When QLACs first arrived on the annuity scene in mid-summer 2014, the word on the street was that employers with defined contribution (DC) retirement plans would probably hold back on adding a QLAC to their plans for quite a while. But the street might be wrong.
The QLAC, or qualifying longevity annuity contract, is a fixed deferred income annuity (DIA) that meets federal government requirements for use with DC plans and individual retirement accounts (IRAs). At least three insurers already have begun marketing such products and more are expected as 2015 unfolds.
Expectations are that QLACs will be distributed mainly in the IRA market via existing insurance and financial advisors, at least initially.
The rationale is that the IRA environment will allow for more rapid adoption. Reasons include: IRA plans are less complex than DC plans; the IRA distribution channels are well versed in presenting annuities; and annuity carriers that develop QLACs can easily sew the QLAC story into their retirement income strategies.
By comparison, 401(k) and other DC plans have been depicted as less receptive to QLACs. This is due to employers’ uncertainty over employee interest in the feature as well as uncertainty over the nature of the product itself. Some also think that adding a QLAC to retirement-sponsored plans will entail complexities that plan sponsors would just as soon avoid, at least during the formative stages of QLAC development and market entry.
Some are receptive
But a 2015 Aon Hewitt survey of nearly 250 plan sponsors found that at least some sponsors are receptive to the idea of adding a QLAC to their plan.
Specifically, 12 percent of the sponsors told researchers that adding a QLAC that permits an in-plan deferred annuity purchase will be a “moderately likely action” for them in 2015.
Under rules promulgated last July by the Department of Labor, consumers in the DC and IRA retirement plans can deposit into a QLAC the lesser of total retirement account balances or $125,000. The QLAC must start its guaranteed income stream no later than age 85. QLAC owners can deduct their annuity premium from their required minimum distribution (RMD) calculations, which may result in a modest reduction in taxes.
Worth noting is that adding a QLAC is not the only annuity strategy that plan sponsors are considering for 2015. For 12 percent of the sponsors, another “moderately likely action” in 2015 will be developing “the ability to transfer assets to a defined benefit plan in order to receive an annuity.”
In addition, they are looking to include “annuity or insurance products as part of the fund lineup” within the DC plan. Three percent of the sponsors said this will be a “very likely action” and 23 percent, a “moderately likely action” in 2015.
What about fostering the ability for plan participants to purchase annuities outside the plan? That’s a topic dear to the hearts of advisors who specialize in rollovers from DC plans.
Just 4 percent of the plan sponsors said that facilitation to purchase annuities outside the plan will be a “very likely action in 2015.” However, one-fifth (19 percent) said it will be a “moderately likely action in 2015.” By comparison, in last year’s survey, only 1 percent termed such facilitation a “very likely action” for 2014, and only 11 percent termed it “somewhat likely.”
The shift in thinking, regarding purchase-outside-the-plan intentions, is subtle. However, the direction is annuity-positive, suggesting that 2015 may present a modest sales opportunity for annuity advisors and companies serving this part of the market.
Overall, 16 percent of plan sponsors told the researchers that encouraging lifetime income is “very important,” and 13 percent said they are “very likely” to address lifetime income in 2015.
InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].