DC Plan Sponsors Called On to Offer In-Plan Annuities

Earlier this month Treasury and the Internal Revenue Service (IRS) issued final rules to make longevity annuities more accessible to the defined contribution (DC) and individual retirement account (IRA) markets (see “Final Rules Seek to Expand In-Plan Longevity Annuity Access”). In short, the final rules ease certain minimum distribution requirements that have made it difficult for retirees to purchase and hold longevity annuity products without potentially jeopardizing the qualified status of their accounts.

Ken Nuss, founder of AnnuityAdvantage, sees this as an opportunity for near-retirees to hedge against the distinct possibility of outliving their retirement savings. “Deferred income annuities function much like an individual pension plan, creating a lifelong and predictable income stream. For those concerned with beneficiaries, the final rules allow for a return of premium option should the purchasing retiree die before (or after) the age when the annuity payments begin. Utilizing this option, the premiums they paid, but have not yet received as annuity payments, would be returned to their account upon death,” Nuss says.

According to AnnuityAdvantage, by codifying longevity annuity contracts in the federal tax regulations, the Treasury Department is signaling that retirement income security is a national priority. According to the rules, investors can divert up to 25% or $125,000—whichever is less—of their retirement account balances into these vehicles, referred to as qualified longevity annuity contracts (QLAC).

The annuity provider explains that the mathematics of deferred income annuities work out such that the earlier one makes an initial investment, the larger the payout in the future, because the insurance company has more time to grow the lump sum. Currently, a man could deposit $20,000 to $25,000, depending on refund options selected, at age 65 and begin receiving $1,000 a month at age 85; a woman would need to deposit slightly more given her longer life expectancy.

Because the Treasury Department's rules are designed to maximize retirement income security, only fixed annuities are approved as QLACs; variable and indexed annuities will continue to be subject to the same minimum withdrawal requirements as typical investment vehicles.

While DCIIA supports regulators’ efforts to encourage more robust and broad-based adoption of lifetime income solutions in U.S. retirement plans, it says there is still more work to do. “There is a real need for innovation in the development of new products and solutions to manage longevity risk,” the association said in a statement.

“Additional regulatory guidance in this arena makes it both easier and simpler to implement these solutions in qualified plans. Such guidance can take many different forms, such as through interpretive guidance or information letters supporting different approaches or examples without necessarily needing to rely on simplistic safe harbors that can have the unintended consequences of inhibiting innovation by creating fear that other potentially better approaches may be inherently ‘un-safe’ from a fiduciary perspective. A regulatory approach that includes a combination of thoughtful safe harbors and flexible examples can go a long way in driving home continued regulatory support for plan sponsor innovation,” DCIIA said.

The association calls on the defined contribution community—sponsors, consultants, Employee Retirement Income Security Act (ERISA) counsel, recordkeepers, investment managers, providers and insurance companies—to embrace the message behind these new regulations and to move toward more widespread adoption of additional tools for participants to use in managing the spending and distribution phase of their retirement.