QLACs Can Boost Retirement Readiness, EBRI Report Says

By Linda Koco

The new qualifying longevity annuity contracts (QLACs) sure have had a nice ride. In one year’s time, they’ve received the federal government’s blessing and received a lot of publicity from the media. In addition, nearly 10 carriers already have rolled them out.

But is anyone buying them? Most experts agree it’s too soon to say. It takes time for carriers to reach advisors and potential customers and educate them about QLACs.

Now comes the Employee Benefit Research Institute (EBRI) with some information about the value of the products that may help boost marketplace interest in the products.

According to a new study from the Washington researcher, the use of QLACs inside of 401(k)s produces a “significant increase” in retirement readiness. This is for people in the “longest relative longevity quartile,” which is the researchers’ term for people with the longest life expectancy based on family status, gender and age.

Since increased retirement readiness translates into increased likelihood of not running out of money, that’s a positive for QLAC ownership.

As a refresher, a QLAC is a type of deferred income annuity. It can be purchased inside defined contribution (DC) plans, such as 401(k)s, and also inside individual retirement accounts. The annuities allow owners to defer their annuity income payments for many years, up to age 85.

Under federal rules released last year, owners are exempt from having to take required minimum distributions (RMDs) from their QLAC at the normal RMD age of 70.5. This can wait until QLAC income begins.

The boost in readiness

The boost in retirement readiness that EBRI researchers detected is noteworthy since the people who live the longest generally are understood to have the greatest need for their retirement money to last a very long time.

In one scenario that EBRI ran, the early (and thus oldest) baby boomers in the “longest relative longevity quartile” would experience an increase in retirement readiness ranging from nearly 2 percent to 4.5 percent if they own a QLAC. The higher percentages reflect the presence of premium discounts.

The increased readiness for late (younger) boomers in the same quartile was higher — it ranged from nearly 3 percent to 6.5 percent. And the increase for Gen Xers was higher still — from 3.5 percent to 6.7 percent. The larger percentage increases for the younger groups are largely a function of their larger 401(k) balances as a multiple of earnings, according to the study.

The scenario that produced those numbers involved purchase of a 10-year laddered in-plan QLAC. Another scenario that EBRI ran, involving another type of in-plan QLAC purchase, showed even higher increases, even as high as 16 percent (for Gen Xers with a 30 percent premium discount).

The findings are based on today’s historically low interest rates. If rates go up, the results would be “even more favorable,” said Jack VanDerhei, EBRI research director and author of the report.

Merits of the product

EBRI said it did the study to assess the ability of QLACs to provide an effective longevity hedge for boomers and Gen Xers.

Due to the long income deferral period in QLACs, their premiums can be “a small fraction” of that for a similar monthly benefit through a single premium immediate annuity, EBRI pointed out in its report.

That, plus the deferral of RMDs, have been widely touted as reasons why consumers might elect these annuities.

Another often-mentioned attraction is that the products establish an income stream to help meet late-in-life expenses.

It’s too early to know how the demand for QLACs and the insurance industry’s supply of QLAC options will modify the market for longevity annuities, VanDerhei wrote.

Also, from a public policy perspective, “the question of how to increase demand for this product to a point where a significant percentage of new retirees will have this type of longevity hedge remains largely unanswered.”

Usefulness for advisors

Since the products are so new, industrywide experience data on QLACs does not yet exist. The EBRI findings may therefore help fill the data vacuum, especially for advisors who are trying to decide whether to recommend the products, when and how.

The study looked only at scenarios involving QLACs in the 401(k) market. Advisors who are reviewing QLACs designed for sale inside of IRAs will need to keep that distinction in mind when reading the EBRI findings as there may be subtle but important differences. Most QLAC rollouts to date have been for the IRA market.

Still, the simulations showing that QLACs can increase retirement readiness may be reason enough to give QLACs careful scrutiny. It’s a factor to consider when evaluating whether to add QLACs to the retirement planning quiver.

Another factor to consider is consumer attitudes toward such a product. On that score, earlier EBRI research found that people are definitely interested. For instance, 47 percent of those who think they might live to at least age 85 were interested in purchasing a QLAC-type product. Even 41 percent of people who believe that living that long is only “somewhat likely” said the same.

InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.