• The DOL has determined that sponsors
need to analyze only the financial viability
of annuity providers at the time of selection,
not 30 years down the road.
• Some lifetime income annuities available
include immediate fixed-income annuities,
QLACs and GLMBs.
• Some advisers believe out-of-plan annuities
are a wiser choice than in-plan, due to
complications with portability.
success rate of making income last.”
Helping Sponsors Make Decisions
According to Brown, helping plan sponsors under-
stand the many annuity choices is not necessarily
a good thing. “Advisers should help plan spon-
sors understand there should be simplicity in
messaging and choice and understand the risks
participants need to mitigate.”
For example, he says, if a participant wants to
delay Social Security and needs a pay-out strategy
to bridge the five years until he reaches 70, an
immediate fixed-income annuity is appropriate.
Other participants may want more flexibility with
accumulated savings, but are concerned about
outliving those savings, so a QLAC may provide
the appropriate insurance protection.
If participants have too many options, inertia
kicks in, he says. Plan sponsors should provide
only a good, limited, competitive selection. “If it
can’t be simply explained to participants, it’s prob-
ably too complex and they’ll do nothing.”
Reddy points to the importance of sponsors’
plan philosophy—whether they want to attract
employees, maintain employee balances only until
they go to their next job, or help them with retire-
ment income. “If they want employees out of the
plan when they separate employment, plan spon-
sors should choose an out-of-plan annuity. If they
want to help employees with retirement income,
doing that effectively can involve a fixed-income
immediate annuity, QLAC or GMLB,” he says.
Dial believes the DOL’s fiduciary rule will
encourage participant uptake of annuities.
“Everyone has been doing an IRA [individual
retirement account] rollover and then setting
up an income distribution plan. If plan sponsors
provide the same service level in their plan, they’ll
need to provide more education and one-on-ones
with participants, especially those closer to retirement, to help them decide on income solutions,”
he says. —Rebecca Moore
Glossary of Annuity Terms
Immediate fixed-income annuity. This distribution option lets participants use a portion of their retirement savings to purchase an immediate
income stream that is guaranteed for as long as they live; this leaves their
remaining assets to be invested to potentially grow their overall portfolio.
Because income annuities produce the highest level of guaranteed
income per dollar of assets, the average retiree would need to save about
one-third more to replicate the power of the lifetime income annuity. While
a retiree trades off a bit of liquidity for the portion of assets put into an
annuity, he likely will gain income overall.
Qualifying longevity annuity contract (QLAC). Also known as
“longevity insurance,” this is a type of deferred fixed-income annuity (DIA)
where income payments begin at an advanced age—typically 80 or 85.
Approved by the U.S. Treasury Department in July 2014 for use as a distribution option in employer-sponsored individual account plans, QLACs can
be purchased with the lesser of 25% of a participant’s account balance, or
$125,000. Assets allocated to the purchase of a QLAC are not included in
the balance used to calculate the required minimum distributions (RMDs)
for participants that begin at age 70 1/2. By lowering the annual RMDs
participants must take in early retirement, more money can remain in the
participant’s DC plan with the potential to grow.
Additionally, by delaying payments to a later age, the participant can
increase the income amount possible when the QLAC’s guaranteed
income payments begin. At the time of purchase, features can be added
to a QLAC that offer inflation protection and provide for a return of premium
(ROP) death benefit payable to designated beneficiaries when the participant dies. However, QLACs generate the most income for the fewest options
Guaranteed minimum income benefit (GMIB). In this approach, participants buy into a fund that provides a minimum income benefit with the potential for upside appreciation. The appreciation comes from the investment
performance of the fund associated with the annuity—typically, a balanced
fund. The minimum (or floor) income benefit is determined by using conservative annuity purchase rates. On retirement, the participant will receive the
higher of the minimum income guarantee (the floor) or the income generated by the current annuity purchase rates applied to the market value of the
account. Once the annuity is purchased, generally there is no liquidity. The
participant may choose not to annuitize, and withdraw the market value of
his account in a lump sum.
Guaranteed lifetime withdrawal benefit (GLWB). This option combines
systematic withdrawals with a potential income guarantee. The products
are often structured as a DC plan investment—i.e., a target-date or target
risk fund—that can guarantee a fixed withdrawal amount regardless of
a participant’s actual account balance at retirement. When the holder
reaches a specified age, the assets are moved into a guaranteed fund
component and “wrapped” with a guaranteed percentage withdrawal
amount, say 4% or 5% of the asset base. Each year, positive investment
performance will result in a reset or “step-up” of the asset base to the
increased current value of the assets; the asset base is kept at the prior
level in the event of a market decline. On retirement, the participant may
take the guaranteed withdrawal amount, while leaving the remainder in
the market. However, excess withdrawals over a stated amount and other
participant actions may trigger penalties and/or reduce the guaranteed