That question is posed in a Sibson Consulting Spotlight report about recently issued rules for qualifying longevity annuity contracts (QLACs) in defined contribution (DC) plans. Sibson says the issuance of the final rules by the Internal Revenue Service (IRS) warrants DC plan sponsors revisiting their plan’s role in helping participants manage the future drawdown of their accumulated savings and the associated longevity risk. A review should start with measuring how well the plan supports the participant drawdown process today, Sibson says.
Richard Reed, defined contribution practice leader with Sibson Consulting in Boston, tells PLANADVISER the first place he thinks plan sponsors should start their review is with their recordkeepers. Many plan sponsors do not know what tools and services are needed to help participants develop a drawdown strategy; instead they rely on their recordkeepers because it is the recordkeeper’s area of expertise. Plan sponsors should look at the tools and services recordkeepers have and decide which are best for their employees, he suggests.
The sponsor should evaluate how the plan’s recordkeeper handles terminating or retiring participants—are they encouraged to keep their assets in the plan or to roll assets into an individual retirement account (IRA) provided by the recordkeeper or another provider? This depends on the philosophy of the plan sponsors, according to Reed, and in part on the philosophy of the recordkeeper. Some plan sponsors want participants to keep their assets in the plan to take advantage of best-in-class investments and economies of scale, while some plan sponsors do not want to continue paying for and keeping track of employee accounts. And, there are some recordkeepers that actively pursue rollovers of terminating or retiring plan participants. “Some plan sponsors have a passion about helping participants determine how to draw down their assets in retirement; some think it’s not their problem,” Reed says.
To help participants figure out what their drawdown strategy should be, there are many variables to consider—how much they have saved, their current asset allocation, how much time they expect to spend in retirement, and how they plan to tap their various retirement income sources, Reed notes. Recordkeepers may offer not only written education materials and online calculators, but also phone and in-person support. He says education materials and online tools are critical, but a gap analysis and longevity risk calculators are also important.
An appropriate drawdown strategy must take into account all sources for retirement income participants have available. Reed points out many recordkeepers have the ability for participants to input Social Security, defined benefit plan assets, and other savings into calculators. According to Sibson’s spotlight, plan sponsors should also consider questions such as: How is the potential future income that a participant’s account balance might generate communicated? How is it included on participant statements, or is there a calculator that must be used? And further, are participants educated about important considerations such as the appropriate Social Security start date?
Of course, there are also plan design features that support participant drawdown strategies. Reed notes that obviously, if the plan only allows for lump-sum distributions, participants cannot use periodic payments from the plan to draw down assets in retirement. Also, if the plan allows for annuity payments, the plan sponsor can add in-plan guaranteed minimum withdrawal benefits, immediate annuities, or QLACs. In addition, managed-accounts offer assistance to participants depending on how customized the advice is to the participant’s circumstances, and perhaps annuitization of assets can be handled in managed accounts, Reed says.
A QLAC is a form of annuity under which payments are scheduled to begin sometime after the participant’s retirement and continue for life. The final rules issued by the Internal Revenue Service (IRS) for QLACs allow a DC plan participant to purchase a QLAC with a portion of his or her account balance without the amount of the purchase being included in the total that determines the amount of his or her minimum required distribution (RMD) each year from the DC account.
According to Reed, there is no standard answer about plan sponsors offering QLACs in their plans, but the advantage is it gives retirees a way of avoiding an all-or-nothing scenario—some assets are not committed and are immediately available for retirement income, while some are committed to guaranteeing future payments. “It allows for a combination strategy,” he says. Some concerns about QLACs include the financial solvency of insurers, how much fiduciary responsibility they will add for plan sponsors, and how difficult it would be to change providers or remove QLACs if they are used.
“I wouldn’t say QLACs are the magic solution, but the IRS rule is setting the right standard and getting employers and everyone else to think about decumulation,” Reed concludes.
The Sibson Spotlight, "Helping Participants Manage 'Longevity Risk': New Rules on Qualifying Longevity Annuity Contracts Are Only a First Step and Plan Sponsors Should Proceed with Caution," may be downloaded from here.