Private Pensions:

Protections for Retirees' Insurance Annuities Can Be Strengthened

HRD-93-29: Published: Mar 31, 1993. Publicly Released: Apr 22, 1993.

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Pursuant to a congressional request, GAO reviewed the adequacy of protections for retirees' insurance annuities, focusing on: (1) state guarantee coverage of insurance annuities retirees receive from private pension plans; (2) federal regulation and oversight of private pension plans' selection of insurers to provide annuity benefits; and (3) options for improving annuity protections.

GAO found that: (1) some retirees risk losing part of their benefits if their insurers fail because of variations in state guarantee coverage provisions, including gaps in annuity coverage, annuity values exceeding the state guarantee limits, and variations in state guarantee limits; (2) the federal guarantee, under the Employee Retirement Income Security Act (ERISA), does not extend to insurance annuities; (3) only one state indexes its guarantee coverage limits to reflect inflation; (4) state guarantee coverage could be improved by standardizing coverage through an interstate compact or incorporating uniform coverage provisions in financial regulation standards; (5) the federal government could improve guarantee coverage by extending Pension Benefit Guaranty Corporation (PBGC) coverage to insurance annuities purchased by PBGC-covered plans or establishing a national insurance guaranty fund; (6) the Department of Labor does not routinely monitor annuity-provider selection and has not provided formal guidance for fiduciaries to consider in evaluating annuity providers; (7) options to strengthen federal regulation and oversight include requiring that fiduciaries meet specified minimum standards in selecting an annuity provider; (8) PBGC participant notification requirements requiring advance notification about an annuity provider or changes in guarantee coverage are inadequate; and (9) Labor investigates questionable annuity purchases because of the potential conflict between participant and sponsor interests and the difficulty in remedying fiduciary breaches after termination.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In March 1995, the Department of Labor issued interpretive bulletin 95-1 regarding fiduciary standards that apply to annuity purchases.

    Recommendation: To assist fiduciaries in complying with ERISA requirements, the Secretary of Labor should issue formal guidance that sets forth the Department's view of the procedures necessary to satisfy these requirements when selecting an annuity provider. The guidance should specify those factors fiduciaries should consider, at a minimum, in determining the suitability of prospective annuity providers. In light of coverage gaps in the state guarantee system, one factor should be the applicable state guarantee coverage provisions. Considering these provisions involves determining the state coverage plan participants would receive under different insurer-selection scenarios.

    Agency Affected: Department of Labor

  2. Status: Closed - Implemented

    Comments: Labor is continuing its broad review of ERISA reporting and disclosure provisions. It has determined that the most appropriate way to respond to the recommendation will be through legislative changes rather than through existing regulatory authority. However, Labor has deferred, for an indefinite period, any action on legislative initiatives.

    Recommendation: The Secretary of Labor should require ongoing plans insured by PBGC to give participants who will receive insurance annuities: (1) advance notice of the identity of the insurer or insurers from which annuities may be purchased; (2) advance notice that PBGC coverage ceases upon the purchase of insurance annuities; and (3) detailed information about the state guarantee coverage of their annuities that applies at the time of annuity purchase. With regard to this last disclosure requirement, plan administrators should be required to inform participants: (1) of the name of the state guaranty association, if any, that guarantees their annuities and the amount of its annuity guarantee limit; and (2) that changing their state of residence may alter their coverage.

    Agency Affected: Department of Labor

  3. Status: Closed - Implemented

    Comments: Final regulations implementing the recommendation were issued in the Federal Register (29 CFR Part 4041.27) on November 7, 1997.

    Recommendation: In standard terminations in which insurance annuities are purchased, the Executive Director, PBGC, should require that plan administrators provide participants detailed information about the state guarantee coverage that applies at the time of annuity purchase. Plan administrators should be required to inform participants: (1) of the name of the state guaranty association, if any, that guarantees their annuities and the amount of its annuity guarantee limit; and (2) that changing their state of residence may alter their coverage.

    Agency Affected: Pension Benefit Guaranty Corporation

 

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