Skip to Main Content

Keeping you informed

DOL Proposes Regulations on Selection of Annuity Providers under Defined Contribution Plans

    Client Alerts
  • September 21, 2007


The Department of Labor (“DOL”) recently published proposed regulations addressing the selection of an annuity contract as an optional form of distribution under 401(k) and other defined contribution plans.  The Pension Protection Act of 2006 clarified that the “safest available annuity standard” applicable to defined benefit plans does not apply to defined contribution plans and charged the DOL to issue clarifying regulations. 


The proposed regulations state that ERISA’s general fiduciary standards govern the selection of annuity providers by defined contribution plan fiduciaries.  Further, they would establish a safe harbor under which a fiduciary that satisfies the following six conditions would be considered to have acted prudently in making its selection:


  1. engaging in an objective, thorough and analytical search (avoiding self-dealing, conflicts of interest of other improper influence) to identify and select annuity providers;
  2. determining whether the fiduciary himself possesses the relevant expertise or knowledge to evaluate the annuity provider, and if not, engaging  a qualified, independent expert as part of the selection process;
  3. considering the ability of the annuity provider to make all future payments under the contract;
  4. considering the cost of the annuity contract in relation to the benefits and services to be provided;
  5. determining that, at the time of the selection, the annuity provider is financially able to make all future payments and that the cost of the annuity is reasonable; and
  6. periodically reviewing considers the appropriateness of the selected provider selected to provide multiple annuities on an ongoing basis.

The proposed regulations also would require fiduciaries to consider additional information, including the annuity provider’s level of capital, surplus, and reserves, ratings by insurance rating services, and the availability of additional protection through state guaranty associations. 


Although these rules will not be effective until after publication of final regulations, employers with defined contribution plans that offer annuity options should take this guidance into account in selecting annuity providers.