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Testimony of Sheldon Smith, Esq., Submitted to the U.S. Department 

of Labor, Employee Benefits Security Administration, and to the U.S. 

Department of the Treasury

On Behalf of:

The American Society of Pension Professionals and Actuaries 

(ASPPA)

September 15, 2010

Hearing on Lifetime Income Distribution Options

Thank you for this opportunity to testify on specific issues pertaining to Lifetime Income 

Distribution Options for Participants and Beneficiaries. 

I am Sheldon Smith, a partner in the Compensation and Benefit Practice Group of the law firm of 

Holme Roberts & Owen LLP. Holme Roberts & Owen LLP is a 230 lawyer firm headquartered 

in Denver, Colorado with two additional Colorado offices and offices in Los Angeles, San 

Francisco, Salt Lake City, Phoenix, and three European cities. We represent several hundred 

companies that sponsor qualified retirement plans, and the seven members of our Compensation 

and Benefits Practice Group work regularly with issues pertaining to the types of defined 

contribution plans that are the subject of this hearing. 

I am speaking today as President of the American Society of Pension Professionals and Actuaries 

(ASPPA). ASPPA is a national organization of more than 7,200 members who provide 

consulting and administrative services for qualified retirement plans covering millions of 

American workers. ASPPA members are retirement professionals of all disciplines, including 

accountants, actuaries, administrators, attorneys, consultants, and investment professionals. Our 

large and broad-based membership gives ASPPA a unique insight into current practical 

applications of ERISA and qualified retirement plans, with a particular focus on the issues faced 

by small to medium-sized employers. ASPPA’s membership is diverse but united by a common 

dedication to the employer-based retirement plan system.

ASPPA and it members are particularly interested and concerned about the issues that are the 

subject of this hearing. We previously filed more expansive comments on this subject in 

response to the joint Request for Information Regarding Lifetime Income Options for 

Participants and Beneficiaries in Retirement Plans (RIN 1210-AB33). In addition, ASPPA, 

together with AARP and WISER, was the cosponsor of the recent Lifetime Income Summit held 

May 20, 2010, in Washington, DC.
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Safe Harbor Issues and Recommendations

Our membership generally believes that a primary hindrance to the availability of lifetime 

income options in defined contribution plans results from the prospect of fiduciary liability

attendant to selection and monitoring of lifetime income options. Notwithstanding the existing 

fiduciary safe harbor for selection of annuity products, it appears that the safe harbor is rarely 

used. It is the exception when an annuity is the form of distribution from a defined contribution 

plan. In fact, very few defined contribution plans offer this distribution option, and in the few 

that do, participants rarely select it.

There are many avenues from which fiduciary liability might arise in selecting lifetime income 

options under current rules. Fiduciary liability might arise from the selection of lifetime income 

options, the selection of providers of lifetime income options, dissatisfaction by participants, and 

the failure to meet statutory and/or regulatory guidelines. Currently, the safest path for plan 

sponsors to follow is to avoid consideration of lifetime income options and, by design, force 

participants to take a lump sum distribution. Although many of these lump sum distributions are 

rolled over to individual retirement accounts, our members detect a significant amount of 

“leakage” from the retirement system when participants take lump sum distributions. This 

erodes the prospect of workers having a sufficient savings pool to provide for a dignified 

retirement.

Issuer Solvency Standards and Safe Harbors for Both Annuity and Non-Annuity 

Products

In 1995, the Department of Labor issued Interpretive Bulletin 95-1. Interpretive Bulletin 95-1 

instructed plan fiduciaries, when considering annuity providers, to select the safest available to

fulfill distribution options in a qualified plan. This created uncertainty when applied to defined 

contribution plans. In section 625 of the Pension Protection Act, Congress addressed this 

uncertainty by providing that the “safest available standard” required by IB 95-1 applied only to 

the selection of an annuity provider for terminal annuities in a defined benefit plan. Further, 

Congress directed the Department of Labor to issue regulations clarifying that the selection of an 

annuity provider to fulfill distribution options in an individual account plan is not subject to IB 

95-1, but rather is subject to ERISA fiduciary standards.

The Department of Labor then promulgated 29 CFR §2550.404a-4, 73 Fed. Reg. 5847 (Oct. 7, 

2008) to provide a safe harbor for fiduciaries in selecting an annuity provider so long as certain 

requirements are met. The safe harbor effectively provides that the fiduciary who meets its 

requirements has fulfilled the duty of prudence attendant to making the selection. Of course, as 

can be seen from the responses to the RFI, there are a multitude of lifetime income options other 

than annuities in the marketplace today, and it is logically anticipated that there will be more 

going forward. Therefore, a broader form of safe harbor, potentially based on the requirements 

contained in the regulation, will be needed.
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The current annuity provider regulations identify a number of requirements that a fiduciary must 

meet in order to obtain protection under the safe harbor. These include:

1. The fiduciary must engage in an objective, thorough and analytical search for the purpose 

of identifying and selecting providers from which to purchase annuities.

2. The fiduciary must appropriately consider information sufficient to assess the ability of 

the annuity provider to make all future payments under the annuity contract.

3. The fiduciary must appropriately consider the cost of the contract in relation to the 

benefits and administrative services provided.

4. The fiduciary must conclude that, at the time of the selection, (a) the annuity provider is 

financially able to make all future payments under the annuity contract, and (b) the cost of the 

contract is reasonable in relation to the benefits and administrative services to be provided under 

the contract.

