Written Testimony Submitted to 

DOL/Treasury Lifetime Income Public 

Hearing

By

Robert J. Toth, Jr.

Law Office of Robert J. Toth, LLC

September 15, 2010

I am an attorney in Fort Wayne, Indiana with nearly 30 years 

of experience in employee benefit matters, with a practice 

focusing on the development, marketing and distribution of 

retirement products and services. My background includes 

experience in the integration of mutual fund and insurance 

products into retirement plan platforms; designing a process to 

provide variable annuitization from mutual fund based DC 

plans; and the application of annuity law to retirement plans. I 

have published major papers on the legal issues related to 

providing insurance guarantees from Defined Contribution 

Plans; and have managed the ERISA legal affairs of a major 

insurer and served as in-house ERISA counsel to a Fortune 100 

company with a billion dollar master trust funding both DB and 

DC plans with innovative investment arrangements.

As such, I have a unique view of the technical requirements 

necessary to provide lifetime income from defined contribution 

plans. The views I herein express are my own, and not of any 

client.

Today I will address two of the issues related to providing 

lifetime income from DC plans: the fiduciary issues related to 

the risk of insurer solvency and the issue of portability of 

income guarantees. It is worth noting at this time that my 

Law Office of Robert J. Toth, Jr. 

110 West Berry Street

Suite 1809

Fort Wayne, IN 46802

O: 260.387.6827

F: 260.449.9771

rjt@rtothlaw.com
comments address only the technical issues related to enabling DC plans to provide these 

guarantees. I am not addressing the more fundamental problem related to the failure of many 

employers to treat the provision of adequate retirement income to their employees as an 

internalized cost of current employment.

Fiduciary/Insurer Solvency Issue

There are two very different issues related to the risk of insurer solvency where an annuity is 

purchased to fund lifetime income. The first is a “current state” issue, that is, what should the 

fiduciary obligations be in selecting an insurer to provide this guaranteed income under the 

existing regulatory environment. The second issue looks to the future. What should be the 

appropriate federal policy be with regard to “guaranteeing the guarantor,” as annuities regain 

widespread acceptance within ERISA plans. Should there be a federally backed ultimate 

insurance program along the lines of an FDIC, and what should it look like.

Current State

Annuities have a long history of providing retirement income for employees, well before the 

passage of ERISA. The federal tax system itself has recognized these financial instruments 

from times predating the 1939 Code. An extensive state-based system of regulation has grown

up around these and other insurance products, as the ability to properly protect the pooling of 

longevity and mortality risk being critical to the welfare of a state’s citizens- risks against 

which no single purchaser of insurance could ever protect itself. Regulation of reserve levels, 

investments, contracts, marketing, agent licensing and insurer insolvency all are a part of the 

system, It is a stable system, one which has not suffered the level of de-regulation that occurred 

through much of the rest of the financial system has over the past 20 years.

Plan fiduciaries who now choose to allow participants to purchase products to guaranty 

retirement income through their employer sponsored defined contribution plans should be able 

to rely upon this regulatory scheme. The DOL should consider recognizing as prudent a 

fiduciary’s reliance on the state’s regulatory schemes; no fiduciary could adequately protect a 

plan against the future insolvency of an insurance carrier. To require fiduciaries to a higher 

standard of care than what is otherwise possible would be in contradiction to the ERISA

standard of care, which relies upon “the circumstances then prevailing that a prudent man 

acting in a like capacity and familiar with such matters would use in the conduct of an 

enterprise of a like character and with like aims.”
The current state regulatory system could be viewed as be flawed in certain important respects,

flaws which could lead to unprotected participants and even abuse if such a broad standard is 

adopted without some other protective measure. This additional protection could be based 

readily available, current and objective financial information. For example, a fiduciary safe 

harbor could give deference to reliance on the state regulatory scheme (on insolvency risk) if 

the insurer is otherwise rated at or above a certain chosen rating by one or more recognized 

rating agencies. Using specific ratings have limited value as a true differentiator of quality of 

an insurer itself can create fiduciary problems. However, reliance upon broad ratings brackets

instead of specific ratings helps avoid the difficulties inherent in rating systems, while taking 

advantage of the benefits they do provide.

