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A Treasury Department final rule could help ensure retirees have steady income
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The U.S. Department of the Treasury and the Internal Revenue Service issued
a final rule on purchasing longevity annuities within defined contribution retirement plan accounts, intended to help ensure that retirees have a stream of regular income throughout their advanced years.
The final rule, published in the
Federal Register on July 2, 2014, makes it easier for plan sponsors to offer the option of purchasing a longevity annuity within 401(k)-type plans. However, whether to make longevity annuities available remains at the discretion of plan sponsors.
A longevity annuity is a type of deferred income annuity that typically begins beyond age 70½—the age at which required minimum distributions (RMDs) from traditional 401(k) plans must generally start to be taken—and continues throughout the retiree’s life.
“As boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live,” said J. Mark Iwry, senior advisor to the secretary of the Treasury and deputy assistant secretary for retirement and health policy, in a news release.
“Instead of planning for an uncertain period, participants can plan for a fixed period—from the date of their retirement to the date at which they start receiving the longevity insurance benefit. Longevity insurance thus reduces uncertainty in planning,”
wrote John A. Turner and David D. McCarthy of the Pension Policy Center in 2013 in
The final rule is largely consistent with earlier proposed regulations on longevity annuities that the Treasury Department issued in 2012 as part of a broader effort with the Department of Labor to encourage lifetime income and enhance retirement security. But it responds to public comments in several respects, including:
• Increasing the maximum permitted investment. A 401(k) or similar plan may permit participants to use up to 25 percent of their account balance or (if less) $125,000 to purchase a qualifying longevity annuity. The dollar limit will be adjusted for cost-of-living increases in $10,000 increments.
• Providing an exemption from RMDs. Retirees will be able to exclude the value of a longevity annuity from the percentage of their account’s value that must be withdrawn each year beginning at age 70½. Instead, payments from the annuity must begin no later than the first day of the month after the retiree turns 85.
• Allowing “return of premium” death benefit. A longevity annuity in a plan can, as an option, provide that if purchasing retirees die, then the premiums they paid but have not yet received as annuity payments will be returned to their accounts for the benefit of their beneficiaries. This option, while potentially reducing the size or start date of the payments, may appeal to individuals seeking peace of mind that if they die before receiving the annuity, their initial investment can go to their heirs.
• Protecting individuals against accidental payment of longevity annuity premiums exceeding the limits. Individuals who inadvertently exceed the 25 percent or $125,000 limit on premium payments may correct the excess without disqualifying the annuity purchase.
“The proposed regulations provided that a variable annuity, indexed annuity, or similar contract cannot be used as a QLAC [qualifying longevity annuity contract],”
an analysis by law firm Davis & Harman LLP, prepared for the SPARK Institute, points out. “The final regulations reject suggestions to allow these products, but allow QLACs to be structured as participating contracts or to provide for certain cost-of-living increases in payments.”
“Employers will need to weigh the merits of adding the product to meet employee needs against fiduciary considerations, such as vendor selection for the annuity, when deciding whether to offer QLACs,”
comments a Buck Consultants alert, adding:
Employers concerned about employees outliving their retirement savings, but reluctant to undertake the responsibility of selecting annuity products to offer through the plan, may want to consider adding a post-termination partial withdrawal feature to their plans. This will encourage participants to keep money in the plan while at the same time providing access to funds in retirement and accommodating the purchase of a QLAC outside the plan through an IRA.
A Critical View
Offering a decidedly skeptical response, Michael Kitches, director of research for Pinnacle Advisory Group, a wealth management firm,
While the new Treasury Regulations may be a boon to annuity companies that wish to sell longevity annuities, ... it's unclear whether the new rules will real impact anytime soon, for the simple reason that longevity annuity purchases have been growing but still represent barely 1% of all annuity purchases ... In fact, given that most consumers are reluctant to buy immediate annuities where they surrender their lump sum liquidity to receive payments for life, it's unclear why they would feel better about a similar contract with payments that don't begin for decades!"
By the Numbers: Annuities and Retirement Plans
According to WorldatWork’s 2013
Trends in 401(k) Plans and Retirement Rewards survey report, about 12 percent of employers indicated that they offered an annuity payout option through either a defined contribution or defined benefit plan; 21 percent reported that they don’t currently offer an annuity but are considering it—“an indication that annuities or annuity‐like income stream payout options may become more common in the near future,” noted WorldatWork.
401(k) Benchmarking Survey also revealed plan sponsors are showing some interest in adding annuity features to their defined contribution plans for both the asset accumulation (in-plan) and asset distribution (at-retirement) phases. But few had actually added these options, with in-plan features at 4 percent and at-retirement features at 6 percent. “With an estimated 10,000 workers retiring every day, annuity features within 401(k) plans may still be interesting to watch over the coming years as these retirees seek a means to convert 401(k) plan balances into a reliable stream of retirement income,” commented Deloitte.
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter
Related SHRM Articles:
DOL Seeks Input on Lifetime Income Options,
SHRM Online Benefits, May 2013
Income Projections Motivated Savings,
SHRM Online Benefits, April 2013
Secret to 401(k) Success: Income Replacement Ratio,
SHRM Online Benefits, April 2012
401(k) Distributions: Easing Into Annuities,
SHRM Online Benefits, June 2008
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