It's never a good sign when the crux of one of our articles is: Nobody knows who is responsible for what. Welcome to the world of QLACs. Qualifying longevity annuity contracts allow people to use 401(k) or IRA money to purchase a deferred-income annuity and exclude its value from the required minimum distribution calculation when they reach age 701/2. The change makes it easier for people to buy contracts that don't begin paying until far later in life — as late as age 85 — so the annuity can truly act as “insurance.” The Treasury Department and IRS announced the final regulation last summer, saying the purpose for updating the laws was to help people manage the risk of running out of money in retirement — the greatest fear many have.
Financial advisers largely welcomed the development (as well as a follow-up announcement last fall that QLACs could be included in target date funds) as another potential planning tool to diversify income in retirement — and to delay a portion of RMD payments. The product certainly isn't for everyone, but with the Obama administration's backing of it, the possibilities were exciting.
Concerns about people outliving their money as life spans and health care costs grow are real. Even if an adviser's got every detail accounted for, having a backstop for healthy clients with less-than-healthy retirement balances can be a real relief to both adviser and client. Whatever an individual adviser feels about a QLAC's usefulness for a particular client, if it is a product with even limited applicability, it should be available.
HAVING A BACKSTOP
So if there's enthusiasm on all sides — advisers, broker-dealers, insurance carriers, the public — where are the QLACs?
OK, they are out there, at least on some platforms. But many advisers still don't have access.
A recent article in
InvestmentNews ex-plained that the delay in broker-dealers adding QLACs to their platforms largely is attributable to confusion over who's responsible for ensuring contracts meet Treasury guidelines, particularly the contribution limits. Either the insurance carrier or the broker-dealer will have to ensure clients are using no more than $125,000 or 25%, whichever is less, of their qualified plan assets on a QLAC.
Some broker-dealers, especially those who consider this “outside business” for their advisers, rely on insurance companies to capture information ensuring suitability on applications, including having clients attest that they meet QLAC requirements. For broker-dealers that process transactions themselves, the responsibility could be greater, but concerns need not translate into inaction.
There is some reprieve after all, for mistakes. The Treasury's final rules permit buyers who exceed the limits to correct that excess amount without disqualifying the annuity purchase. Of course, the penalty for not taking the RMD for that overage could be hefty. These issues could benefit from further guidance from Treasury and the IRS.
Find out the
Changes in penalties from not taking the RMDs here.
The incentive for the industry to take action and sort out the responsibility for meeting QLAC requirements could very well gain steam on its own, once demand starts to grow for the products. Currently, the idea of locking into low rates with some of these annuities is not spawning a wave of adviser interest. Neither is the fact that contribution maximums are relatively low.
LIMITS TOO LIMITING
Two types of clients might especially benefit from a QLAC, but for both, the limits of 25% or $125,000 diminish the product's usefulness. For clients with low account balances — who are most likely to outlive their savings — 25% of a tiny pile of money won't buy much guaranteed future income. For the wealthy who don't need longevity insurance but want to delay RMDs, sticking $125,000 into a low-paying annuity might not be worthwhile.
So there's a lot to be done to reach the full potential of these products. But regardless of the need for tweaks, more guidance and a stronger impetus to take responsibility around QLACs, the fact that the industry — and government — are having this conversation is encouraging.
Pensionizing a portion of defined-contribution dollars is a worthwhile concept. It would benefit everyone if the industry continues to discuss creative ways to evolve risk management — insurance at its very purest — to meet the growing challenges facing retirees.
