Agents, advisors and benefits brokers will most definitely have a role to play in the “QLAC” marketplace now in the making.
QLAC is short for qualifying longevity annuity contract. That’s the name the Treasury Department bestowed on certain longevity annuities that can be used in defined contribution (DC) plans such as 401(k)s as well as in individual retirement accounts (IRAs). The purpose of QLACs is to provide a guaranteed stream of lifetime income at older ages.
Longevity annuities are essentially deferred income annuities (DIAs) that start their income stream several years after policy purchase, typically deep into old age.
In July, the Treasury Department laid out final regulations that effectively make these products “work” for many consumers who have qualified DC plans. The QLACs do this by minimizing required minimum distributions (RMDs) and associated taxes as well as guaranteeing lifetime income. We’ll look at some of that in a moment. First, let’s review QLAC status and agent opportunities.
According to several sources contacted for this article, carriers are developing QLACs that fit the regulation’s requirements. No one is setting a date for when the first one will hit the streets, but the group-think is “early 2015.” A few insiders suggest even before, such as “by year-end 2014.”
Carriers are initially focusing on developing QLACs for sale in IRAs, according to Steve Shepherd, a partner in the institutional annuities and life insurance solutions business of Hewitt EnnisKnupp. The firm is an Aon Company based in Norwalk, Conn.
Shepherd said IRA-based QLACs will be a viable retail market for annuity companies because many consumers already have rollover IRAs or individually created IRAs. It will be faster for carriers to implement products for this part of the market than for the DC market, he said.
Opportunities for Agents
In the retail market, agents, advisors and brokers will find themselves providing clients with guidance on QLACs. Clients may need an advisor’s help with deciding whether to take a QLAC option that a rollover IRA provider has made available, for instance.
In other cases, retail agents and brokers may be called upon to help clients decide whether to create an IRA, Shepherd said. They might do this if the client wants a QLAC in order to benefit from the QLAC’s tax feature but does not have that option at work.
Clients also may turn to advisors for help with deciding whether to take a QLAC that’s been offered at work (assuming the workplace plan offers the option). If the client does take the option, advisors will likely help the client integrate the QLAC into the client’s overall retirement plan, he said.
Institutionally based QLACs will be slower for annuity carriers to implement, Shepherd predicted. These are QLACs designed specifically as longevity options for DC plans. The development in this area will be evolutionary, as insurers assess the extent of demand for the products in the DC environment, how best to implement the options, plan design issues and related matters.
Here, too, advisors and brokers will have a role, Shepherd said. For instance, they will assist the plan sponsor with such things as understanding the QLAC, deciding if the option makes sense for plan participants, and if implemented, determining how to integrate it into the plan.
The RMD Kicker
Industry professionals expect that the QLAC’s RMD feature will appeal to clients who are concerned about making the required withdrawals to meet the government’s RMD rules.
The RMD is the minimum amount of money that the federal government requires plan participants to withdraw from their plans every year, starting on April 1 of the year after they turn age 70.5. The withdrawals are subject to income taxes.
The regulations state that the value of the QLAC can be excluded from the taxpayer’s retirement account balance when calculating the RMD. That creates a smaller base on which to perform the RMD calculations, thus reducing the size of the yearly RMDs and minimizing the income tax exposure.
People can’t go hog wild with the RMD-minimizing. That’s because the regulations limit the maximum QLAC premium to $125,000 (subject to cost-of-living adjustments) or 25 percent of the person’s account balance, whichever is less. From the government’s perspective, this ensures that the largest chunk of plan assets is still included in RMD calculations every year.
By comparison, participants who already own so-called in-plan longevity annuities must include the annuity amount in RMD calculations every year. (The existing in-plan products tend to be guaranteed minimum withdrawal benefits or DIAs.)
People who want smaller RMDs and reduced tax exposure do not like that aspect of the older in-plan products, according to industry sources. But whether plan sponsors that currently offer those options will add QLACs to the menu remains to be seen.
Some additional information to keep in mind about QLACs
The QLAC requirements. To be considered a QLAC, a longevity annuity must have not only the cap on lifetime premium but also a maximum date when payouts must start (age 85). In addition, current regulations say the QLAC can be a fixed annuity or a DIA but not a variable or indexed annuity – a stipulation the industry hopes will be lifted. Some other requirements exist as well.
When to “talk QLAC.” Plan sponsors may want to consider QLACs as an option at the time they review available retirement income solutions, the Hewitt EnnisKnupp report on QLACs suggested.
Death benefit. Government regulations do provide for this. A plan sponsor can choose to offer a return of premium (ROP) as the death benefit. Otherwise, the QLAC’s death benefit is a life annuity payable to a beneficiary.
Fiduciary standards. “DC plan sponsors will need to assess the creditworthiness of the underlying insurer or insurers of the plan’s QLACs,” wrote Hewitt EnnisKnupp in its QLAC report. “This analysis is similar to what one would expect of a fiduciary in assessing any investment option offered under the plan.”
This will take awhile. “Whether or not QLACs become viable for broader adoption will depend on how the markets, products and thought leadership evolve over time,” Hewitt EnnisKnupp said.
The IRS regulations on QLACs are available on the web here: http://bit.ly/innqr-qlac