The watershed moment for lifetime income

I couldn't help but break out in applause as I sat with the Treasury Department's Mark Iwry at our government affairs conference when he announced a final rule to facilitate access to longevity annuities in workplace retirement plans and individual retirement accounts. It was years in the making, but looking back on this announcement and the events that have followed, it is becoming clearer to us at the Insured Retirement Institute that this may be the watershed moment for the retirement income movement. We continue to believe that the retirement plan space is the next frontier for retirement income. Making lifetime income options more readily available in qualified plans will help enhance retirement security at a time in Americans' lives when most are vulnerable to outliving their financial assets or facing reduced standards of living. The advent of qualifying longevity annuity contracts (QLACs) and other retirement income-focused policy actions has opened the gates for innovative pioneers who are now moving into this frontier. Their efforts are likely to reshape the industry for years to come and greatly advance retirement security in the United States. President Barack Obama's administration has taken considerable steps over the past several years as part of a broad initiative to promote access to lifetime income in retirement plans. These steps led to the unveiling of the QLAC rule last July. The rule allows the value of longevity annuity contracts, up to certain limits, to be excluded from calculations for required minimum distributions — overcoming a significant impediment to their use in qualified plans.

POLICY MOVES

Encores are difficult in any field. But shortly after the QLAC an-nouncement, the Treasury Department, along with the Department of Labor, delivered more news to the delight of retirement income advocates. The regulators issued new guidance making it clear that plan sponsors may offer deferred income annuities in target date investment options that are designated as the default investment alternative in 401(k) and other defined-contribution plans. Before the end of 2014, the first product with a QLAC label hit the market. Others will quickly follow. We anticipate at least six more companies will offer QLACs in the near term, with more entering this market over time. With regulators green-lighting default investment alternatives in target date funds, the innovators are hard at work developing new retirement income products. And where the innovators lead, the market is sure to follow. Yes, questions will undoubtedly rise as QLACs and other retirement income products are made available in qualified plans, but details will be worked out. In certain instances, particularly concerning the use of guaranteed living benefits in target date investments, additional guidance will be needed and welcomed. More clarity for plan sponsors on safe harbor issues also would be cheered. But the path forward has been established.

KEEPING THE FOCUS ON INCOME

As we move into 2015 and beyond, achieving the promise of the policy initiatives for retirement income also will require that consumers use these options. To that end, IRI is working with regulators at the Labor Department and lawmakers on Capitol Hill to advance proposals to provide plan participants with lifetime income illustrations that estimate the amount of retirement income that can be generated from one's retirement plan. Our new consumer research supports the view that these estimates will help Americans make informed decisions regarding their retirement options and lead to better outcome-focused savings behaviors. After 1,500 workers were shown sample lifetime income estimates, more than 90% said they want their benefit statements to include these estimates. Moreover, more than 75% said they would increase their contribution level after seeing the estimates. And by no small margin. Contribution rates would be increased by four percentage points or more. As with savings improvements, with retirement income being the focus, we believe use of in-plan options will only increase as well. The pursuit of lifetime income options in retirement plans will go a long way toward helping Americans prepare for their income needs in retirement. But it is merely a piece of the retirement security puzzle. More will need to be done to increase savings. Fortunately policy options exist here. For instance, contribution thresholds for auto-enrollment and auto-escalation can be increased. But increasing savings also will require broader initiatives to improve financial education in the United States. These efforts, in addition to boosting savings, can help address other challenges to financial security in retirement. As Americans age, more will be vulnerable to financial elder abuse and the challenges of diminished capacity. These issues are the subject of our new Protecting Older Investors resource center. We urge all to join us in this education effort. While more work remains to help Americans attain financial security in retirement, regulators and the industry have made great leaps and bounds by expanding the availability of, and access to, lifetime income in retirement plans. A robust market in these options appears to be on the horizon. The actions taken during the past year will pave the way for innovation in this arena. It is already underway. Cathy Weatherford is president and chief executive officer of the Insured Retirement Institute.