Longevity insurance faces hurdles to become a retirement option

MAY 14, 2012
Longevity insurance has received the Treasury Department's blessing, but it could be years before these deeply deferred annuities become a regular part of retirement plans. Last month, the Treasury Department and the Internal Revenue Service proposed a package of rules to make it easier for retirement plan participants and IRA holders to invest in longevity insurance — an annuity that people buy as they enter retirement but don't start collecting until they reach their 80s. The disappearance of the traditional defined-benefit retirement plan, which gave retirees a stream of guaranteed income for life, as well as retirees' longer lives, helped fuel the Treasury Department's push to make longevity insurance accessible to employees leaving the workplace. Specifically, one part of the proposed regulation would adjust the way tax laws governing required-minimum distributions from 401(k)s and IRAs applied to these annuities. Provided the annuity cost no more than 25% of the account balance, or up to $100,000 — whichever were less — and payouts started at 85, the annuity wouldn't be subject to required-minimum-distribution rules until it started paying out income. Another part of the proposal would allow participants in defined-benefit plans to split their savings into an annuity and a lump sum, as opposed to being required to choose one or the other. But experts said that it will take considerable groundwork before longevity insurance becomes a regular employee option. It will require a combination of further regulatory clarity from the Labor Department, increased education for workers and plan sponsors, and a ramp-up in sales suitability procedures for advisers selling these annuities to plans. “This proposal is at the point where target date funds were 15 years ago,” said Harry James, head of retirement plans for Lockton Investment Advisors LLC's St. Louis office. “It took the better part of 10 years to make them a qualified default investment. [And] it's likely we'll be having this discussion into 2013, 2014 and 2015 before the Treasury [Department] gets something hammered out.” The Labor Department will be instrumental in efforts to get plan sponsors to accept longevity insurance, as the agency will need to provide guidelines to protect employers from liability when it comes to choosing a carrier, according to Bradford P. Campbell, an attorney with Drinker Biddle & Reath LLP.

INCOME PROJECTING

Meanwhile, retirement industry experts are keeping their fingers crossed that this summer, the DOL will come up with a suggested way for retirement plan providers to show employees their retirement income savings balance as a stream of income. But the success of that initiative will depend on the methodology used when projecting the balance as a future income stream. It could turn away younger workers with tiny balances if they see that their savings will get them even tinier income streams. “The DOL and Treasury are struggling internally with the right balance between accuracy, prognostication and encouragement,” Mr. Campbell said. “If you don't project future years of participation in the plan and [instead] calculate income based on an $8,000 balance, you'll get the impression that this doesn't have much value.” Other regulatory kinks also must be worked out, including implementation of rules that draw the distinction between education and advice for longevity insurance and other income products. Currently, the DOL's Interpretive Bulletin 96-1 covers this ground for investment options within a plan, allowing providers to share with workers details on funds within a 401(k) without venturing into the realm of fiduciary advice. “People are hopeful that the DOL is receptive to expanding Interpretive Bulletin 96-1,” Mr. Campbell said. “Carving out a good space for information and education would be helpful for participants.”

EDUCATION CRUCIAL

Education on longevity insurance could also be valuable so employers and employees understand how the deeply deferred annuity works. “To get this integrated into plans, service providers will need to explain to the plans how longevity insurance can improve the outcome for the participant,” said Paul Horrocks, a vice president at New York Life Insurance Co. There still are operational hitches as far as incorporating longevity insurance into plans for employees who are retiring. For instance, there are only a handful of insurers that offer longevity insurance — MetLife Inc., New York Life, Symetra Life Insurance Co. and The Hartford Financial Services Group Inc. (at least until April 27 when it is exiting the annuity business) — but there are numerous insurers who act as providers to 401(k) plans. The difficulty is wrestling away a portion of a participant's assets from an insurer that's already acting as a record keeper to a 401(k) plan and giving those funds to a competitor for longevity insurance. “Right off the bat, you need competing insurers to work together,” said Caleb Nitz, director of retirement plans at ValMark Securities Inc. “It's a tough concept; companies need to change their practices.” As a result, offering longevity insurance might work best with unbundled 401(k) plans, where the record keeper and the third-party administrator are different entities, Mr. Nitz said. It would make it easier to incorporate the annuity without the same level of resistance a plan sponsor would otherwise get from a bundled provider, he added. “Adding longevity insurance is one thing in theory but another thing in practice,” Mr. Nitz said. [email protected]

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