Choosing an annuity provider under Interpretive Bulletin 95-1

When a defined benefit plan buys annuities to settle its obligations, whether in a full plan termination or a partial pension risk transfer, the choice of insurer is a fiduciary decision under ERISA, and it is one of the few that cannot be revisited. Once the contract is signed and the plan's obligation is discharged, participants look to the insurer, not the plan, for every future payment, and the sponsor's ability to help them is gone.

The standard

The Department of Labor set out the standard in Interpretive Bulletin 95-1. Fiduciaries must take steps calculated to obtain the safest annuity available, unless under the circumstances it would be in the interests of participants and beneficiaries to do otherwise. Price is not the test. Cost and other considerations may play a role only when the alternatives are comparably safe, and a fiduciary who selects a lower-priced insurer must be able to show that the insurer was equally safe, not merely acceptable.

The factors

The bulletin lists what a fiduciary should examine for each insurer:

• The quality and diversification of the insurer's investment portfolio
• The size of the insurer relative to the proposed contract
• The level of the insurer's capital and surplus
• The insurer's lines of business and other indications of its exposure to liability
• The structure of the annuity contract and any guarantees supporting it, including the use of separate accounts
• The availability of additional protection through state guaranty associations and the extent of their guarantees

Credit ratings are evidence, but the bulletin expects fiduciaries to look at the substance behind the rating. State guaranty coverage is a useful example. Limits for annuity benefits vary by state and are typically a few hundred thousand dollars of present value per contract holder, which covers most participants fully and the largest benefits only in part. Where the participants live and how the contract is structured both affect how much protection that is.

What the Department of Labor said in 2024

SECURE 2.0 required the Department to review the bulletin. In its June 2024 report to Congress the Department left IB 95-1 in place without amendment, concluding that the factors remain the right ones, and identified developments it would continue to watch: private equity ownership of insurers, the growth of affiliated and offshore reinsurance, greater use of privately originated and less liquid assets in insurer portfolios and the concentration of transactions among a small group of insurers. Fiduciaries should assume these topics will be raised in any later review of their decision, and should address them in the record.

Why the written record matters

Insurer selection in pension risk transfers has drawn litigation, with participants in several large transactions alleging that the fiduciaries chose an insurer that was not the safest available. Whatever the merits of those cases, they make one thing plain: the strength of a fiduciary's position rests on what is in the file. Which insurers were considered and why others were excluded. How each finalist measured against every factor in the bulletin. What the independent expert concluded. Why the final choice was made and, if price was a factor, why the alternatives were judged comparably safe.

What a documented review includes

1. An initial screen of insurers active in the market for contracts of this size and type
2. A review of each finalist against every IB 95-1 factor, with the analysis written down
3. Portfolio analysis: asset allocation, credit quality, exposure to private credit and structured assets, affiliated and offshore reinsurance and liquidity
4. Comparison of contract terms, including separate account protection, administrative provisions and the treatment of data errors discovered after closing
5. Guaranty association coverage by state for the actual participant population
6. A written report supporting the fiduciaries' conclusion, dated before the contract is signed

The participant data that goes to the insurer deserves equal care. Errors found after closing are corrected under the contract's terms, and those terms vary. A data reconciliation before bidding, rather than after, avoids most of the disputes.

We prepare the insurer analysis and the fiduciary report alongside the termination or settlement calculations, so the financial results and the fiduciary record are developed together and tell the same story.

This article is general information about the topics discussed and is not actuarial, legal or tax advice for any specific plan or employer.