Retirement Income:Lasting Forever?
Treasury regs encourage plans’ use of annuities, but obstacles remain
Illustration by Dadu Shin
Just 15% of sponsors believe that most employees will be prepared at retirement. However, few have turned to retirement-income products to help improve the situation.
That is according to Deloitte Consulting LLP’s 2011 “Annual 401(k) Benchmarking Survey,” which queried 430 sponsors with plans of various sizes. Asked whether they have considered adding an in-plan retirement-income product, none had actually done so, while 14% said they were looking into it and 74% were not considering it. Questioned about whether they had considered adding an at-retirement income solution, only 5% already had made the addition and 72% were not considering it.
“If you think about insurance products or annuities, they have been in vogue and out of vogue, and they are coming back into vogue” because of income-adequacy concerns, says Stacy Sandler, a Minneapolis-based Deloitte principal. “But plan sponsors are very hesitant to put them in there.” She cites fiduciary risk, portability issues and low participant interest as reasons. “The uptake is very low, even when they are offered at retirement,” she adds.
Some comfort for sponsors and participants came in February, when the U.S. Department of the Treasury and the Internal Revenue Service (IRS) proposed regulations intended to facilitate increased use of these products by plans (see “IRS and Treasury Address Lifetime Income”). “I do not think it is a broad-based safe harbor,” says David Levine, a Washington-based principal at Groom Law Group. “It is an opening effort. They are trying to encourage more lifetime-income streams. They also are trying to make sure that they do not create a black hole, a largely unregulated market.”
The biggest news about the proposed regulations is the encouragement of longevity insurance by exempting a qualified longevity annuity contract (QLAC) from the amount considered when determining the required minimum distribution for retired participants aged 70.5 years and older. The proposal includes technical requirements for QLACs and would only apply to certain types of straightforward products, such as fixed annuities, Levine says. “This is probably the most innovative of the ideas,” he says of QLACs. For participants, “it preserves money.” Another regulation makes clearer how the spousal-consent requirements apply when a defined contribution (DC) participant buys a deferred annuity.
Still, major issues remain. “Not everybody is going to stay at [a] job, so there is portability risk,” Sandler says. “A sponsor using [QLACs] in-plan has to figure out how to maintain them for employees who leave.”