Reading Between the Lines of the IB 95-1 Report

The Department of Labor’s report on Interpretative Bulletin 95-1, issued early this week, did not make any definitive recommendations or conclusions. However, some experts say the report still contains insight into where the DOL might engage in rulemaking on pension risk transfers in the future.

The SECURE 2.0 Act of 2022 required the DOL, in consultation with the ERISA Advisory Council, a volunteer body of 15 subject matter experts that advise the DOL, to publish a report on possible updates to IB 95-1 by the end of 2023. That bulletin provides regulatory guidance from the DOL outlining the factors fiduciaries should consider when selecting a PRT provider to be sure it is a prudent choice.

The report noted that certain issues within the PRT marketplace were brought to the council’s attention, such as the role of private equity ownership, offshore re-insurance, administrative capacity, and riskier investment profiles, among other items, as deserving of further research and analysis. The report did not recommend any policy changes or designate any issues as being particularly concerning.

What the Report Didn’t Say

James Walton, a managing director at Agilis, agrees that “there weren’t a lot of conclusions” in the report, which primarily summarized a two-day public hearing hosted by the council in July 2023.

Walton explains that “the DOL recognized the complexity of the issues” in choosing to not reach any conclusions, apart from that further study would be helpful. He adds that if the report had made any clear recommendations, it would have likely influenced fiduciary PRT decisions even though neither it nor IB 95-1 itself have the force of law: “small nudges could shift the market towards seeing one provider as safe or not safe, and that can impact a large number of transactions.”

Despite this, the report did “open the door to future changes,” and pointed to some “issues that warrant further attention,” Walton says.

Kendra Isaacson, a principal at Mindset, and a former Senate staffer who worked on SECURE 2.0, agrees with that sentiment of future rulemaking, and says industry watchers should “read between the lines” of the report, which does “hint at areas they want to study further.”

Joe Anzalone, a managing director at Agilis, says that administrative capacity should be considered by fiduciaries when selecting a PRT provider, and that this factor is “hard to shoe it into one of the six criteria and is probably something worth considering” in a potential update to IB 95-1.

When an insurance company takes over a pension in a PRT, it is essential that they have the ability to take on monthly checks and customer service functions; so a later update in this area may be possible.

Not everyone thinks further study should lead to any shifts, however.

Little if anything has to be changed in IB 95-1, says Preston Rutledge, former Assistant Secretary of Labor for the Employee Benefits Security Administration and consultant to the American Council of Life Insurers: “The DOL was thoughtful, methodical, and made the correct decision to not modify the current risk transfer guidance which, because it is principles-based, continues to work well. The department also got it right when they indicated that any future guidance would remain principles-based and would only be issued following notice and public comment.”

Why the ERISA Advisory Council?

The inclusion of the advisory council likely influenced the DOL’s thinking and response, but its participation was not a foregone conclusion.

Mindset’s Isaacson explains that Section 321 of SECURE 2.0, the section that required this report, was primarily in response to concern about the role of private equity ownership in the life insurance industry. She says that Republicans in Congress supported a study to explore an update to IB 95-1 “as long as the advisory council could participate.”

The council is staffed by members of different parties and viewpoints serving on a volunteer basis, and always has one member on it representing the interests of the insurance industry.

“Some members of the industry felt targeted by the study,” and required the council to participate, the first time ever that Congress has required it to do a specific task. This was a compromise to get the report into the legislation at all, Isaacson recalls.

Rutledge says that “consultation with the advisory council was entirely appropriate given that the statutory duties of the council are to advise the Secretary and submit recommendations regarding the Secretary’s functions under ERISA.”

Currently, the insurance representative is Alice Palmer of Lincoln Financial Group. Lincoln Financial Group declined to comment.

Impact on PRT Litigation

Jerry Schlichter, founding and managing partner at the Schlichter Bogard law firm, which has recently brought several PRT-related lawsuits in federal courts, says that the report “certainly reflects the concerns of annuitants.”

He argues that the report is a sign that private equity ownership of PRT providers “is a concern at DOL” because of the conflicts of interest that can arise in the opaque world of private assets, as well as in business models that often invest with shorter time horizons than the retirement investors they are charged with insuring.

Schlichter also notes that the report cites a study from Aon which says “plan fiduciaries chose the lowest cost annuity in 78% of transactions,” which could suggest that “the chief driver of annuity selections is cost, rather than a rigorous process aimed at choosing the safest available annuity.”

While the report might not have an immediate impact on PRT litigation, “it shows the continuing serious concern that DOL has to these transactions,” Schlichter says.