Selection and monitoring of the provider of a lifetime income option, as with all other investment 

options in a defined contribution plan, should implicate fiduciary obligations. However, as 

expressed below, we believe that there must be a structure in place to allow for a safe harbor for 

fiduciaries that is neither burdensome nor expensive.

The Annuity Safe Harbor

The most significant difficulty with the existing annuity safe harbor provision is the issue of 

issuer solvency. The current economic environment has highlighted the need to allow 

participants the opportunity to purchase properly priced lifetime guarantees inside a defined 

contribution plan as well as demonstrating that the pooling of risk and the undertaking of 

solvency risks are critical marketplace functions. In order to accomplish this, we suggest that the 

annuity safe harbor permit the fiduciaries to use and rely upon items 3 and 4(b) of the existing 

safe harbor described above1, but that a safe harbor be provided for complying with items 1, 2 

and 4(a). In our written comments, we suggested that fiduciaries be permitted to rely on existing 

state regulatory structures to protect against insurer solvency. The annuity safe harbor would 

provide that an adequate fiduciary review would have the fiduciaries acknowledge that: (a) the 

task they undertake is different from the mere investment of account balances; (b) the standard 

against which they will be judged necessarily has a stronger insolvency risk; and (c) they have 

addressed that risk adequately by understanding and relying on the state’s regulatory role in 

managing the risk. However, this improved safe harbor would still leave many employers, 

especially small employers, without the means of complying with the requirements. 

A meaningful safe harbor would provide plan fiduciaries, especially small plan fiduciaries, with 

reliance on solvency determinations made by EBSA and/or the Treasury Department. The 

 

1

In the case of item 3, we suggest that the Department of Labor should review whether 

additional guidance on fee transparency is needed with respect to these options to adequately 

allow a plan fiduciary to fulfill its obligations.
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agencies could publish a list of providers determined to be solvent based on the considerations 

that would otherwise be pushed down to the plan fiduciary level. 

The agencies’ review would rely heavily on the determinations of state insurance regulators. An 

insurer’s rating would be used as an element of this analysis, given the intensive reviews made 

by the rating agencies including interviews with management, coupled with a review of the 

underlying rating report and an understanding of the significance of the rating. Plan fiduciaries 

would be provided with a “pass” on the insolvency risk provided the insurance companies from 

which the guarantees are purchased are on the “approved providers’ list.” A fiduciary would be 

required to monitor that status in the same way that fiduciaries are required to monitor other 

individual account plan investments.

Hybrid Products Safe Harbor

Since guaranteed lifetime income products (referred to as GMWBs, GMIBs and various other 

names) and other hybrid products are not annuities, it appears they are not covered by the 

annuity safe harbor. Nevertheless, solvency concerns applicable to annuity purchases also 

apply to non-annuity products, and a fiduciary safe harbor similar to the annuity safe harbor 

should apply.

We believe that a new (or expanded) safe harbor would help facilitate the development and 

acceptance of new alternatives to traditional annuities, both now and in the future, by eliminating 

fiduciary uncertainty regarding the selection of these products. The failure to provide an 

additional (or expanded) safe harbor could inappropriately favor one form of lifetime income 

product over others, which we believe would be ultimately to the detriment of plan participants 

and beneficiaries.

404(c) Changes

We believe that the regulations under 29 CFR §2550.404c-1 should be amended to anticipate the 

addition in a self-directed investment defined contribution plan of one or more lifetime income 

options. Additional fiduciary protection must be provided to allow for this investment choice by 

the participants without burdening plan fiduciaries with any additional liability exposure so long 

as certain conditions are met.

The §404(c) conditions might include: (1) simple written explanations of each of the lifetime 

income options, (2) a description of the impact on diversification of the selection of a lifetime 

income option as part of the “investment portfolio” or as the sole investment option, (3) relevant 

information concerning each provider of a lifetime income option available under the plan, and 

(4) the extent to which guaranteed income is available under each lifetime income option.

Application of IB 96-1 to Investment Advice Rules

Investment education to participants concerning lifetime income options should fall under the 

ambit of Interpretive Bulletin 96-1 in order to allow plan fiduciaries to provide participants with 

necessary information regarding the decumulation phase of their defined contribution account 

balances. The Department of Labor should provide specific guidance to identify what types of 

educational information could be given to participants so that it would be considered “education” 
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rather than “advice.” This additional guidance should be cast in the nature of a safe harbor and 

should make it clear that it is merely educational and would not subject the provider to the 

prohibited transaction rules as an investment advice fiduciary.

Summary

Plan sponsors should be encouraged, but not required, to include lifetime income distribution 

options in defined contribution arrangements. One of the major obstacles to the offering of these 

options is the fiduciary burden that arises from selection of a provider for annuities, or other

lifetime income option. To encourage provision of lifetime income options, future guidance must 

reduce the fiduciary burden with regard to the determination of a provider’s solvency. We

recommend that any guidance dealing with the role of fiduciaries in selecting hybrid non-annuity 

lifetime income options and providers will be subject to a safe harbor that is similar to the relief 

applicable to the selection of a provider of more traditional annuity options. We further 

recommend that the Department of Labor modify rules regarding “investment education” to 

participants to include lifetime income option “education.”