Increased Focus on Pension Lift-Outs: What Plan Fiduciaries Need to Know

After years of few developments, Congress, the Department of Labor (“DOL”) and the plaintiffs’ bar have all recently turned their attention to pension lift-outs.  The DOL’s current guidance, Interpretive Bulletin 95-1 (“IB 95-1”), which describes fiduciary standards for when a pension plan purchases annuities to transfer the liability for some plan participants (often called a pension lift-out or pension risk transfer), was issued almost 30 years ago.  However, as “current trends in both equities and interest rates have made de-risking much more affordable for plan sponsors” and more fiduciaries have begun to investigate whether a lift-out is right for their plan, there has been increased focus on how plan fiduciaries are to manage these transactions.

In IB 95-1, the DOL provides that plan fiduciaries must take steps to select the “safest annuity available”, unless it would be in the interest of plan participants and beneficiaries to do otherwise.  IB 95-1 also sets out factors that fiduciaries should consider in evaluating the claims-paying ability of an insurer.  This bulletin has been the DOL’s primary guidance on fiduciary obligations for pension lift-outs since 1995.  Recently, in the SECURE 2.0 Act of 2022 (“Secure 2.0”), Congress instructed the DOL to review IB 95-1, consult with the ERISA Advisory Council to determine whether amendments to IB 95-1 are needed, and to report to Congress on the findings.  As of this writing, the DOL’s recommendations for an update to IB 95-1 have not yet been published, although in 2023 the DOL published a paper for purposes of consultation with the ERISA Advisory Council.

In the midst of this regulatory review, four new lawsuits have been filed against plan fiduciaries, alleging fiduciary breaches in selecting the annuity provider for their pension lift-outs.  The suits were brought against employers (Alcoa USA Corp., AT&T Inc. and its investment advisor State Street Global Advisors Trust Company, and Lockheed Martin) who purchased annuities from Athene, a private-equity backed insurance provider.  All of the suits allege that the fiduciaries did not choose the “safest annuity available” when they selected Athene.

The lawsuits are all in an early stage, and it is too soon to say what, if any, takeaways there will be for employers, including whether the allegations at issue are specific to the one annuity provider used.  Similarly, it is not clear what, if any changes, the DOL would make to its current lift-out guidance based on the review required by SECURE 2.0.

Despite potential changes on the horizon, plan fiduciaries considering a pension lift-out should follow the same process in choosing an annuity provider as they have for many years.  They should conduct a careful analysis of available annuity options, including using the services of a qualified, independent expert to help them with this assessment as needed, and closely follow the DOL’s guidance in IB 95-1.