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Leonard A. Davis, Chief Counsel – Benefits
Sharon W. Vaino, Assistant Tax Counsel
Tax Department
Metropolitan Life Insurance Company
One MetLife Plaza
Long Island City, NY 11101-4015
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2002-14A
29 CFR 2509.95-1
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Dear Mr. Davis and Ms. Vaino:
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This is in response to your request for guidance concerning the selection of
annuity providers, pursuant to Interpretive Bulletin 95-1 (29 C.F.R. §
2509.95-1), in connection with distributions from defined contribution plans.
Specifically, you have requested the Department to address the application of
specific requirements of Interpretive Bulletin 95-1 to defined contribution
plans.
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Interpretive Bulletin 95-1 (the IB) provides guidance concerning the
fiduciary standards under Part 4 of Title I of the Employee Retirement Income
Security Act (ERISA) applicable to the selection of annuity providers for
purposes of pension plan benefit distributions. In general, the IB makes clear
that the selection of an annuity provider in connection with benefit
distributions is a fiduciary act governed by the fiduciary standards of section
404(a)(1), including the duty to act prudently and solely in the interest of the
plan’s participants and beneficiaries. In this regard, the IB provides that
plan fiduciaries must take steps calculated to obtain the safest annuity
available, unless under the circumstances it would be in the interest of the
participants and beneficiaries to do otherwise. The IB also provides that
fiduciaries must conduct an objective, thorough and analytical search for
purposes of identifying providers from which to purchase annuities and sets
forth six factors that should be considered by fiduciaries in evaluating a
provider’s claims paying ability and creditworthiness. (§ 2509.95-1(c)).
Further, the IB recognizes that there may be situations where it may be in the
interest of participants and beneficiaries to purchase other than the safest
available annuity, such as when an annuity is only marginally safer, but
disproportionately more expensive than a competing annuity. However, the IB
notes that increased costs or other considerations could never justify putting
the benefits of participants and beneficiaries at risk by purchasing an unsafe
annuity. (§ 2509.95-1(d)).
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The following information is provided in response to the specific issues
raised by your request.
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The general fiduciary principles set forth in the IB with regard to the
selection of annuity providers are equally applicable to defined benefit and
defined contribution plans. Accordingly, the selection of annuity provider by
the fiduciary of a defined contribution plan would be governed by section
404(a)(1) and, therefore, such fiduciary, in evaluating claims paying ability
and creditworthiness of an annuity provider, should take into account the six
factors set forth in § 2509.95-1(c).
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With regard to factor six (§ 2509.95-1(c)(6)) relating to state guarantees,
you requested a clarification as to the scope of a fiduciary’s consideration.
Factor six indicates that fiduciaries should consider “the availability of
additional protection through state guaranty associations and the extent of
their guarantees.” For purposes of factor six, fiduciaries should determine
whether the provider and annuity product are covered by state guarantees and the
extent of those guarantees, in terms of amounts (e.g., percentage limits on
guarantees) and individuals covered (e.g., residents, as opposed to
non-residents, of a state). Such information should be available to the public
and easily accessible through state guaranty associations and state insurance
departments. Of course, if there were facts known to the fiduciary calling into
question the ability of a state association offering guarantees to meet its
obligations under the guarantee, it would be incumbent on the fiduciary to weigh
that information when selecting an annuity provider.
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In evaluating the six factors, the IB indicates that, “[u]nless they
possess the necessary expertise to evaluate such factors, fiduciaries would need
to obtain the advice of a qualified, independent expert.” With regard to this
provision, you express concern that fiduciaries should be able to make
evaluations of annuity providers without becoming or hiring an expert in annuity
matters. The standard set forth in the IB follows from the prudence standard of
section 404(a)(1)(B). That section provides that a fiduciary shall discharge its
duties “with 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.” (Emphasis supplied). Accordingly, in those instances where
the fiduciary responsible for the selection of an annuity provider has, at the
time of the selection, a sufficient level of expertise or knowledge to
meaningfully evaluate the claims paying ability and creditworthiness of an
annuity provider, including the factors set forth in the IB, the fiduciary would
not be required to engage a qualified, independent expert to evaluate such
factors. For purposes of the IB, “independent” means independent of the
annuity provider.
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With regard to paragraph (d) of § 2509.95-1, relating to costs and other
considerations, you request confirmation that, in evaluating competing products,
cost is an appropriate consideration for the fiduciary of a defined contribution
plan when the participant receives an increased benefit as a result of reduced
costs. It is the view of the Department that it is appropriate for the fiduciary
of a defined contribution plan in selecting an annuity provider to take into
account the costs and benefits to the participant or beneficiary of competing
annuity products. Consistent with the IB, however, a lower cost cannot justify
the purchase of an unsafe annuity even when the annuity would pay a higher
benefit amount to the participant or beneficiary.
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Lastly, you raise a question concerning the applicability of paragraph (e) of
§ 2509.95-1 to defined contribution plans. Paragraph (e) requires that special
care be taken in reversion situations where fiduciaries selecting annuity
providers have an interest in the sponsoring employer that may affect their
judgment. In such situations, the IB advises that the fiduciary will need to
obtain and follow independent expert advice calculated to identify those
insurers with the highest claims-paying ability willing to write the business.
In the absence of any possibility of funds reverting to a plan sponsor in
connection with the termination of a defined contribution plan, it is the view
of the Department that paragraph (e) would not apply to such plan.
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This letter constitutes an advisory opinion under ERISA Procedure 76-1.
Accordingly, this letter is issued subject to the provisions of the procedure,
including section 10 relating to the effect of advisory opinions.
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Sincerely,
Louis Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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