by Jane Meacham, Contributing Editor
The U.S. Department of Labor (DOL), in late December 2016, issued an information letter that indicated employer plan sponsors are entitled to use lifetime income products as a part of a prudent qualified default investment alternative (QDIA), even if the products contain certain liquidity and transferability restrictions.
The guidance—although considered informal because of its method of delivery—may reassure and encourage defined contribution (DC) plans sponsors about safe harbors available when offering annuity-like products as part of their investment mix.
Although federal regulators have taken steps since 2014 to make so-called qualifying longevity annuity contracts (QLACs) more appealing for plans, many employers continue to opt not to offer them because of liability concerns should the annuity provider fail in the future, among other reasons.
QLACs are a form of longevity insurance that can help retirees hedge the risk of outliving their savings in DC plans and individual retirement accounts (IRAs).
Request from TIAA
Specifically, the DOL letter responded to a request from large academic and nonprofit retirement plan provider TIAA for clarification on whether its “Income for Life Custom Portfolios (ILCP)” meet the conditions of a QDIA under the Employee Retirement Income Security Act of 1974 (ERISA). TIAA said the product contains some liquidity and transfer restrictions that fail the frequency-of-transfer requirement described in the regulation.
TIAA in its letter to the DOL inquired whether Title I of ERISA prohibits a plan fiduciary from selecting the ILCP as a default investment alternative for a participant-directed individual account plan. It offers the lifetime income product as a custom target-date fund (TDF) investment model that may be included as a QDIA on plans’ investment menus, and each plan option has an ILCP developed for it through an asset allocation service.
But unlike traditional TDFs, the ILCP allocates investment funds to a fixed guaranteed annuity, known as an “Annuity Sleeve,” which is subject to some liquidity restrictions. The allocation percentage to the sleeve is capped at 50 percent, TIAA told the DOL in its request for information.
The DOL’s chief of the Division of Fiduciary Interpretations, Louis J. Campagna, said in the December 22, 2016, information letter that “[i]t is the view of the Department that a fiduciary of a participant-directed individual account plan could, consistent with the provision of Title I of ERISA, prudently select an investment with lifetime income elements as a default investment under the plan” if it complies with all requirements of federal regulations except for reasonable liquidity and transferability conditions.
Because one condition for qualifying as a QDIA is the ability of the participant or beneficiary to transfer plan assets in their entirety or in part to any other investment alternative available in the plan no less frequently than once every 3 months, the ILCP in this case would not constitute a QDIA, the DOL letter said. But it also said the QDIA regulation’s standards are not intended to be the only means by which a fiduciary might meet the responsibilities for selecting a default investment.
For example, stable value products or funds may be prudent for some participants even though they are not usually QDIAs, according to the regulations.
Lifetime Income Products Emphasized
Campagna also noted that the DOL and the U.S. Treasury Department have cited the need for lifetime income as an important public policy issue, and have supported initiatives that could lead to broader use of these products in DC plans as a supplement to traditional accumulation of retirement savings as participants’ longevity increases.
He cautioned that a plan evaluating a lifetime income product as a default investment should evaluate the plan’s demographics and consider how the QDIA’s characteristics align with the needs of plan participants and beneficiaries.
The information letter also said the fiduciary should take into account the costs associated with the investment alternative and consider what additional notice should be provided to participants about the lifetime income product’s restricted liquidity and transferability, before those restrictions apply to the participants.
In conclusion, however, the DOL letter said “[w]hether the selection of any particular investment alternative, including the ILCP, as a default investment alternative satisfies the fiduciary duties of prudence and loyalty” laid out in ERISA “would depend on the facts and circumstances.”
The letter reminded TIAA and others reviewing it that its response related solely to the application of ERISA as addressed in that plan sponsor’s letter.
Jane Meacham is the editor of BLR’s retirement plan compliance publications. She has nearly 30 years’ experience as a writer/editor of financial services news.