Note that this relief would only apply to the insolvency risk. The fiduciary would still need to 

perform its diligence with regard to the suitability, design and price of the annuities being

purchased. 

Future State

Beyond the immediate question of the standard to which plan fiduciaries will be held for 

insurance company insolvency is the larger (and separate) question of whether the existing 

system should be replaced or supplanted with something else.

The current system which protects insurance policyholders from insurer insolvency is the state 

guaranty association system, which is the final step backing an entire regulatory process. Each 

state maintains its own program, generally in accordance with uniform laws which have been 

developed through the NAIC. These associations are not funded; they instead rely on 

assessments upon other insurance companies in the domicile state of the insolvent insurance 

company. It has the appearances of an ad hoc system subject to a number of varying

limitations, but it is also one in which the guaranty associations have made substantial efforts 

at coordination.

Addressing the limitations and weaknesses of the process, and developing a uniform program 

well suited for ERISA plans under which the purchase of insurance guarantees are an integral 

part of the system, is something which will take time consuming analysis and legislation. 
Answering this question is separate than that of what the fiduciary standard should be in the 

current environment, and should not prevent the application of the interim standard described 

above.

Portability

Portability, at first glance, seems to be one of the more intractable issues to resolve in the 

efforts to make lifetime income products easily available from defined contribution plans. It 

includes both the ability to preserve a guarantee already purchased and the ability to 

consolidate guarantees collected over a lifetime. It is a critical element of a successful 

retirement income program, given the mobility of the workforce; the life cycle of corporate 

employers/plan sponsors; and the fiduciary obligation to be able change current issuers of 

guarantees in plans. 

The challenge of preserving the guarantees, which have purchased and the ability to 

consolidate them at retirement have been well addressed over a long period of time in the 

retirement marketplace and the associated federal regulatory scheme. It is just that these 

concepts have never been widely applied, nor are familiar, to the 401(k) marketplace, where 

the vast majority of defined contribution assets reside. The task will be to find a manner to 

effectively update and “bridge” these existing rules to help accommodate the needs of adequate 

retirement security. 

I specifically refer to the development and regulation of Individual Retirement Accounts and 

Annuities under Code Section 408; pre-2007 403(b) annuities, as applied outside of the 

employment context; defined benefit terminal funding annuities; and the use of the qualified 

plan distribution annuities. Each of these arrangements are effectively “individual pensions,” 

with the underwriters and issuers of these products having tax compliance responsibility for the 

applicable rules. In addition to the individual being able to maintain his or her guarantees in a 

compliant environment, transfers and consolidation between them have been well 

accommodated in the past through the use of 1035 exchanges and (before its repeal) 90-24 

exchanges. 

The application of a number of these existing rules will need to be clarified and extended to all 

types defined contribution plans by regulation or ruling, but the basic structure currently exists 

to accommodate these products.
These rules address the distribution of guarantees from a plan upon a distributable event, where 

a participant has purchased the guarantees as part of the distribution from the plan, or takes a

distribution of the guarantees previously purchased. Experience is now telling us, however, 

that legislative change is likely necessary for the accommodation of those products under 

which a participant accumulates various sorts of guarantees as an investment in defined 

contribution plans during employment, through the use of elective deferrals. This can create a 

challenge for plan sponsors and record keepers when the plan discontinues its relationship with 

the issuer of the guarantee. Sponsors and administrators will be still be required to report on 

these guarantees, under these circumstances, until the participant has a distributable event. A 

legislative option would be to treat these guarantees as being distributed as individual pensions 

as long the vendor meets certain requirements and takes on certain compliance responsibilities. 

This would include, but not be limited to, meeting substantial transparency and suitability 

requirements. If the vendor could not meet those requirements, then those products could not 

be distributed in this manner.

In close, retirement plan products have a long history of providing income guarantees to 

retirees-well predating the growth and reliance upon the 401(k) plan. As we seek to enable the 

defined contribution system to help accommodate for the inadequacies of the existing defined 

benefit system, it should be recognized that substantial structures already exist at both the 

federal and state level, which can be utilized as the basis for this effort.