Federal Deposit
Insurance Corporation

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(a) Scope. This Interpretive Bulletin provides guidance concerning
certain fiduciary standards under part 4 of title I of the Employee
Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. 1104-1114,
applicable to the selection of annuity providers for the purpose of
pension plan benefit distributions where the plan intends to transfer
liability for benefits to the annuity provider.
(b) In General. Generally, when a pension plan purchases an annuity
from an insurer as a distribution of benefits, it is intended that the
plan's liability for such benefits is transferred to the annuity
provider. The Department's regulation defining the term ``participant
covered under the plan'' for certain purposes under title I of ERISA
recognizes that such a transfer occurs when the annuity is issued by an
insurance company licensed to do business in a State. 29 CFR 2510.3-
3(d)(2)(ii). Although the regulation does not define the term
``participant'' or ``beneficiary'' for purposes of standing to bring an
action under ERISA Sec. 502(a), 29 U.S.C. 1132(a), it makes clear that
the purpose of a benefit distribution annuity is to transfer the plan's
liability with respect to the individual's benefits to the annuity
provider.
Pursuant to ERISA section 404(a)(1), 29 U.S.C. 1104(a)(1),
fiduciaries must discharge their duties with respect to the plan solely
in the interest of the participants and beneficiaries. Section
404(a)(1)(A), 29 U.S.C. 1104(a)(1)(A), states that the fiduciary must
act for the exclusive purpose of providing benefits to the participants
and beneficiaries and defraying reasonable plan administration expenses.
In addition, section 404(a)(1)(B), 29 U.S.C. 1104(a)(1)(B), requires a
fiduciary to act with the care, skill, prudence and diligence under the
prevailing circumstances that a prudent person acting in a like capacity
and familiar with such matters would use.
(c) Selection of Annuity Providers. The selection of an annuity
provider for purposes of a pension benefit distribution, whether upon
separation or retirement of a participant or upon the termination of a
plan, is a fiduciary decision governed by the provisions of part 4 of
title I of ERISA. In discharging their obligations under section
404(a)(1), 29 U.S.C. 1104(a)(1), to act solely in the interest of
participants and beneficiaries and for the exclusive purpose of
providing benefits to the participants and beneficiaries as well as
defraying reasonable expenses of administering the plan, fiduciaries
choosing an annuity provider for the purpose of making a benefit
distribution 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. In addition, the
fiduciary obligation of prudence, described at section 404(a)(1)(B), 29
U.S.C. 1104(a)(1)(B), requires, at a minimum, that plan fiduciaries
conduct an objective, thorough and analytical search for the purpose of
identifying and selecting providers from which to purchase annuities. In
conducting such a search, 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 services would not be sufficient to meet this requirement. In
this regard, the types of factors a fiduciary should consider would
include, among other things:
(1) The quality and diversification of the annuity provider's
investment portfolio;
(2) The size of the insurer relative to the proposed contract;
(3) The level of the insurer's capital and surplus;
(4) The lines of business of the annuity provider and other
indications of an insurer's exposure to liability;
(5) The structure of the annuity contract and guarantees supporting
the annuities, such as the use of separate accounts;
(6) The availability of additional protection through state guaranty
associations and the extent of their guarantees. Unless they possess the
necessary expertise to evaluate such factors, fiduciaries would need to
obtain the advice of a qualified, independent expert. A fiduciary may
conclude, after conducting an appropriate search, that more than one
annuity provider is able to offer the safest annuity available.
(d) Costs and Other Considerations. The Department recognizes that
there are situations where it may be in the interest of the participants
and beneficiaries to purchase other than the safest available annuity.
Such situations may occur where the safest available annuity is only
marginally safer, but disproportionately more expensive than competing
annuities, and the participants and beneficiaries are likely to bear a
significant portion of that increased cost. For example, where the
participants in a terminating pension plan are likely to receive, in the
form of increased benefits, a substantial share of the cost savings that
would result from choosing a competing annuity, it may be in the
interest of the participants to choose the competing annuity. It may
also be in the interest of the participants and beneficiaries to choose
a competing annuity of the annuity provider offering the safest
available annuity is unable to demonstrate the ability to administer the
payment of benefits to the participants and beneficiaries. The
Department notes, however, that increased cost or other considerations
could never justify putting the benefits of annuitized participants and
beneficiaries at risk by purchasing an unsafe annuity.
In contrast to the above, a fiduciary's decision to purchase more
risky, lower-priced annuities in order to ensure or maximize a reversion
of excess assets that will be paid solely to the employer-sponsor in
connection with the termination of an over-funded pension plan would
violate the fiduciary's duties under ERISA to act solely in the interest
of the plan participants and beneficiaries. In such circumstances, the
interests of those participants and beneficiaries who will receive
annuities lies in receiving the safest annuity available and other
participants and beneficiaries have no countervailing interests. The
fiduciary in such circumstances must make diligent efforts to assure
that the safest available annuity is purchased.
Similarly, a fiduciary may not purchase a riskier annuity solely
because there are insufficient assets in a defined benefit plan to
purchase a safer annuity. The fiduciary may have to condition the
purchase of annuities on additional employer contributions sufficient to
purchase the safest available annuity.
(e) Conflicts of Interest. Special care should be taken in reversion
situations where fiduciaries selecting the annuity provider have an
interest in the sponsoring employer which might affect their judgment
and therefore create the potential for a violation of ERISA
Sec. 406(b)(1). As a practical matter, many fiduciaries have this
conflict of interest and therefore will need to obtain and follow
independent expert advice calculated to identify those insurers with the
highest claims-paying ability willing to write the business.
[60 FR 12329, Mar. 6, 1995]