PLANSPONSOR - February/March 2020 - 47

INSIDE ANGLE
Safe Passage
How to confidently choose a lifetime-income provider, post-SECURE Act
A
s the U.S. retirement system has shifted away from
pension plans in favor of a defined contribution (DC)
plan savings model, some policymakers and others
have expressed concern as to whether participants can appropriately
budget and spend down their accumulated savings through
retirement. Worries that some participants may have trouble
understanding how to make their money last when the time
comes led Congress to include three major lifetime income provisions
in the newly enacted SECURE [Setting Every Community
Up for Retirement Enhancement] Act. These provide 1) for the
delivery of lifetime income illustrations to plan participants; 2)
for the portability, should a change in providers occur, of participants'
lifetime income benefits that have accumulated " in-plan " ;
and 3) for a fiduciary safe harbor for the prudent selection of
lifetime income providers.
In this way, the SECURE Act seeks to prompt participants
to begin thinking about their plan savings in terms of a lifetime
income stream-a concept, that by itself, is a positive development-while
it reduces some of the barriers that have traditionally
discouraged the use of lifetime income products by DC plans.
For plan sponsors, the latter change can be significant. We
discuss the safe harbor provision in greater detail below.
SECURE Act Section 204
SECURE Act Section 204 adds Section 404(e) to ERISA-establishing
the new, optional SECURE safe harbor, which allows
for the prudent selection of a guaranteed retirement income
contract (GRIC) on behalf of a DC plan. The provisions of the
safe harbor have their origins in the pre-existing regulatory
safe harbor issued by the Department of Labor (DOL) in 2008
that allows for the selection of individual account plan benefit
distribution providers.
The 2008 safe harbor was unpopular for several reasons-
the main one being the vague wording of several of the conditions.
Given that subjective wording, fiduciaries were unable to
confidently conclude they would be able to meet the conditions.
Thus, the DOL safe harbor was not actually viewed as a safe
harbor within the retirement plan marketplace.
The SECURE safe harbor addresses this weakness. Its most
significant feature is a provision stating that the selecting fiduciary
will satisfy its conditions if it receives a set of written representations
from the insurer substantiating the latter's financial
capabilities. The safe harbor caveats that the fiduciary must not
subsequently have received notice of any change in the insurer's
circumstances or other information that would cause it to question
the representations. The representations to be supplied by
the insurer are as follows:
1) The insurer is licensed to offer guaranteed retirement
income contracts.
2) The insurer, at the time of selection and for each of the
immediately preceding seven plan years: operates under a certificate
of authority from the insurance commissioner of its domiciliary
state that has not been revoked or suspended; has filed
audited financial statements in accordance with the laws of its
domiciliary state; maintains and has maintained reserves that
satisfy all of the statutory requirements of all states in which the
insurer does business; and is not operating under an order of
suspension, rehabilitation or liquidation.
3) The insurer undergoes, at least every five years, a financial
examination by the insurance commissioner of its domiciliary
state.
4) After providing the above representations, the insurer
will notify the fiduciary of any change in circumstances that
would preclude the insurer from making such representations at
the time the contract is issued.
Finally, the SECURE safe harbor provides that where a plan
fiduciary satisfies its conditions, it is relieved of all liability for
any losses that may result due to an insurer's inability to satisfy
its financial obligations under the contract. Specifically, this
applies to the distribution of any benefit or to any investment
in the contract by or on behalf of a participant or beneficiary
pursuant to the selected annuity contract.
Whether these SECURE Act provisions will foster more widespread
adoption and acceptance of guaranteed lifetime income
products in DC plans and greater usage of these products by
participants is unclear. But reducing the fiduciary liability
risk associated with selecting and monitoring the providers
may encourage a wider exploration of the products by the plan
sponsor community. This is certainly a big first step in the
right direction.
Stephen Saxon is a partner with Groom Law Group, Chartered,
and George Sepsakos is a principal with Groom. Offices for
Groom are in Washington, D.C.
PLANSPONSOR.COM February - March 2020 47
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PLANSPONSOR - February/March 2020

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