Issues Regarding the Use of Longevity Annuities as QLACs

The government supports longevity annuities as important retirement income planning tools.  Multiple regulations last year made it easier and more beneficial to use these types of annuities within employer-sponsored defined contribution plans.  It’s been about a year since the Treasury Department and IRS started allowing longevity annuities to be used as QLACs within defined contribution plans.  Last fall, the government changed regulations to allow QLACs to be included in target-date funds as well.  You can purchase a longevity annuity 25% of your 401k plan or IRA (up to a maximum of $125,000) and have that money be exempt from required minimum distributions at age 70 1/2.  The government made these changes to help U.S. workers who are worried about running short of money during their retirement.  This longevity risk is one of the most common retirement concerns.1

A recent editorial from Investment News, “Time to get in gear on longevity annuities,” says that the full potential of these products will not be reached until there are some major changes in the annuity marketplace.  Financial advisors were mostly happy about these changes because they add another tool to help diversify income planning for retirement.  Qualified Longevity Annuity Contracts don’t work for all retirees, but it’s important that they are accessible for the people who might benefit from them.  The article calls QLACs a backdrop for people who are healthy and expected to live a long life, but don’t necessarily have the amount of money they need to finance that longer life.2  It seemed like everyone was on board with the importance of these longevity annuities, including insurance companies, advisors, consumers, and broker dealers.  But the products haven’t exactly been as accessible as you might think.  There are definitely QLACs out there; MetLIfe introduced one of the most recent options.3  There is at least one reason that more products aren’t currently available, though.

It’s not clear who is responsible for ensuring that the right amount of money is being used to purchase these longevity annuities so that they meet the government requirements.  The responsibility will have to lie with either the insurance company or the broker-dealer to make sure that clients don’t use more than 25% or $125,000 of their qualified plan assets to buy a longevity annuity.  A lot of broker-dealers rely on the insurance companies to make sure that their annuities meet suitability guidelines and QLAC requirements.  But those broker-dealers who process their own transactions have to take responsibility themselves.  If a mistake is made with the amounts, it can be corrected without losing the annuity, but the clients might have a large penalty if they incur a required minimum distribution overage.4

The other issue keeping some people away from these QLACs is the relatively low contribution limit.  The Investment News article says that the limits are just too limiting for many consumers.  Two of the groups that would benefit most from these QLAC guidelines are those who have very little saved for retirement and those who have a lot saved but need to get past the RMD rules.  Those with low retirement savings are the most likely to succumb to longevity risk worries, but 25% of their low account balances might not be enough for a longevity annuity to provide income in the future.  And wealthy people who aren’t interested in the longevity insurance aspect but want to delay some of their minimum distribution requirements might not benefit much from a $125,000 annuity.  Reaching the full potential of QLACs will take more government guidance and an increased understanding of who is responsible for what.

It’s important to have a way for clients to create supplementary income streams during retirement, so the talk of using some defined contribution funds to purchase QLACs and create future income will continue.