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Portability of Guaranteed Lifetime Income: Issues and Answers

Practice Management

The increased prevalence of defined contribution plans has heightened the importance of portability and the rules and circumstances affecting it, says a recent analysis that addresses common questions that arise as a result. 

In “In-Plan Guaranteed Lifetime Income: Debunking Portability Myths,” the Institutional Retirement Income Council (IRIC) writes that the rise of DC plans has generated greater attention to guaranteed lifetime income products. And portability is a key factor affecting such vehicles, they say, and sometimes regarded as an impediment. 

“Portability is frequently cited as an obstacle to offering a lifetime income product due to both its importance and the widely held view that portability options do not exist or are not feasible,” says IRIC. They discuss portability in a series of questions and answers, and offer suggestions regarding ways to address related issues. 

What is portability?

Portability, says IRIC, is the transferability of a participant’s guaranteed lifetime income benefit if a plan moves between recordkeepers or the participant moves his or her retirement assets to an IRA.

Why is portability important?

Portability is important, argues IRIC, because it allows the transfer of guaranteed lifetime income benefits from one platform to another and prevents the loss of the benefit.

What creates the need for portability?

Portability is necessary when there is movement from one administrative platform to another. 

At what levels should there be portability? 

IRIC writes that portability is important at the plan level as well as the participant level, since the movement of assets can be from one plan to another because of plan action, or from a plan to an IRA at the initiation of a participant. 

To what does portability apply?

Portability applies to in-plan guaranteed lifetime income products when the risk is shared with the product provider. For instance, with guaranteed minimum withdrawal benefits, deferred income annuities, longevity insurance and qualified longevity annuity contracts the plan sponsor has included such a product as an investment and a distribution option. IRIC says that portability does not apply for a non-guaranteed income sources, since there is no guaranteed benefit specific to an individual participant that would need to be tracked or moved.

What is required to in order for portability to take place? 

A way to transfer the individual participant’s guaranteed lifetime income benefit to a new recordkeeper is central to portability, says IRIC. This may be done directly with a product provider, they write, or through a provider of income middleware—a central repository for participant-level income benefits—acting as a clearinghouse. 

Are there associated fees? 

There could be such fees, says IRIC. They write that whether fees are involved depends on the approach a recordkeeper takes and what pricing model for accepting new plans it uses.

What happens if the recordkeeper to which one moves already has the particular guaranteed lifetime income product on its platform? If it does not? 

IRIC says that portability will not be affected if the guaranteed lifetime income product is already on the recordkeeper’s platform. But if it is not on the platform, the new recordkeeper could:

  • agree to recordkeep the product and either fully integrate guaranteed lifetime income into their services or not integrate it;
  • agree to “buy out” the guarantee as part of the conversion in the case of a recordkeeper that is an insurance company; or 
  • refuse to recordkeep the product. In such a circumstance, the plan sponsor could transition to the product provider, who would send out statements on the product. The funds in the product would be completely separate from other plan funds. Participants then would have two sets of processes to follow. 

What happens if the recordkeeper or product provider will not support a guaranteed lifetime income a participant holds? 

IRIC writes that a plan may move to a recordkeeper that does not support guaranteed lifetime income products. They say that in such a circumstance, it is most likely that the product investment would be liquidated and the assets transferred into a similar investment. In such an event, IRIC suggests, fiduciaries may want to consider whether there are other ways to helping those participants, such as adding deferred annuities as an investment alternative and offering a managed account service, including investments or investments that offer a managed risk feature.

Is it possible to use an IRA rollover for portability? 

Participants can use rollover IRAs to take their assets from the plan, says IRIC, but they cannot use them to move a guarantee between recordkeepers/plans. In addition, they write, only participants who have had a distributable event can take such an action.

Is it possible to move a benefit to a guaranteed lifetime income product another insurer offers? 

IRIC writes that while that is not possible, it is possible to move assets from one guaranteed lifetime income product to another.