The BCG Pension Insider
May 2023 – Volume 139, Edition 1
Fiduciary Considerations in the Context of IB 95-1
In a pension risk transfer annuity buyout, Department of Labor Interpretive Bulletin 95-1 (“IB 95-1”) states that fiduciaries “must take steps calculated to obtain the safest annuity available, unless under the circumstances it would be in the interests of participants and beneficiaries to do otherwise.” It further states that it may “be in the interest of participants and beneficiaries to choose a competing annuity if the annuity provider offering the safest available annuity is unable to demonstrate the ability to administer the payment of benefits to the participants and beneficiaries.”
| Fiduciary Responsibilities | IB 95-1 |
|---|---|
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As an interpretive bulletin, IB 95-1 provides guidance concerning the fiduciary standards applicable to the selection of an annuity provider for purposes of pension plan benefit distributions. In addition to providing guidance regarding compliance with ERISA’s fiduciary requirements, it comments specifically on areas where special care may be needed, such as avoiding conflicts of interest, seeking independent expert advice, and selecting the safest available annuity.
IB 95-1 explains that the fiduciary obligation of prudence “requires, at a minimum, that plan fiduciaries conduct an objective, thorough and analytical search for the purpose of identifying and selecting providers from which to purchase annuities. In conducting such a search, a fiduciary must evaluate a number of factors relating to a potential annuity provider’s claims paying ability and creditworthiness. Reliance solely on ratings provided by insurance rating services would not be sufficient to meet this requirement.” This explanation of the fiduciary obligation of prudence is followed by a list describing six specific factors.
This list of six items excludes several important items that have evolved since the Interpretive Bulletin was issued in 1995, such as asset-liability and liquidity management practices, the use of derivatives and capital management including riskbased capital requirements. These additional safest available criteria are not only critical to evaluating an insurer’s longterm financial prospects (and their ability to make the required payments to plan participants), but also evidence the “care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims” as provided under ERISA 404(a)(1)(B).
The point is that IB 95-1 is clearly not intended to provide fiduciaries with a prescriptive safe harbor, but to guide the fiduciary in a complex process while protecting the interests of plan participants and beneficiaries. Figure 1 below shows a framework of fiduciary considerations a fiduciary should consider in selecting an annuity provider and contract in a standard annuity buyout. Administration should be a consideration beyond the issues of safety and thus falls under other relevant considerations.
Figure 1: IB 95-1 Hierarchy
A Deeper Dive into Key Administration Factors
Certainly, it is critical for plan participants to receive accurate and timely pension payments. And, of course, tax reporting to participants and to the IRS must be accurate and timely as well. Beyond this, are many other aspects of administration that are important considerations to a fiduciary because they are important to participants. Figure 2 below categorizes the major administration considerations and why they are important.
Figure 2: Critical Components of Annuity Buyout Administration
| Category | Why It’s Important | Key Considerations |
|---|---|---|
| Setup | Plan participants should not experience disruption, inconvenience or angst when their pension benefits transition to the insurer. | Communications Resources Project Management |
| Call Center | Plan participants should receive convenient, knowledgeable, efficient and courteous customer service. | Responsiveness Staff Experience Customer Satisfaction |
| Procedures and Standards | Plan participants should receive accurate information. The fiduciary should feel confident that the insurer can deliver the services it promises. | Procedures Manual Performance Standards Complaint Log Maintenance |
| Systems | Good systems accommodate excellence in all of the above. They should be reliable and should protect sensitive information. | Functional Integration Systems Flexibility Back-up / Disaster Recovery Cybersecurity |
When selecting an insurer for an annuity buyout, fiduciaries need to understand the needs of their participants, and appreciate the many ways that administration has an important impact on their plan participants. For example, younger, more tech-savvy participants may better appreciate online services over a traditional call center that relies on phone conversations.
How Can BCG Help
Our due diligence and fiduciary services involve conducting the insurance company due diligence required by IB 95-1, including reviewing the administration capabilities of insurers and serving our clients in a fiduciary capacity as an independent expert. BCG’s ongoing evaluation of insurers via questionnaires, on-site visits and the experience of more than 2,500 annuity placements makes us uniquely qualified to assist plan fiduciaries with the due diligence process. To learn more, contact us.
Contact Us
Steve Keating, Managing Director
BCG Pension Risk Consultants | BCG Penbridge
T: 203-955-1566
E: skeating@bcgpension.com
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ANNUITY PURCHASE RATES
Sample Interest Rates for a Pension Annuity Buyout
(Assumes no lump sums, disability, or unusual provisions)
Retirees (duration of 7) – 4.49%
Term Vesteds (duration of 10) – 4.51%
Actives (duration of 15) – 4.50%
Annuity Purchase Rates as of May 1, 2023