Labor Department withdraws annuity safe harbor rule after industry pushback

The US Department of Labor has withdrawn a direct final rule that would have eliminated a long-standing regulatory safe harbor for selecting annuity providers in workplace retirement plans, following significant opposition from the Insured Retirement Institute and other industry stakeholders.

The move comes after the Insured Retirement Institute, a trade group representing the retirement income industry, and other commenters argued that removing the safe harbor could discourage plan sponsors from offering lifetime income options, potentially undermining the goals of recent federal retirement legislation.

In comments filed July 31, the group had warned that eliminating the regulatory safe harbor “could unintentionally lead to reluctance in offering lifetime income options, which would be contrary to the goals of the SECURE Act and SECURE 2.0 in promoting guaranteed retirement income.” 

The regulatory safe harbor, established under the Pension Protection Act of 2006, provides fiduciaries with a framework for evaluating both annuity providers and contracts. While the SECURE Act of 2019 introduced a statutory safe harbor focused on the financial health of insurers, the regulatory version covers broader fiduciary responsibilities, including the selection process for both providers and products.

Reacting to EBSA's decision, Emily Micale, director of regulatory affairs at the Insured Retirement Institute, said that the group is “grateful that DOL withdrew this direct final rule.”

“We appreciate that DOL and the Trump Administration are seeking ways to reduce unnecessary regulatory burdens," Micale said in the IRI's Monday statement. "However, the direct final rule would make the regulatory climate more difficult for financial professionals and plan sponsors and potentially would have negatively affected retirement savers’ access to beneficial retirement products and strategies.” 

The DOL said it decided to reverse course as it considered the volume and substance of adverse comments against its direct final rule. The feedback, it said, raised serious issues that required a substantive response.

Many plan sponsors and service providers have designed their internal procedures and fiduciary practices around the safe harbor framework, which IRI says continues to provide value by reinforcing prudent selection criteria and promoting consistent practices.

The DOL's U-turn on the safe harbor for annuities also comes shortly after President Donald Trump issued an executive order directing it and the Securities and Exchange Commission to reexamine existing rules that govern the types of investment options allowed in 401(k)s.

Aside from private market investments and investment vehicles that invest in digital assets, the White House order also included "lifetime income investment strategies including longevity risk-sharing pools" among the alternative assets in its democratization push.

In a statement following the order, Secretary Lori Chavez-DeRemer emphasized the need for federal government to respect American workers' ability to make retirement decisions, including those around alternative assets.

"This Executive Order further supports our efforts to improve flexibility and eliminate unfair one-size-fits-all approaches," Secretary Chavez-DeRemer said. "American workers should be able to make choices that best meet their personal financial needs, and President Trump’s Executive Order will empower them to do that."

Micale said the Insured Retirement Institute looks forward to working with the Department of Labor “to discuss ways to streamline regulations and to improve retirement security for workers and retirees.”