Logic Insurance, Longevity Annuities Arrive in 401(k) Plans - The U.S. Department of the Treasury and Internal Revenue Service (IRS) recently approved the use of longevity annuities inside of target date funds in 401(k) plans and Individual Retirement Accounts (IRAs). They can be included in target date funds used as default investment alternatives, thus qualifying for the safe harbor protection for plan sponsors as outlined in the Pension Protection Act of 2006.
In recent years many experts in retirement planning and income have written about the benefits of retirees having the option to annuitize all or part of their retirement plans in the same fashion as a defined benefit pension plan.
Are They Portable?It is not uncommon for people to work at five or more employers during the course of their career. What happens if an investor allocates a portion of their 401(k) plan assets to the purchase of one of these annuities and then leaves that employer? Can the annuity benefit purchased be rolled over to a new employer’s plan or to an IRA? Or is the retirement plan participant just out the money used to fund the premiums?
Is This a Good Deal for Participants?Any decision as to whether to buy an annuity to fund a portion of one’s retirement income will in part depend upon the terms of the annuity offered. What are the contract’s underlying expenses? If an annuity is a viable option is this the way for an investor to go? Are there better alternatives available outside of their retirement plan?
A part of the decision will hinge on the participant’s situation. Are they comfortable managing their own investments and more importantly with managing the withdrawal process during retirement? Do they have a trusted financial advisor in place to assist them in these areas?
What other retirement resources do they have? Are they covered by Social Security or a defined benefit pension plan? If they are married the retirement assets of both spouses should be considered.
Clients will have many questions once QLACs become readily available in their 401(k) plans and financial advisors need to become knowledgeable about these products in order to properly advise their clients. For example, they may rightly ask if earmarking a portion of their 401(k) account to an annuity that doesn’t kick in until later in retirement is a good way to diversify their retirement income stream.
As mentioned earlier retirement plan sponsors will have questions about these products including whether or not to even offer them. Financial advisors who advise 401(k) plans as a part of their practice can be an even bigger resource to their clients by becoming knowledgeable about QLACs and being an expert their plan sponsor clients can turn to.
In recent years many experts in retirement planning and income have written about the benefits of retirees having the option to annuitize all or part of their retirement plans in the same fashion as a defined benefit pension plan.
What is Longevity Annuities Arrive in 401(k) Plans?
They argue that defined contribution plans put the onus of managing retirement on the shoulders of retirees who may or may not have the skills needed.
QualificaionAs part of the new rules this portion of the investor’s 401(k) or IRA will be exempt from the required minimum distributions that would normally kick in at age 70 ½. The annuity contract must meet the specifications for a qualified longevity annuity contract (QLAC):
- Only 25% of any employment retirement plan or IRA can be invested in a QLAC.
- The cumulative dollar amount invested across all retirement accounts may not exceed the lessor of $125,000 or the 25% threshold. The $125,000 dollar amount will be indexed for inflation.
- The limitations will apply separately for each spouse with their own retirement accounts.
- The QLAC must begin its payouts by age 85 (or earlier).
- The QLAC must provide fixed payouts that can be adjusted for inflation.
- The QLAC can have a return-of-premium death benefit payable to heirs should the retiree die before or after the benefit begins.
Deferred AnnuitiesPayments may be deferred as far out as age 85. The thought process is that these retirees will at least have something left if they overspend during their early years of retirement and/or if their investment results are not sufficient to keep the value of their nest egg at a point where they will not outlive their assets.
How Will the Annuity Be Selected?One question is how the annuity provider will be selected for a 401(k) plan? Since they will be included as part of the target date fund family offered in the plan will the fund providers bring in their own annuity provider?
In the case of the “Big Three” providers, Vanguard, Fidelity Investments and T. Rowe Price Group (TROW) all already offer annuities so it would not be inconceivable that they would partner with the insurance companies they already work with to create a QLAC offering.
Many insurance companies are already in the 401(k) business and will likely see this as a huge revenue opportunity and will offer QLACs in the various target date funds they offer to 401(k) plan sponsors.
A likely scenario is that the responsibility for selecting a QLAC product will fall on the plan sponsor who already is charged with selecting the investment choices offered within their plans. They in turn will likely rely on the plan’s outside investment advisor or in the case of some plans the insurance agent or registered rep servicing the plan.
In the latter arrangement the commission on these annuities will be a real boon to the agents and registered reps and plan sponsors need to be extra diligent in monitoring the selection process to ensure the best interests of their employees are being served.
How Will the Annuity Be Selected?One question is how the annuity provider will be selected for a 401(k) plan? Since they will be included as part of the target date fund family offered in the plan will the fund providers bring in their own annuity provider?
In the case of the “Big Three” providers, Vanguard, Fidelity Investments and T. Rowe Price Group (TROW) all already offer annuities so it would not be inconceivable that they would partner with the insurance companies they already work with to create a QLAC offering.
Many insurance companies are already in the 401(k) business and will likely see this as a huge revenue opportunity and will offer QLACs in the various target date funds they offer to 401(k) plan sponsors.
A likely scenario is that the responsibility for selecting a QLAC product will fall on the plan sponsor who already is charged with selecting the investment choices offered within their plans. They in turn will likely rely on the plan’s outside investment advisor or in the case of some plans the insurance agent or registered rep servicing the plan.
In the latter arrangement the commission on these annuities will be a real boon to the agents and registered reps and plan sponsors need to be extra diligent in monitoring the selection process to ensure the best interests of their employees are being served.
Are They Portable?It is not uncommon for people to work at five or more employers during the course of their career. What happens if an investor allocates a portion of their 401(k) plan assets to the purchase of one of these annuities and then leaves that employer? Can the annuity benefit purchased be rolled over to a new employer’s plan or to an IRA? Or is the retirement plan participant just out the money used to fund the premiums?
Is This a Good Deal for Participants?Any decision as to whether to buy an annuity to fund a portion of one’s retirement income will in part depend upon the terms of the annuity offered. What are the contract’s underlying expenses? If an annuity is a viable option is this the way for an investor to go? Are there better alternatives available outside of their retirement plan?
A part of the decision will hinge on the participant’s situation. Are they comfortable managing their own investments and more importantly with managing the withdrawal process during retirement? Do they have a trusted financial advisor in place to assist them in these areas?
What other retirement resources do they have? Are they covered by Social Security or a defined benefit pension plan? If they are married the retirement assets of both spouses should be considered.
As mentioned earlier retirement plan sponsors will have questions about these products including whether or not to even offer them. Financial advisors who advise 401(k) plans as a part of their practice can be an even bigger resource to their clients by becoming knowledgeable about QLACs and being an expert their plan sponsor clients can turn to.
The new Treasury and IRS rules allowing for deferred income annuities in 401(k) plans and IRAs potentially open up some new opportunities for retirement savers. Now that QLACs are here, many questions remain. Both retirement savers and retirement plan sponsors will have questions and will need help deciding if this is a good route for them to go. Knowledgeable financial advisors can be at the forefront of providing this guidance. (Author: Roger Wohlner)
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