Treasury and Labor both took significant steps in promoting lifetime income from defined contribution arrangements during Mark Iwry and Phylis Borzi’s tenures. The fiduciary rule at the DOL and staff reductions at the IRS seems to take their toll, as focus on this issue lessened dramatically-and then disappeared completely.
The recent uptick in publications from the private sector focusing on lifetime income is now a welcome surprise, complete with studies showing that participants are now wanting elements of guaranteed income ad part of their retirement arrangements. But lifetime income can be a daunting concept for the non-actuarial/non-insurance professional whose practice is focused on defined contribution arrangements. Where does one even start in trying to figure this out, and whether or not to include it your clients DC plans or IRAs?
I strongly recommended that the best place to start to get a fundamental understanding of how DC plans and IRAs can be used to provide lifetime income is to look at the IRS’s guidance on the Qualified Longevity Annuity Contracts, the QLAC. The preamble to the proposed regulation provides clear (ok, ok, admittedly highly technical, and mixed in with RMD stuff) guidance on how lifetime income is structured. Don’t be misled that it is structured as relief to the Required Minimum Distribution Rules. The TRUE value of the reg is NOT the RMD relief-the true value is that it describes how 401(k) plans can offer lifetime income.
That preamble should not be read alone. The IRS’s guidance in Revenue Ruling 2012-3 was actually designed to make the QLAC regs work, so you will need to read that as well. Though the Rev Ruling is about when annuitization occurs for purposes of spousal consent, it approves the notion that Lifetime Income in a 401(k) is an investment option, and not a benefit under the plan (thus not subject to 411(d)(6) and other sticky rules).
If you don’t want to look at the regs and rev ruling, I had put together a basic primer on how the QLACs work (including use of 2012-3) in a paper,which is still current: First Steps to Modernizing DC Annuitization: QLACs and Revenue Ruling 2012-3. This may be useful in figuring out lifetime income. I can’t believe that six years has passed since its writing.
The DOL issues related to the purchase of an annuity (after all, in order to actually guarantee lifetime income, there has to be insurance. Only insurance companies, or the government, can legally provide this sort of promise) are still out there, mostly the “safest available annuity” issue, formal guidance is still on their annual guidance worklist. They did give some relief in 2015 as well, will the release of FAB 2015-2. I discussed this on a blog of a few years back. If you need more information on Lifetime Income, click on the Lifetime Income Category in this site’s sidebar.