Distribution Planning: Know Your Options

Accumulation has long been the focus of retirement planning—but times are changing, and now the converse is coming into sharper focus. 

In a session of the ASPPA Winter Symposium, Kelsey N.H. Mayo Partner, Employee Benefits Poyner Spruill LLP discussed this trend. “A huge part of the plan” has been centered on building up savings, she told attendees, adding that now there is increasing focus on decumulation. Following are highlights of the discussion. 

Traditional options for decumulation include lump sum payments—particularly for non-QJSA DC plans—and life and joint & survivor annuities, particularly for QJSA plans, asid Mayo. Other options include:

• lifetime installments; 
• guaranteed lifetime withdrawal benefit; 
• qualified longevity annuity contracts; and  
• annuity purchases.

Legal requirements for distributions, Mayo said, include that non-QJSA plans are not required to offer lifetime income (at least not currently) and that a decision to offer them is a non-fiduciary decision. And if distributions are offered, she said, there are fiduciary considerations, such as the selection of the distribution provider—particularly regarding such considerations as safety and fees—as well as participant education and communication. 

Lifetime Installments 

Lifetime installments are a designed draw-down of an account, said Mayo, calling them “a formula designed to create a stream of income that will hopefully last an individual’s lifetime.” They are not guaranteed income. Lifetime installment distributions often do not come in level installments, Mayo observed. The calculation is based on a formula of account balance, with particular importance to percentages and life expectancy, and may be similar to the defined contribution required minimum distribution calculation.

Guaranteed Lifetime Withdrawal Benefit 

Mayo also discussed the guaranteed lifetime withdrawal benefit (GLWB) feature. She highlighted that: 

• The GLWB feature varies by carrier, but it provides guaranteed income, with a draw down of an account combined with an annuity if income exceeds the account draw down. 
• Unlike annuitization, one can start and stop distributions. 
• The provider controls investment. 
• Risk is transferred. 
• It entails a death benefit, often including payment of any balance that there may be. 
• Fees are built into the price of a contract. 

“I think of it as a hybrid benefit,” she remarked. 

Qualified Longevity Annuity Contracts

Qualified longevity annuity contracts (QLACs), said Mayo, are a “a hybrid model” that are “in some ways a tax-planning mechanism.” With the QLAC feature:

• a portion of the account is used to purchase deferred annuity;
• there is a set income once the deferred annuity start date is reached;
• the amount used to purchase the QLAC is not included in a required minimum distribution calculation; 
• before the annuity starting date, one can take other distributions from the account balance;
• a survivor benefit may be provided and/or return of premium as a death benefit; and
• fees are built into the price of the contract. 

Annuities

Mayo noted that the SECURE Act provides a safe harbor designed to reduce fiduciary duty to provide an incentive to offering annuities. 

“A common knock is that annuities are expensive, but not all of them are,” said Mayo, although she did note that some of them can be. 

The decision regarding whether to offer an annuity is not a fiduciary decision, she said; rather, the fiduciary’s job is to select the best option to implement the decision to offer annuities and to disclose the material features, including fees. Nonetheless, she said, fiduciaries do need to pay attention and ask the right questions to understand fees, she added. 

Possible expenses related to annuities that should be evaluated include:  

• commissions;
• administrative fees;
• surrender charges;
• mortality charges;
• investment expense ratios;  and 
• charges for transfers, distribution, charges, third party transfers, contracts, underwriting and redemption.

Evaluating such costs is a fiduciary responsibility similar to other plan costs, Mayo said. One should consider cost v. features, remarking that “not all annuities and providers are created equally.” In addition, she suggested that costs related to annuities be re-evaluated periodically.

Lifetime Income Disclosures 

Mayo noted that the SECURE Act added a lifetime income disclosure requirement. Disclosures must include the following:

• beginning and ending dates of the statement period; 
• value of the account balance as of the last day of the statement period, excluding the value of any deferred income annuity; 
• single life annuity payable in equal monthly payments for the life of the participant (single life annuity); and 
• joint and 100% survivor annuity payable in equal monthly payments for the joint lives of the participant and spouse. 

Under the SECURE Act, explanations also are required which provide: 

• commencement date;
• age assumptions;
• interest rate, mortality, and marital status assumptions;
• a description of a single life annuity and joint and 100% survivor annuity, the availability of other survivor percentage annuities and the impact of choosing a lower survivor percentage; and 
• monthly payment amounts as illustrations. 

The SECURE Act also provides protects from liability from the disclosure requirement as long as the requirements of the rule are satisfied, the benefit statement includes language that is substantially similar in all material respects to the model language or the Model Benefit Statement Supplement and there is no limitation of liability regarding disclosures on deferred annuities.