In earlier newsletters, we discussed two of  the key issues for selecting an insurance company to provide guaranteed income for retirees under 401(k) and other defined contribution plans.  We explained that the process is not inherently different from - or more difficult than - other fiduciary decisions (for example, selecting investment products or providers).  We pointed out that the DOL safe harbor regulation is helpful, but does not give specific guidance on what information should be reviewed.  We described some of  the information a plan committee or other fiduciary should consider, noting that a plan committee does not need to predict the future, but instead just needs to make an informed, prudent decision.  

In this article, our focus is again on the fiduciary process of  selecting an insurance company.

But first, why should a plan consider offering a lifetime income guarantee? By “lifetime income guarantee,” we mean an annuity (or other product provided by an insurance company) that guarantees a stream of  payments for the life of  a retired participant, and possibly his or her spouse.  The reason to offer a guarantee is to eliminate, or at least reduce, the risk that a retiree will outlive the money in his or her plan account or rollover IRA.  Elements of  this risk include the possibility of  living longer than expected, market downturns at the “wrong” time, the impact of  withdrawing retirement funds too quickly and the erosion of  critical decisionmaking capacity as the retiree ages.  A guarantee of  payment for life addresses those risks.

How should a committee select an insurance company?  ERISA requires fiduciaries to engage in a prudent process, which entails gathering and assessing relevant information and making a rational decision based on that information.  But what if  the committee just selects a well-regarded insurance company that has a long history of  providing annuity benefits to thousands of  annuitants?  In one case, then Appeals Court Judge Antonin Scalia (now Supreme Court Justice Scalia) said that “[e]ven if  a trustee failed to conduct an investigation before making a decision, he is insulated from liability if  a hypothetical prudent fiduciary would have made the same decision anyway.”¹

 In other words, if  other fiduciaries would have chosen that insurance company after engaging in a prudent process, the committee making the same choice - but without conducting an investigation - would not be exposed to liability. We are not advocating that fiduciaries avoid engaging in a prudent process.  However, it may help a committee feel comfortable with its decision if  it knows that many others have chosen that insurance company to provide guaranteed retirement income.  

With that in mind, what information should a committee consider?  Among other factors, some key issues for evaluating insurance companies include the following:

• Whether the company is regulated by all, or almost  all, of  the states.  The degree of  scrutiny by state regulators varies from state to state, but many state agencies conduct thorough, detailed and rigorous investigations; fiduciaries can take comfort in their findings of  soundness.
• The company’s commitment to the annuity or guaranteed income business assessed by the number of  guaranteed income contracts and total assets in guarantees.
• The quality and consistency of  the company’s ratings across all of  the major rating agencies.
• The consistency of  the ratings over an extended period (generally, at least one economic cycle). The long-term financial stability of  an insurance company - expressed by uniformly high ratings over extended periods of  time - is particularly important for selecting a provider that will pay benefits many years in the future

For other articles in this series on annuities: 

1. Variable Annuity Contracts May Require Continuing Attention – What Broker-Dealers Need to Know
2. The Role of Managed Payout Funds in Retirement

_{1 Roth v. Sawyer-Cleator, 16 F.3d 915, 919 (8th Cir. 1994); Herman v. Mercantile Bank, N.A. 143 F.3d 419, 420 (8th Cir. 1998). See also, Bussian v. RJR Nabisco, Inc., 223 F.3d 286, 300 (5th Cir. 2000): “ERISA’s obligations are nonetheless satisfied if  the provider selected would have been chosen had the fiduciary conducted a proper investigation.”  Note, however, that while the “hypothetical prudent fiduciary” standard may protect a fiduciary that engaged in an imprudent search from being liable for damages, it may not prevent an injunction against the fiduciary from acting on behalf  of  the plan in the future. See, Brock v. Robbins, 830 F.2d 640, 646-647 (7th Cir. 1987).}