Government Accountability Office pushes DOL to update 401(k) annuity rules

The Labor Department, however, offered a rebuke to the recommendations, saying they would erode consumer protections

Sep 12, 2016 @ 11:30 am

By Greg Iacurci

The Government Accountability Office has recommended the Labor Department update rules around the offering of annuities in 401(k) plans, in hopes of spurring greater uptake of lifetime income options among participants.

In a new report, the GAO, a government agency that provides investigative services for Congress, recommends the Department of Labor clarify existing rules laying out how employers sponsoring a 401(k) can satisfy fiduciary duties when selecting an annuity provider for their retirement plan.

Wording of current rules, known as safe-harbor requirements, has been cited as a reason for low prevalence of lifetime income options in 401(k)s. Only 9.1% of 401(k) plans offer a lifetime income option, according to the Plan Sponsor Council of America.

The debate around how to turn 401(k) assets into a lifetime income stream has been a major focus for regulators and 401(k) industry stake-holders of late. In 2014, the Treasury Department issues rules promoting use of longevity annuities in 401(k)s. That same year, Treasury and DOL officials gave plan sponsors the OK to use target date funds including deferred annuities as a default plan investment.

Last week, Morningstar Inc. issued a report detailing how the U.S. lags other countries in public policy around lifetime income.

The primary challenge of current rules, according to the GAO, is that plan sponsors must, in order to obtain fiduciary relief, be able to assess an insurer's ability to make all future payments under an annuity contract, and conclude that, at the time of selection, the company can make those payments.

Current rules are a major barrier to annuity uptake because plan sponsors perceive judging an insurer's solvency decades in the future as too risky, according to Aron Szapiro, director of policy research at Morningstar.

The GAO recommends in its report, published Sept. 8, that the DOL update the safe harbor by “providing sufficiently detailed criteria” related to assessing an annuity provider's “long-term solvency.”

It also asks the DOL to consider providing legal relief for plan fiduciaries offering “an appropriate mix” of annuity options in a 401(k) plan. No incentive exists for plan sponsors to offer a mix of annuity options to participants, the GAO said.

The DOL, however, offered a rebuke to the GAO's recommended course of action.

In a letter responding to the recommendations, Phyllis Borzi, assistant secretary of Labor for employee benefits security, said the GAO recommendations would erode consumer protection.

“Rather than strengthening consumer protections for plan participants and beneficiaries, we are concerned that your suggestion carries the risk of degrading the oversight required of a fiduciary responsible for protecting the rights and interests of plan participants and beneficiaries,” Ms. Borzi wrote of the safe-harbor recommendation.

She also said fiduciary relief for offering a mix of annuities would transfer responsibility associated with selection of an annuity provider “from a responsible fiduciary to an individual employee.”

The DOL said plan sponsors, under current rules, can outsource annuity selection to a fiduciary investment adviser, which “better preserves ERISA's prudence and loyalty duties in annuity selection decisions.” The GAO argues, however, that not all plans have access to such services.

However, even though the GAO's recommendations aren't the DOL's desired approach, Ms. Borzi said officials were “open to considering” such approaches as those identified in the report. Due to the “need to focus on higher priority regulatory projects,” any such project is a “long-term action.”

Mr. Szapiro of Morningstar said he believes the GAO's recommendations “are on point,” because they can likely be accomplished in a way that expands annuity access and protects consumers.

However, the DOL “definitely have strong concerns about eroding consumer protections, and they're certainly not rushing to do anything about it," he said.

Charles Jeszeck, director of the GAO's Education, Workforce and Income Security group, said it's “unclear if they ultimately hope to go in a different direction.”

“As indicated in their comment letter, our recommendation is not their first choice,” Mr. Jeszeck said.

The DOL's position could change depending on what the DOL hears in public comments and information it receives during any public comment period on a proposed rule change in the future, Mr. Jeszeck said.


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