Particularly risky behavior performed by professionals is often accompanied by the warning: Do not attempt to try this at home. Unfortunately, that warning no longer applies to those of us who have to face longevity risk.
Back in the day, when defined benefit pensions were king, longevity risk was handled by professional actuaries. Workers knew that when they retired they would receive an exact amount that had been carefully calculated. There was no risk that they would ever outlive their income, no matter how long they lived.
Now, with most of us covered by defined contribution plans, we have to be our own actuaries. We have to figure out for ourselves, with the help of an advisor, how long we might live and how much money we’ll need to cover that time span. A daunting task, even with the help of skilled and knowledgeable advisor—especially when a miscalculation could mean living the last years of one’s life in poverty.
Now advisors will have a new tool to help clients deal with the risk of outliving their income. It’s called a qualified longevity annuity contract (QLAC) and actuary William Held writes about them on page 22.
“Longevity annuities,” says Held, “are deferred annuities that allow a person to take a portion of their assets and buy a monthly benefit payable at some point in the future.” In other words, the annuity is set up to kick in only if the retiree lives past his or her expected life span, in this case age 85. Until then, a portion of the person’s retirement account is used to pay the annuity’s premiums.
Though the regulations governing QLACs are far from final, they do contain some troubling limitations. For instance, according to a bulletin published by Ascensus, the maximum amount of the premiums paid to a QLAC under a plan is the lesser of a dollar limit or a percentage limit. The dollar limit is $100,000 (adjusted for inflation) minus the total premiums paid. The percentage limit is 25 percent of a participant’s account balance on the date of a premium payment minus previous premiums paid to the QLAC.
The proposed regulations also require QLAC issuers to provide certain reports and disclosures, including:
• A nontechnical description of the dollar and percentage restrictions on premiums;
• The annuity start date under the contract, including any option to begin payments before the annuity start date;
• The amount or estimated amount of the annuity payment payable as a single life annuity after the annuity start date;
• A statement of any death benefit payable under the contract, along with differences in death benefits payable if the contract owner dies before or after the annuity start date;
• A description of the administrative procedures associated with the contract owner’s elections under the contract.
Even if it’s not ideal, at least at this stage, it’s a step in the right direction. Annuities are complicated instruments. They can look expensive and, if not properly explained, clients can have a hard time overcoming their distrust of them, especially a new product like a QLAC. But as advisors become more familiar with them, and learn how to find the right fit for each client, they could very well be an important part of many 403(b) portfolios.
Steven Sullivan is editor of 403(b) Advisor Magazine. He lives in Baltimore, Md.
Category: Member Focus