Insurers slow to introduce QLACs for 401(k) market

In the year and a half since the Treasury Department issued guidelines on qualified-longevity-annuity contracts, or QLACs, just over 10 insurers have developed such products. However, aside from one insurer, MetLife Inc., all have launched QLACs for the retail-retirement rather than defined-contribution market, even though Treasury's new rules allow for both. Basically, it's easier for insurers to dip their toes in the QLAC waters with an IRA product first, according to Michael Finke, professor of personal financial planning at Texas Tech University. “It's a product which needs to make its way into the DC world, but there are more steps to get there than in the IRA world,” Mr. Finke said. QLACs are a type of deferred-income annuity that starts paying an income stream to investors as late as age 85. Treasury guidance issued in July 2014 made it so money in these annuities wouldn't be subject to required minimum distributions investors must take at age 70½ from traditional 401(k)s and IRAs. Many advisers like the QLAC concept in part because it offers investment and tax diversification, and a hedge against outliving retirement assets. Indeed, 57% of CPA financial planners said their clients' top retirement concern is running out of money, according to a survey by the American Institute of CPAs. A recent analysis by the Employee Benefit Research Institute found QLACs can improve retirement readiness and offer cost-effective longevity protection. “For advisers, I think this will be a key topic,” said Fredrik Axsater, global head of defined contribution at State Street Global Advisors. WHOLE DIFFERENT ANIMAL Foresters Financial is planning to launch a QLAC version of its existing single-pay and flexible-pay longevity annuities early next year. The firm is launching it in an IRA because doing so is a natural extension of its existing longevity annuity business, said Carol Springsteen, president of Foresters Life Insurance and Annuity Co., since Foresters already sells its existing longevity annuities in the retail market. Launching a 401(k) QLAC product would involve different administration and distribution costs, and would essentially create a new product, she said. “It's a whole different animal,” according to Ms. Springsteen. Foresters is interested in the institutional market, but wants to venture into the retail market first to see how the products fare, Ms. Springsteen said. 401(k) CHALLENGES As with any mutual fund or other investment in a 401(k), a plan's investment committee must go through a due diligence process with QLACs and determine if the annuity is right for the plan and participant population, said Sean Deviney, who runs the retirement plans department at Provenance Wealth Advisors. Part of the due diligence involves evaluating the financial strength of an insurer to ensure the firm will remain solvent and able to meet payout obligations to participants. That includes researching credit ratings and understanding how an insurer hedges its general account, Mr. Deviney said. According to a Towers Watson survey, fiduciary risk associated with insurer selection is the second-highest reason plan sponsors don't offer lifetime income options for DC plans. These types of considerations aren't inherent to the IRA market. “[The QLAC contract] is just an agreement between the saver and the insurance company, so it's a much cleaner arrangement [in the IRA market],” said Robert E. Pike, president and chief executive at Stratford Advisors. Further, there's been low participant demand for QLACs — even less than with other types of more established lifetime income products, Mr. Deviney said. Lack of participant demand was sponsors' top reason for not offering an annuity product, according to the Towers Watson survey. Of course, it's early days. “There aren't that many providers in the 401(k) QLAC market because it's almost nonexistent at this point,” Mr. Deviney said. LONE WOLF MetLife's Retirement Income Insurance product is currently the only QLAC specifically for institutional distribution in a 401(k) plan. “Right now, we think there's a definite market and a definite opportunity,” according to Roberta Rafaloff, who oversees institutional income annuities for MetLife's Corporate Benefit Funding group. The firm also has a separate QLAC, offered as part of its Guaranteed Income Builder product, for retail distribution. The institutional QLAC product is offered as a distribution option by a 401(k) plan and doesn't actually sit on a plan's investment menu, according to Ms. Rafaloff. It is not an IRA annuity, but rather a qualified plan distributed annuity. A QPDA is an annuity contract that is purchased by the plan for a plan participant, and is then distributed from the plan to the participant, Ms. Rafaloff explained. At the point of retirement, a participant can choose to put some money — Treasury rules stipulate the lesser of 25% of an investor's account balance or $125,000 — into the annuity. An institutional product offers a bit more flexibility to investors, Ms. Rafaloff said. Treasury regulations say an investor must have four times the amount of the QLAC purchase in an existing IRA the year before the purchase. So, a 401(k) investor wanting to roll $100,000 from a 401(k) plan into an IRA QLAC in February 2016 would need an existing IRA balance of $400,000 as of Dec. 31, 2015, in order to do it. That requirement doesn't apply in the institutional market, according to Ms. Rafaloff. Further, one administrative challenge cited as a reason against offering an in-plan annuity is that not all record-keeping firms have the technology in place to track annuity contributions. Therefore, it would pose a problem for plan sponsors if they were to elect a new plan record keeper unable to administer the same QLAC. Because the MetLife QLAC doesn't actually reside on a 401(k) plan's investment menu, that particular administrative hurdle doesn't apply, Ms. Rafaloff said. TARGET DATE FUNDS Many industry experts believe QLACs will eventually become most prevalent in DC plans within target date funds, due to the explosion in popularity of such funds after the Pension Protection Act of 2006. Treasury issued separate guidance in October 2014 allowing deferred annuities — including QLACs — to be bundled into TDFs' fixed-income allocations, and the Labor Department said these types of TDFs could be used as a 401(k)'s qualified default investment alternative. “QLACs are not much of a player in DC right now, but as soon as companies start adopting QLACs within a default structure, there's a lot of potential to become very popular,” Mr. Finke said.