Broker-dealers face administrative hurdles in rollout of QLAC annuity

Confusion remains over who ensures the contract purchase meets Treasury's guidelines

May 13, 2015 @ 1:21 pm

By Darla Mercado

Qualified longevity annuity contracts are the latest “it” product for life insurers, but broker-dealers are running into hitches when rolling out the annuities onto their platforms.

Annuity nerds will remember that last summer the Treasury Department introduced its final rule on longevity annuities, encouraging retirees to protect themselves against the risk of outliving their retirement savings. The so-called qualified longevity annuity contract, or QLAC, is a variety of deferred income annuity: Clients buy the contract now and receive an income stream that begins far in the future, as late as in the client's eighties.

The rules permit participants in 401(k)s and IRAs to use up to 25% of their account balance, or $125,000, to buy a qualifying longevity annuity contract. The qualified dollars that go into the contract are exempt from required minimum distribution rules that kick in at age 70.5.

Indeed, deferred income annuities and their QLAC cousins are poised to become a bigger part of advisers' retirement income strategies for clients.

Sure enough, carriers, including The Principal Financial, Pacific Life and AIG are releasing products.

Lincoln National Corp. and Thrivent Financial have also joined the game.

But even with the Treasury's blessing and a growing number of issuers to choose from, broker-dealers are encountering administrative hurdles. Namely, distributors and insurers are still trying to figure out who's responsible for ensuring the contract applications meet the Treasury's guidelines.


Either the carrier or the broker-dealer will have to ensure that clients are using no more than $125,000 in qualified plan assets or 25% of the balance in their qualified account.

“There's some confusion over who's responsible for watching the contribution limits, who's monitoring that and what are the penalties for the clients who exceed it,” Ethan Young, director of insurance and annuities at Commonwealth Financial Network, said.

Thanks to state-level regulation, life insurers are responsible for making sure that annuity purchases meet state suitability standards. But broker-dealers shoulder that responsibility as well, at least to the extent to which they process fixed annuity insurance business.

For now, broker-dealer firms are waiting for insurers to take the reins, likely by releasing an attestation form where the client can confirm that the QLAC purchase indeed meets the Treasury's qualifications.

“That's been the biggest challenge,” Zachary Parker, first vice president of income and distribution products at Securities America Inc., said. “How do you verify that it's the right amount and not too much? The carriers are going to work that out.”

Indeed, there could be situations where the client purchases a QLAC through an insurer, fails to bring it up to his or her adviser and then purchases a second contract. “Who's to know the first contract even exists?” asked Mr. Young. “The companies won't communicate with each other.”

Some broker-dealers haven't even rolled the QLACs yet. At LPL, for instance, they're still under review, confirmed LPL spokesman Peter Gilchrist.


For now, firms are still working on getting their advisers up to speed on deferred income annuities. Sales of the products hit record levels last year at $2.7 billion, up 22% from 2013. But they continue to be hampered by low interest rates. Those very same low rates are yet another difficulty advisers confront when they assess clients' income options, and they're hampering QLAC recommendations, too.

“They're available, but they're not selling, and I'm not sure if it's a lack of awareness or a low interest rate environment,” Mr. Young said. “We haven't seen sales of these take off.”


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