Brookings Sees Huge Role For QLACs

By Arthur D. Postal
InsuranceNewsNet

WASHINGTON – Qualified Longevity Annuity Contracts – also known as “longevity annuities” – can play a key role in addressing the growing concern that retirees will outlive their assets. That’s one finding included in a new study published by the Brookings Institute. 

However, a number of barriers limit the use of QLACs, the study said. Those barriers impede the inclusion deferred income annuities in workplace retirement plans.

The hurdles faced by the QLAC market range from “consumer decision making that does not account adequately for longevity risk to the fiduciary concerns of employers to incomplete markets for the hedging of risk by insurance companies,” the study said.

Ironically, the study was published as both the Internal Revenue Service and the Department of Labor acted to remove legal burdens that will allow target date mutual funds (TDFs) to include deferred income annuities as qualified default investment alternatives in employer-sponsored retirement plans.

The study, “Better Financial Security in Retirement? Realizing the Promise of Longevity Annuities,” was commissioned by Brookings, a Washington-based think tank. Katharine G. Abraham of the University of Maryland and National Bureau of Economic Research, and Benjamin H. Harris of Brookings conducted the study.

The report said that QLACs — deferred income annuities that begin to pay out at when the owner reaches a  relatively advanced age — are “an intriguing new vehicle” for helping retirees deal with some of the most important sources of risk they face in retirement.

The report said QLACs offer “individuals protection against outliving their assets.” Because some QLAC purchasers will not live long enough to receive benefits, they cost less than ordinary annuities, the report notes.

“With a deferred annuity established to provide income late in life, people can more easily allocate their remaining resources over the fixed period of time until the benefits from the deferred annuity begin to be paid out,” the report said.

“A major attraction of a longevity annuity is that the cost of purchase as part of a retirement portfolio is sufficiently low that financial liquidity to address other retirement risks can be preserved,” the report also notes.

Defined benefit plans have suffered a precipitous decline over the years. By 2013, the share of full-time private sector workers covered by a traditional defined benefit plan fell to just 13 percent.

For many older workers, defined contribution plans often were supplementary to an existing defined benefit plan, but this has become less common, the report notes.

Meanwhile, the share of full-time private sector workers with only a defined contribution plan has risen from 20 percent in 1989-90 to 40 percent in 2013, according to the report In addition, a growing share of full-time private-sector workers with defined benefit plans are covered by so-called cash balance plans structured to provide a defined dollar account value at retirement rather than a defined monthly pension payment. The implication of this, according to the report, is that many workers lack the ability to  investing these funds so they provide adequately for retirement. 

IRS regulations require cash balance plans to offer annuities as the default payout option, the report explained. But perhaps because of how they are presented to workers, many retirees in these plans choose instead to take a lump sum distribution.

Cash balance plans were unusual in 1989-90 but covered 31 percent of full-time private-sector workers with defined benefit plans in 2013, accounting for 6 percent of all full-time workers as of that date.

Cathy Weatherford, president and CEO of the Insured Retirement Institute, said the Brookings report “adds to the growing chorus of praise being given to these lifetime income products that can help Americans protect against outliving their assets in retirement.”

Regarding the new guidance allowing target date mutual funds to offer longevity annuities, Weatherford said she expects the Treasury Department to act soon to finalize its proposal for partial annuitization. This  would allow pension plan participants – when given the option of a lump sum or an annuity – to receive part of their benefits in the form of an annuity. “This rule will remove the all-or-nothing choice that plan participants must make when given the option,” Weatherford said.

Arthur D. Postal has covered regulatory and legislative issues for more than 30 years in Washington, D.C. He can be reached at [email protected].

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