The first deferred-income annuity that meets the Treasury's guidelines for a qualified-longevity-annuity contract is out, and broker-dealer execs have plenty of questions.
AIG launched the so-called QLAC version of its American Pathway deferred-income annuity at the start of November, a response to the
the guidance released in July by the Treasury Department that made it easier to use qualified plan dollars to buy a DIA. It's an annuity for qualified plan dollars: Money comes out of the 401(k) or the IRA, goes to the annuity, and it retains its “qualified” status in the eyes of the IRS but it isn't subject to required minimum distributions. The AIG QLAC contract is sold as a retail product, and it doesn't go inside of a 401(k).
Per the Treasury's guidance, people with a 401(k) or IRA account can use up to 25% of their account balance or $125,000 — whichever is less — to purchase a qualified-longevity-annuity contract. Most importantly, money that goes into the QLAC isn't subject to
required minimum distribution rules that would require them to take money from their qualified retirement plans at age 70½. The idea is that a portion of savings will go toward the contract purchase, with income distributions beginning far into the future.
Though AIG's American Pathway DIA has been around since last year, the carrier built an endorsement that would permit the contract to fit into the framework of QLACs. In that context, clients up to 83 can buy the contract and defer receipt of their income for anywhere between 12 months to 40 years.
“Because of the interest we had and the feedback from clients on the proposed qualified-longevity-annuity guidelines, we intentionally developed the DIA to take those requirements into account,” said Stephen Brenneman, vice president of AIG's fixed annuities product development. “We didn't have to create a new product to be compliant; we created an endorsement for QLAC to accompany the annuity we created a year ago.”
AIG also addresses buyers' concern about losing the money should the annuitant die before the stream of income begins. The QLAC has an optional return-of-premium death benefit, and clients can choose not to make a death benefit payable if they use the lifetime-income-only annuity payment option. Further, there's an annual payment increase option of 1% to 5% on each income start date anniversary or an inflation adjustment that tracks the consumer price index for urban customers.
LOTS OF INTEREST, MANY QUESTIONS
Some product gatekeepers at broker-dealers haven't seen the QLAC version of the AIG annuity yet, but they anticipate plenty of interest.
“We're beginning some dialogue with the advisers,” said Bob Steinke, senior vice president and head of managed and insured solutions at Janney Montgomery Scott. He envisions QLACs being used in a way that's not all that different from most DIAs: A portion of money in the annuity that can guarantee income will allow investors to invest a little more aggressively.
But there are plenty of questions. For instance, can money that starts out in a qualified account and is then used to buy a QLAC be converted to a
Roth IRA just before the income stream starts?
“If there were no restrictions and you put in $125,000, wait 15 years and then convert at the last minute — and the next year you get sizable tax-free leveraged payouts, that's a valuable income tool,” said Judson Forner, director of investment marketing at ValMark Securities Inc.
Can this strategy be executed? Yes, according to Jeff Levine, a CPA and IRA technical expert with Ed Slott & Co. Advisers need to understand that once the qualified money in the QLAC is converted into a
Roth IRA, it's no longer a QLAC, he added.
“It's an interesting notion, but it's not a home run for everyone,” said Mr. Levine. “I would look at it before hitting age 70.5.”
Another question on gatekeepers' mind is, Who is responsible for determining that the annuity purchase meets the Treasury Department's guidelines?
“Do we need to code that into our order entry systems?” Mr. Steinke asked. “How do [the manufacturers] know that no more than 25% of the IRA is being allocated to the product? They don't have that information; we do.”
“There are a lot of unanswered questions at this point,” he added.
