Slack adoption of annuities in 401(k) plans has been attributed, in part, to employers' fears of liability if insurers prove unable to meet annuity contractual obligations.
On Thursday, the Family Savings Act passed out of the U.S. House of Representatives by a 240 to 177 vote, with 10 Democrats voting with Republicans to advance the bill.
The legislation would relax existing regulatory guidance on employer participation in Multiple Employer Plans by allowing non-related employers to pool workers under one defined contribution plan.
One of three bills packaged under Tax Reform 2.0, the Family Savings Act originally included 17 provisions that, along with removing the employer commonality requirement for participation in MEPs, would relax restrictions on contributions and mandatory withdrawals from IRAs, and create Universal Savings Accounts, which would allow after tax contributions up to $2,500 annually to grow tax free.
The original bill did not include a provision creating an annuity selection safe harbor for fiduciary sponsors of defined contribution plans.
But an amendment added in the 11th hour by House Ways and Means Committee Chair Kevin Brady, R-TX, does just that.
Under the amendment, employers meet their fiduciary obligations at the time of selecting an annuity provider if they engage in an “objective, thorough, and analytical” provider search.
Employers are obligated to consider the financial capability of an annuity provider's ability to meet future obligations.
Fiduciaries would be required to obtain written representations certifying that insurance companies have been licensed by state insurance commissioners for at least seven years preceding an insurer's selection as an annuity provider to a plan.
Employers will also need written certification that insurance companies maintain adequate capital reserves, as determined by state regulators.
The amendment explicitly states that employers are not required to select the cheapest annuities.
Employers will satisfy their fiduciary obligations by annually reviewing providers via further written certifications.
But the amendment also explicitly states that employers would not be required to review the appropriateness of a provider after plan participants have purchased an annuity through a defined contribution plan.
Arguably the most meaningful provision of the amendment says employers will not be liable for how contributions to annuities are invested in underlying products. And employers would not be liable for losses due to an insurance company's inability to satisfy future obligations.
Chairman Brady's amendment came after leading trade organizations for insurance companies publicly criticized the original version of the Family Savings Act for not including an employer annuity selection safe harbor.
Slack adoption of annuities in 401(k) plans has been attributed, in part, to employers' fears of liability if insurers prove unable to meet annuity contractual obligations.
Under an existing Labor Department safe harbor, employers are required to assess the future solvency of an annuity provider.
According to data cited by the Insured Retirement Institute, which lobbies on behalf of insurance providers, fewer than 10 percent of 401(k) plans offer a lifetime income investment option. More than 90 percent of employer sponsors want a clearer annuity selection safe harbor, according to IRI.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
