When a plan administrator selects an insurer to provide annuities for a retirement plan subject to ERISA, it is engaging in a fiduciary act that must be conducted prudently. Mistakes in this process can expose the plan administrator to significant liability and jeopardize retiree security. This article explains how to leverage available guidance and offers practical tips to document and defend your selection process.

Safe Harbor for Defined Contribution Plans

Federal policymakers have increasingly nudged employers maintaining defined contribution plans, which have become the primary retirement asset for most employees as the percentage of U.S. workers covered by defined benefit plans continues to decline, to provide for a more secure post-employment life for employees. The prevailing policy view is that defined contribution plans are effective tools for the accumulation of retirement assets but have so far been ineffective in fostering a prudent decumulation of retirement assets. Thus, as part of the SECURE 2.0 Act, Congress added Section 404(e) of ERISA to further encourage the provision of lifetime income options in defined contribution plans.

Under Section 404(e) of ERISA, a fiduciary that follows a structured process when selecting an annuity provider for a defined contribution plan is deemed to satisfy the duty of prudence. The safe harbor requires you to conduct/consider:

As part of the safe harbor, you must also obtain specific written representations from each insurer confirming its financial capacity to satisfy obligations. Remember, you are not required to select the lowest-cost insurer — only to conclude that costs are reasonable in light of the benefits and features offered.

There is currently an additional regulatory safe harbor that is similar, but not identical to, the statutory safe harbor. However, the Department of Labor (DOL) has announced its intention to remove the regulatory safe harbor, effective as of September 2, 2025, citing its redundancy with the statutory safe harbor.

Pension Risk Transfer and Defined Benefit Plans

The transfer of risk related to the payment of pension benefits under defined benefit plans – whether upon plan termination or as a cost-saving measure while the plan is ongoing – is increasingly prevalent as market conditions remain favorable. In either case, as interpreted by the DOL, the selection of an annuity provider is a fiduciary act, and ERISA requires plan fiduciaries to select the “safest available annuity” to transfer the obligation to pay monthly benefits to plan participants. Among other considerations, the DOL guidance includes the following criteria:

• Fiduciaries must, at a minimum, conduct an objective, thorough, and analytical search to identify and select providers from which to buy annuities, evaluating each potential annuity provider’s claims-paying ability and creditworthiness according to certain elements.
• There may be situations where it may be in the interest of participants and beneficiaries to purchase an annuity other than the safest available annuity, such as when an annuity is only marginally safer, but disproportionately more expensive than a competing annuity.
• Unless they possess the necessary expertise to evaluate the relevant factors, fiduciaries must obtain the advice of a qualified, independent expert.
• A fiduciary might conclude, after conducting an appropriate search, that more than one annuity provider is able to offer the safest annuity available.

There has been a recent spate of lawsuits challenging the transfer of pension benefit obligations and alleging a failure by plan fiduciaries to select the safest available annuity. These suits have had different degrees of success in the early procedural stages. Moreover, in the SECURE 2.0 Act of 2022, Congress directed the DOL to re-visit its guidance on annuity provider selection (which dates from 1995) and modify it as it may be necessary. To date, no updated guidance has been issued to modify or amend these regulatory criteria, and it is unlikely that any such modification will be issued any time soon.

Despite the arguments put forward in the recent lawsuits and considering the lack of any action by the DOL in this area, the best defense against any future claims of breach of fiduciary duty remains a good process, and, in particular, a process that adheres to the DOL standards described above for selecting an annuity provider. For this purpose, procuring the services of a qualified independent expert is essential.

Practical Tips for a Prudent Process

1. Engage ERISA counsel, an investment consultant, an independent expert to assist in evaluating prospective insurers and an actuary early in the planning phase.
2. Build in at least four to six weeks for RFP responses, provider Q&A, and internal reviews.
3. Use a standardized scorecard to drive objective comparisons across proposals.
4. Maintain a decision file that includes RFP materials, rating reports, cost benchmarks, and call or meeting notes.
5. If you deviate from the lowest cost or highest rating, memorialize your rationale in writing.
6. For ongoing plans, schedule annual or biennial reviews of active contracts to confirm ongoing performance and cost competitiveness and re-benchmark quotes every three to five years.

Conclusion and Next Steps

Selecting the right annuity provider is more than a compliance exercise — it’s a safeguard for retirees and a shield against fiduciary risk. By following the applicable guidance and meticulously documenting each step, plan fiduciaries can demonstrate that their decisions were both prudent and well-informed.

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