labor

SUBCHAPTER F--FIDUCIARY RESPONSIBILITY UNDER THE EMPLOYEE RETIREMENT 
INCOME SECURITY ACT OF 1974

PART 2550--RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY

0
1. The authority citation for Part 2550 is revised to read as follows:

     Authority: 29 U.S.C. 1135; and Secretary of Labor's Order No. 
1-2003, 68 FR 5374 (Feb. 3, 2003). Sec. 2550.401c-1 also issued 
under 29 U.S.C. 1101. Sec. 2550.404a-1 also issued under sec. 657, 
Pub. L. 107-16, 115 Stat. 38. Sections 2550.404c-1 and 2550.404c-5 
also issued under 29 U.S.C. 1104. Sec. 2550.408b-1 also issued under 
29 U.S.C. 1108(b)(1) and sec. 102, Reorganization Plan No. 4 of 
1978, 5 U.S.C. App. 1. Sec. 2550.408b-19 also issued under sec. 611, 
Pub. L. 109-280, 120 Stat. 780, 972, and sec. 102, Reorganization 
Plan No. 4 of 1978, 5 U.S.C. App. 1. Sec. 2550.412-1 also issued 
under 29 U.S.C. 1112.


0
2. Add Sec.  2550.404a-4 to read as follows:


Sec.  2550.404a-4  Selection of annuity providers--safe harbor for 
individual account plans.

    (a) Scope. (1) This section establishes a safe harbor for 
satisfying the fiduciary duties under section 404(a)(1)(B) of the 
Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. 
1104-1114, in selecting an annuity provider and contract for benefit 
distributions from an individual account plan. For guidance concerning 
the selection of an

[[Page 58450]]

annuity provider for defined benefit plans see 29 CFR 2509.95-1.
    (2) This section sets forth an optional means for satisfying the 
fiduciary responsibilities under section 404(a)(1)(B) of ERISA with 
respect to the selection of an annuity provider or contract for benefit 
distributions. This section does not establish minimum requirements or 
the exclusive means for satisfying these responsibilities.
    (b) Safe harbor. The selection of an annuity provider for benefit 
distributions from an individual account plan satisfies the 
requirements of section 404(a)(1)(B) of ERISA if the fiduciary:
    (1) Engages in an objective, thorough and analytical search for the 
purpose of identifying and selecting providers from which to purchase 
annuities;
    (2) Appropriately considers information sufficient to assess the 
ability of the annuity provider to make all future payments under the 
annuity contract;
    (3) Appropriately considers the cost (including fees and 
commissions) of the annuity contract in relation to the benefits and 
administrative services to be provided under such contract;
    (4) Appropriately concludes that, at the time of the selection, the 
annuity provider is financially able to make all future payments under 
the annuity contract and the cost of the annuity contract is reasonable 
in relation to the benefits and services to be provided under the 
contract; and
    (5) If necessary, consults with an appropriate expert or experts 
for purposes of compliance with the provisions of this paragraph (b).
    (c) Time of selection. For purposes of paragraph (b) of this 
section, the ``time of selection'' may be either:
    (1) The time that the annuity provider and contract are selected 
for distribution of benefits to a specific participant or beneficiary; 
or
    (2) The time that the annuity provider is selected to provide 
annuity contracts at future dates to participants or beneficiaries, 
provided that the selecting fiduciary periodically reviews the 
continuing appropriateness of the conclusion described in paragraph 
(b)(4) of this section, taking into account the factors described in 
paragraphs (b)(2), (3) and (5) of this section. For purposes of this 
paragraph (c)(2), a fiduciary is not required to review the 
appropriateness of this conclusion with respect to any annuity contract 
purchased for any specific participant or beneficiary.

    Signed at Washington, DC, this 29th day of September, 2008.
Bradford P. Campbell,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
 [FR Doc. E8-23427 Filed 10-6-08; 8:45 am]

BILLING CODE 4510-29-P