One of the key fiduciary roles in the assessment of any DC lifetime income program process necessarily involves whether, and how, the plan or the vendor accommodates any required spousal consent rules related to the payout of annuities.
The vast majority of the defined contribution plans comply with ERISA and the Code’s spousal consent rules by simply requiring spousal consent to the participants change in any beneficiary to someone other than the spouse. This simplicity does not change when a plan chooses to offer either an accumulation of lifetime income guarantees as an investment option under the plan (as opposed to the lifetime income benefit being provided as a stated benefit under the plans terms), or a program which offers the participant the ability to choose an annuity at the time of separation from service.
Where the circumstances may change, however, is when the plan actually takes the steps to either pay out the accumulated benefit in the form of an annuity contract, or offers to purchase and distribute an annuity contract at the time participants separate from service. This is where the fiduciary needs to be “in the know” as to whether, when and how any spousal rights apply to payment of that benefit. This involves being informed as to how and when a participant may elect during any “applicable election period” to waive a Qualified Joint and Survivor Annuity (QJSA); how the rights to revoke any such election during the applicable election period is actually implemented; as well as the operation of the right to elect something called the qualified optional survivor annuity (“QOSA”) during such period.
This involves a number of inquiries. One is whether these rules actually apply to the distribution. There is a difference whether the annuity contract is treated as a distribution annuity (see my prior blog, where I discuss those differences) or whether it is simply an in-kind rollover to an IRA. Another inquiry is to whether or not the plan itself must be involved in the execution of those rights, which may occur when immediate annuities are purchased and distributed at the time of separation from service. This inquiry will also include an assessment of the manner and timing in which any “right to revoke” an election impacts the election periods demanded by the law. Yet another inquiry is where the line is drawn between what the plan must do and what the insurer must do.
Particularly instructive, here, is Revenue Ruling 2012-3, which provides some pretty bright lines as to whether the plan itself or the insurance company-treated, for these purposes, as the plan administrator of the QPDA- is the responsible party.
This is where a prior post of mine regarding the “Engineers, Operators and Analysts” of Lifetime Income really comes into play. The plan sponsor or its advisor (the “analyst” in my category of things) need not be familiar with the intricacies of the application of these rules in all circumstances. THAT is under the purview of the “engineer” or the “operator” of these programs. What the analyst needs to know, however, is how the choices those “engineers” made in the program being reviewed impacts its fiduciary assessment of the program, including its judgment of the ability of the responsible party to actually pull it off.