MetLife has entered the still-new qualifying longevity annuity contract (QLAC) market. However, unlike the handful of other current QLACs out there, this annuity is designed for use in the “institutional annuity” marketplace — specifically, as an annuity-based retirement income distribution option for 401(k) retirement plans.
QLACs are deferred income annuities (DIAs) that can be purchased in 401(k)s and individual retirement accounts (IRAs) if the products meet the QLAC regulations that the Department of Treasury issued in July 2014.
Other early players in this market have developed their initial QLACs for use with IRAs. They view this market as easier to enter than the 401(k) market. This is because they can avoid the complexities associated with group plans, and because their companies have wide distribution potential through their advisors, many of whom have IRA-owners among their clientele.
Some of the early players say they will explore offering QLACs for 401(k)s later on, if the demand emerges. But for MetLife, the time to offer QLACs for 401(k)s is right now.
Income should be the outcome
“We believe retirement income should be the outcome of any retirement plan,” Roberta Rafaloff explained in an interview about the MetLife Retirement Income Insurance QLAC. Rafaloff is vice president-institutional income annuities at MetLife.
The firm is so convinced of this that its corporate benefit funding business began designing its QLAC for the institutional market last summer, after the Treasury regulations came out. Now, MetLife is talking with plan record-keepers and plan sponsors about adding the new QLAC as an option for their plans.
The target market is the plan sponsor/record-keeper that is committed to changing the focus of retirement plans from “a bag of accumulation assets” to an insurance vehicle for retirement income, Rafaloff told AnnuityNews.
Some benefits professionals doubt that many plan sponsors will be interested in something like that, “because a QLAC is an annuity” and “people don’t understand or like annuities.” MetLife thinks otherwise.
A study published in 2010 found that nearly half (44 percent) of employees said they “would like their employer to offer an annuity option as part of their defined contribution plan,” Rafaloff pointed out. The finding is part of MetLife’s eighth annual Employee Benefit Trends Study.
That reflects the growing recognition that people need and want retirement income solutions, she indicated.
MetLife is no stranger to offering annuities with 401(k)s. It claims bragging rights as the first company to introduce longevity insurance (essentially a DIA) to the market back in 2004. Today, the QLAC is a distribution option on its 401(k) platform alongside an immediate annuity the company also offers for this market.
New York regulators have already approved the MetLife QLAC, and Rafaloff predicts the majority of other states will follow suit by end of summer.
Adding QLACs as a 401(k) income option will help strengthen awareness of annuities overall, she predicted.
When an annuity becomes part of a retirement plan, she said, “people investigate it more. They go to websites, make calls to their plan sponsors,” and generally make efforts to become more familiar with it.
She drew a parallel to what happened with investment products in the 1950s and 1960s, when employers started offering 401(k)s. At the time, many employees did not know much about stocks and bonds or mutual funds, but once they saw the options in their plans, they started learning about them.
Historically, DIAs — which essentially are longevity insurance products — have not been a viable option for plan participants, Rafaloff allowed. The key reason is that, under previous Treasury regulations, participants could not defer their income start date beyond age 70½ without incurring a significant tax penalty.
But with the new Treasury regulations, Rafaloff believes that QLACs will get serious attention in the retirement market — from participants as well as plan sponsors. The regulations not only allow the use of QLACs in both 401(k)s and IRAs but allow some tax deferral related to the qualified money used to buy the contracts.
Impact of Treasury regulations
Specifically, QLAC owners can exclude their QLAC premiums from calculations of the yearly required minimum distributions (RMDs) that people must take out of their qualified savings starting at age 70½ . The RMDs are subject to income taxes. However, if the participant has a QLAC, these taxes will be computed on the qualified account value minus the premium for the QLAC. That effectively results in a smaller basis for computing the RMD-related taxes.
By lowering the annual RMDs that participants must take in early retirement, “more money can remain in the participant’s DC plan with the potential to grow,” Rafaloff said. And “by deferring payments to a later age, the participant can maximize the income amount that is possible when the QLAC’s guaranteed income payments begin.”
The structure creates a best-of-both-worlds environment, she maintained. DC plan participants can, for example, “have both immediate income through systematic withdrawals for a portion of their balance, and guaranteed income for the rest of their lives once the QLAC begins payment.”
As a result, “more money can remain in the participant’s DC plan with the potential to grow.” And, by deferring income payments to a later age, participants can “maximize the income amount” they receive once income does start.
Some product features:
- Payment options include lifetime income options for one person or two (spouses).
- Inflation protection options will, if elected, increase a participant’s income payments by 1 percent, 2 percent or 3 percent each year, depending on option chosen.
- As with all QLACs, the maximum premium is the lesser of 25 percent of the participant’s account balance or $125,000.
- Participants can pick the income start date up to age 85, and can change their election so income starts sooner (but not later) than originally set.
AnnuityNews Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].
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