Qualifying longevity annuity contracts in 401(k) plans could significantly increase the retirement readiness of younger workers with longer life expectancies, the Employee Benefit Research Institute reported recently.
Modeling two scenarios involving the recently approved QLACs, EBRI found that, while the general population might experience a “small reduction” in retirement readiness by purchasing a QLAC with a portion of their retirement account, generations following Baby Boomers could stave off longevity risk with such annuities.
QLACs typically do not begin paying benefits until the contract holder is at least 80 years old, so those who die before that time are at risk of losing their premiums. For this reason, plan sponsors and participants have been slow to accept an annuity as a default aspect of a 401(k) plan. In the August report, titled “How Much Can Qualifying Longevity Annuity Contracts Improve Retirement Security?” the private, nonprofit and nonpartisan EBRI modeled these scenarios:
- Converting 15 percent of the current employer-sponsored 401(k) balance of a participant aged 55 to 64 to a “laddered” QLAC premium over 10 years, attempting to partially mitigate the risk presented by buying the product when interest rates are at historic lows, as they are now.
- Having the plan sponsor convert the accumulated value of its 401(k) contributions to the participant to a one-time QLAC purchase at retirement age (assumed to be 65 in the study), on either an opt-in or opt-out basis for the employees. This scenario would not include previous employers’ 401(k) contributions on behalf of the retiree.
When EBRI figured in the effect of sensitivity to rising interest rates over time on QLAC premiums, the results for retirement security of future retirees were even more favorable, the organization said.
In 2014, one of the major constraints on using these types of annuity products was removed when the U.S. Treasury Department and the IRS issued final rules for creating QLACs that would be exempt from the required minimum distribution rules. These rules normally require distributions from defined contribution plans and individual retirement accounts to begin by age 70½, much earlier than the age at which payments often start with QLAC products. The idea of longevity annuities has been discussed in the retirement plan community for at least a decade, but the removal of MDR tax implications is expected to make in-plan QLACs more common soon.
EBRI used its well-known Retirement Security Project Model to establish longevity quartiles based on family status, gender and age. It then calculated proprietary Retirement Readiness Ratings for the various age cohorts, from Early Baby Boomers to Gen Xers. The model simulates the percentage of the population in each longevity quartile at risk of not having enough income to cover average expenses and uninsured health care costs.
Who’s Interested in QLACs?
EBRI in its 2015 annual Retirement Confidence Survey attempted to measure participants’ interest in purchasing QLACs with part of their retirement savings to guarantee some income from age 80 onward. Interest was not overwhelming, but the researchers said it was strongly associated with the respondent’s perceived likelihood of living to age 85.
About 38 percent of those surveyed said they were very or somewhat interested in QLACs, while 59 percent told EBRI they were not too interested or were not at all interested. However, of those expecting to live to age 95, for example, more than half were somewhat or very interested in buying such a product.
To read the complete story on Thompson’s HR Compliance Expert, click here.