I am of an age to be contemplating retirement (and I work in the field so that age may come sooner for me than for others).  My parents are both in their late 80s; I had a grandmother who died a few weeks shy of her 100th birthday.  So I have a personal interest in the risk of outliving one’s retirement assets.

The IRS recently issued two sets of proposed regulations and two notices that attempt to address these issues.  One set of proposed regulations, if finalized, will permit plan participants (and IRA holders) to use up to the lesser of 25% of their account balances or $100,000 to purchase what is being called a “Qualifying Longevity Annuity Contract” or QLAC, which is a type of annuity contract purchased before age 70 to begin paying benefits at between ages 80 and 85.  The goal would be to allow participants to use a portion of their retirement assets to ensure that they will have a stream of lifetime income if they outlive their life expectancy so that they can better manage the remaining assets between the time that they retire and the time that the QLAC begins.

The QLAC has a number of requirements and restrictions attached to it; I am assuming that once the IRS finalizes these regulations, the insurance industry will develop products that meet the requirements.  But will employers sponsoring 401(k) plans add them either as an investment option for active participants or as a distribution option for retired participants? Because plan sponsors may have access to institutional pricing of annuities and because plans must provide annuities on a unisex basis, policies available through a plan may provide a better value (particularly for women) than policies available through an IRA, where pricing is more likely to be retail pricing and where gender based rates could be used. 

The reason that plan sponsors may be reluctant to offer QLACs in their plans is fiduciary risk.  The Department of Labor (DOL) places strict standards on plan sponsors/fiduciaries that provide annuities under an individual account plan, such as a 401(k) plan.  The sponsor must engage in an objective, thorough and analytical search for the right provider; must obtain sufficient information to assess the ability of the annuity provider to make all future payments; must consider the costs (fees and commissions) in relation to the benefits and services provided under the contract; and must conclude that the provider is financially able to meet its obligation to make future payments and that the costs are reasonable.  If necessary, the fiduciary must hire an expert to assist it in evaluating the products.

To date, plan sponsors have been reluctant to take on the responsibility of providing annuities to plan participants.  In addition to this IRS guidance, the DOL may also need to provide guidance to plan sponsors that convinces them that the benefits of the QLACs will outweigh the fiduciary risks of QLAC selection. 

I can hope that the guidance comes before I retire.