On June 24, the Department of Labor ("DOL") issued a report (the "Report") to Congress regarding its review and consideration of potential amendments to Interpretive Bulletin 95-1 ("IB 95-1"). SECURE 2.0 directed DOL to review, in consultation with the ERISA Advisory Council, its longstanding guidance regarding fiduciary considerations in the selection of annuity providers in pension risk transfer ("PRT") or "de-risking" transactions and to report back whether changes are needed.
The Report concludes DOL is not prepared to make changes to IB 95-1 at this time. It includes the ERISA Advisory Council's statement (the "Statement") on IB 95-1, which was issued on August 29, 2023, after days of deliberations. Both the Report and the Statement highlight the success of IB 95-1 over the last 30 years. However, both also note that some have raised concerns about matters such as the evolution of insurer ownership since IB 95-1 was issued, the growth of PRT, and the impact of these transactions on PBGC or other ERISA protections and the diversity of investment strategies used by insurance companies. The Report notes that DOL will continue to evaluate the efficacy of IB 95-1 and may, at some point in the future, consider changes to IB 95-1 through a public process that provides stakeholders the opportunity to comment.
DOL issued IB 95-1 nearly three decades ago to provide guidance to fiduciaries selecting annuities to complete a partial or complete plan termination. The guidance was intended to address concerns regarding the financial strength and stability of annuity providers in the wake of high-profile insurer failures. The guidance sets forth the following six factors for fiduciaries to consider in selecting an annuity provider:
- The quality and diversification of the annuity provider's investment portfolio.
- The size of the insurer relative to the proposed contract.
- The level of the insurer's capital and surplus.
- The lines of business of the annuity provider and other indications of an insurer's exposure to liability.
- The structure of the annuity contract and guarantees supporting the annuities, such as the use of separate accounts.
- The availability of additional protection through state guaranty associations and the extent of their guarantees.
Plan sponsors are generally required to purchase annuities to effectuate the termination of defined benefit pension plans under ERISA, and they often use PRT to de-risk portions of their plans. There has been an uptick in PRT transactions over the past few years as plan funding levels and interest rates have become more favorable. The Report notes that "[i]n 2022, defined benefit [PRT] annuity purchases reached an all-time high with transactions totaling $52 billion in premiums."
SECURE 2.0 included a provision (section 321) that required DOL to review IB 95-1 to determine whether amendments are warranted and to report to Congress its findings by December 29, 2023. DOL was directed to "consult" with the ERISA Advisory Council. In August 2023, the ERISA Advisory Council issued the Statement detailing the Council's deliberations and their position on recommendations received from stakeholders. Six Council members did not support changes to IB 95-1 while the other nine members supported various changes but without any consensus.
The DOL Report concludes that the existing framework in IB 95-1 "continues to identify broad factors that are relevant to a fiduciary's prudent and loyal evaluation of an annuity provider's claims-paying ability and creditworthiness." Thus, DOL is not prepared to propose changes to IB 95-1. Moreover, while the Report describes various areas of potential review in the future, DOL recognized that any changes would need to avoid unintended consequences – and would be preceded by a notice and comment rulemaking process.
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