This is a pretty exciting time in the defined contribution plan marketplace. Years of work from a number of different quarters seem to be finally beginning to coalesce around the notion of sanely “decumulating” assets from DC plans. I wonder if a measure of all this may be the growing catalog of acronyms associated with annuities, with the use of acronyms being so deeply engrained in retirement plan professionals’ daily practices and language.
So let’s take a look. The DC lifetime income efforts received a substantial boost from the Setting Every Community Up for Retirement Enhancement (SECURE) Act with the adoption of two new rules intended to increase the utilization by DC plans of different sorts of lifetime income. First there is SECURE’s Section 109, which added a new Internal Revenue Code Section 401(a)(38) and amended Code Sections 403(b) and 457(b), creating the qualified plan distribution annuity contract (QPDAC) to permit an in-service distribution of an annuity contract when the plan fires the annuity carrier. (It is curious that there were no related changes to ERISA Title 1 under these rules, which would have been helpful.)
Then there is SECURE’s Section 203, which mandated disclosures regarding lifetime, under which the DOL issued its Interim Final Rule (IFR) executing the terms of the statute. That IFR created a class of annuities called Deferred Income Annuities (DIAs) to which special disclosure rules apply.
These followed the initial, nascent regulatory efforts to support lifetime income through the Qualified Plan Longevity Annuity Contract (QLAC) regs, published by the IRS under Treas. Reg. §1.401(a)(9)-6, under which the purchase and distribution of certain types of annuity contracts receive special treatment under the required minimum distribution rules.
But QLACs are relatively new, considering the long-standing-and various-tax regulations and tax guidance recognizing the status of something called the Qualified Plan Distributed Annuity (QPDA), of which the QPDAC appears to be a subset.
Let us also not forget other important acronyms that attach to certain insurance features and products through which lifetime income options—now defined (sort of) under Section 401(a)(38) (and which, by the way, includes the potential of non-insurance products that, theoretically, anyway)—guarantee lifetime income. The most popular of these appears to be the Guaranteed Lifetime Withdrawal Benefit (GLWB), which is actual a pretty cool design—but also requires answering related technical questions you don’t usually see in the qualified plan market, like when is it “payment as an annuity,” and how the spousal notice and consent rules apply.
Then there are the insurance contracts themselves. The DC market is well familiar with the GIC and insurance company separate accounts, which are all part of a type of annuity called the Variable Annuity (VA) that has funded 401(a) and 403(b) contracts for generations. A VA is generally considered an “accumulation vehicle,” like mutual funds, which are designed to accumulate wealth that then needs to be transformed into a lifetime income stream.
But then there are other types of annuities with which we will all need to become comfortable, and which are just beginning to hit the DC market. They are designed to provide the participant the ability to accumulate a range of valuable income options not found in a VA. In particular, there is the Fixed Income Annuity (FIA), which provides a variety of income accumulation options and can be attached to a GLWB feature. It has been popular in the retail market for years, and at least two major carriers have announced that they are introducing in the qualified plan market. Then there is the Registered Indexed Linked Annuity (RILA), which is growing in popularity in the retail market and is bound to make its presence known in the qualified plan marketplace soon.
There are more acronyms related to lifetime income, for sure, but this should give us all a heads-up about things soon to come. The current state of affairs on this issue reminds me a bit of those early “daily valuation” days of a few decades ago, when few were familiar with the operation of daily valuation schemes and mutual funds were not the predominant form of DC investment. Daily valuation relied heavily on the new “fintech” of the time as well, just as today’s decumulation options are reliant on today’s fintech.
Even though they look like they are the complicated “new kids on the block,” annuities and other lifetime income arrangements in DC plans are not all that difficult to deal with once you are familiar with them. While they are distinctly different than the accumulation vehicles we have grown so used to handling, it’s only a matter of gaining familiarity with them and how they operate. It appears that getting familiar with them will be a growing demand on retirement professionals.
Robert Toth is Principal at Toth Law and Toth Consulting. Used by Permission. The original is here.
Opinions expressed are those of the author, and do not necessarily reflect the views of ASPPA or its members.
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