What is meant by the “Safest Annuity Available?”
Department of Labor Interpretive Bulletin 95-1 (DOL 95-1) requires plan sponsors “to obtain the safest annuity available, unless under the circumstances it would be in the interest of participants and beneficiaries to do otherwise…A fiduciary must evaluate a number of factors relating to a potential annuity provider’s claims-paying ability and creditworthiness. Reliance solely on ratings provided by insurance rating agencies would not be sufficient to meet this requirement.” The types of factors to be considered include:
- 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;
- The availability and extent of additional protection through state guaranty associations.
My company has a defined contribution plan [401(k)]. Is this plan subject to the Department of Labor Interpretive Bulletin 95-1 defining the “Safest Available Annuity?”
Under the Pension Protection Act of 2006, Section 625, the Secretary of Labor is directed to issue final regulations clarifying that the selection of an annuity contract as an optional form of distribution from an individual account plan is not subject to the safest available annuity standard under Interpretive Bulletin 95-1 and is subject to all otherwise applicable fiduciary standards. The Department of Labor amended Interpretive Bulletin 95-1 to limit its application only to defined benefit plans and simultaneously published final regulations for defined contribution plans effective December 8, 2008.
What are the rating categories of the four rating agencies and how do they compare?