Should the U.S. Department of Labor’s (DOL) rules be strengthened to better protect workers and retirees when employers unload their pension responsibilities in so-called “de-risking” transactions?
That was the question asked and addressed during an all-day hearing July 18 convened by DOL’s ERISA Advisory Council. Norman Stein, PRC’s Senior Policy and Legal Counsel who testified at the hearing, answered with a resounding “yes.”
De-risking (also known as a pension risk transfer) is a way for companies to sell off their pension liabilities to insurance companies. The practice generally involves an employer buying a group annuity from an insurer, which, in turn, takes over the responsibility of paying the plan’s monthly pensions to workers and retirees. This strategy allows companies to get out from their corporate pension liabilities (and wash their hands of further legal and administrative responsibility for paying benefits), all the while making their shareholders happy.
Insurance companies are happy, too – because they get billions of dollars to invest.
But do these deals make workers and retirees happy? Not so much. That’s because workers and retirees face much uncertainty as a result, Stein told the Advisory Council. He said that PRC has heard from thousands of workers and retirees over the past 15 years, and they worry that their retirement security could be in jeopardy.
Stein explained that workers and retirees “watch as their earned benefits under a retirement plan are being transferred to a commercial insurer. The plan and administrative apparatus with which they are familiar and the generous PBGC guarantees they understand and on which they have relied for decades, disappear in favor of a new (insurance) entity that they did not choose and an arcane system of state regulation and state insurance guarantee associations they do not understand.”
In simple terms, this adds up to a lot of lost protections that they previously had under the federal private pension law known as ERISA. Not only do workers and retirees lose their valuable PBGC protections, they can lose other important protections such as annual benefit disclosures, standards for claims procedures if their benefit is denied or miscalculated, possible loss of protections against creditors who want to go after their pensions, and the loss of oversight by the Department of Labor.
Stein also warned of the psychological impact of de-risking on workers and retirees. “A plan fiduciary and plan sponsor should consider, even though the law might not mandate its consideration, the distress and emotional upheaval that participants and their families experience during a risk transfer.”
In his written and oral testimony to the Advisory Council, Stein provided a list of recommended protections that he urged the Council and DOL to adopt. Among them, he said that DOL should strengthen the standards on how fiduciaries choose insurance companies to ensure that these entities will remain safe and secure well into the future. He also emphasized that plan fiduciaries should be required to negotiate with insurance companies to replicate ERISA protections that are lost in these transactions. (Fiduciaries are the plan and company officials who are authorized to control pension plan investment and management decisions and who must act solely in the interests of workers and retirees).
Congress required, as part of the SECURE Act, that the Department of Labor– in consultation with the ERISA Advisory Council –reevaluate its guidance on de-risking and report to Congress on the findings of such review and consultation, including an assessment of any risk to participants and beneficiaries.
PRC, along with AARP, AFL-CIO, the Consumer Federation of America, the National Retiree Legislative Network, Retirees for Justice, the United Food and Commercial Workers Union and other organizations representing workers and retirees told the Counsel what needs to be done. Now the Department of Labor should act to strengthen protections for workers and retirees.