PLANSPONSOR - September - October 2023 - 39

INSIDE ANGLE
PRTs' New Notoriety
What the DOL may address if revisiting IB 95-1
T
he number of defined benefit pension
plan terminations has reached
record levels as plan sponsors seek
to get out from under pension fund liabilities.
Once a plan sponsor decides to
terminate
its pension plan,
someone
must implement that decision and select
an insurer that will assume the plan's liabilities.
That decision of whom to select
is fiduciary.
In this respect, fiduciaries have relied
on long-standing guidance issued by the
Department of Labor under Interpretive
Bulletin 95-1, which provided a framework
for how to select the insurer. However, that
guidance could change soon.
After some stakeholders expressed
concerns that IB 95-1 should be modernized,
Congress directed the DOL under
SECURE [Setting Every Community
Up for Retirement Enhancement] 2.0
to review IB 95-1 and consult with the
ERISA [Employee Retirement Income
Security Act] Advisory Council to determine
whether amendments to the guidance
are warranted. The DOL is required
to report its findings to Congress by
the end of this year. The following will
provide a background of IB 95-1 and some
issues that could be subject to scrutiny if
changes are made.
Background of IB 95-1
Terminating a defined benefit plan is a
settlor decision not subject to ERISA's fiduciary
standards. However, implementing
the decision is a fiduciary act governed by
those ERISA standards. As noted above,
the DOL issued IB 95-1 to assist fiduciaries
with the implementation.
IB 95-1 describes the department's
position that ERISA Section 404 requires
... the retirement industry needs to
follow these developments closely
as they could significantly affect how
fiduciaries select insurers.
a plan fiduciary choosing an annuity
provider to take steps calculated to obtain
the safest available annuity unless, under
the circumstances, it would be in the
interest of plan participants and beneficiaries
to do otherwise. A plan fiduciary
must, therefore, engage in an objective,
thorough and analytical search to identify
and select an appropriate provider,
including ascertaining its creditworthiness
and claims-paying ability.
The DOL has further stated that this
analysis should involve considering the
following, as well as other, factors: 1) the
quality and diversification of the annuity
provider's investment portfolio; 2) the
size of the insurer relative to the proposed
contract; 3) the level of the insurer's capital
and surplus; 4) the lines of business of the
annuity provider and other indications of
an insurer's exposure to liability; 5) the
structure of the annuity contract and
guarantees supporting the annuities; and
6) the availability of additional protection
through state guarantee associations and
the extent of those guarantees.
The agency's guidance also specifically
states that, unless the plan's fiduciaries
have the expertise to evaluate the
above factors, those fiduciaries should
obtain the advice of an independent
expert in the search.
Hearings and Next Steps
While insurers have missed no payments
to former participants since the development
of IB 95-1, plan fiduciaries may
have additional factors to consider when
selecting an insurance company.
The ERISA Advisory Council recently
held hearings on IB 95-1 to help that agency
make its evaluation. At the meeting, stakeholders
discussed what factors might be
important to add, should the DOL decide
to update IB 95-1. Among them are: 1) the
insurer's ownership structure-whether
a for-profit or mutual company; 2) investment
strategies of the insurer and related
entities; 3) whether the insurer is owned
by private equity; 4) the lines of business
that the insurer engages in; 5) reinsurance
arrangements; 6) the insurer's risk-based
capital ratio; 7) use of separate accounts by
insurers for pension risk transfer clients;
and 8) disclosures issued by insurers.
While the DOL's process is in the early
stages of determining whether it should
issue guidance,
the retirement
industry
needs to follow these developments closely
as they could significantly affect how fiduciaries
select insurers. Knowing that the
department's report to Congress will be
issued by year-end, the regulated community
should watch for it-it will likely
provide clues as to the DOL's next steps.
Steve Saxon is a partner in Groom Law Group, Chartered, and George
Sepsakos is a principal in Groom. Offices for Groom are in Washington, D.C.
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