Just a few short years ago it looked like qualified longevity annuity contracts (QLACs) were ready to catch on with defined contribution (DC) plan sponsors. Notices and regulations from the Department of the Treasury and the Department of Labor appeared to give the green light for DC plans to include annuities like QLACs. QLACs typically defer the beginning of the annuity payments until later in a retiree’s life; that solves a retiree’s longevity risk without the burden of committing most of their retirement funds to an immediate annuity soon after they leave the workplace.
Yet the momentum seems to have stalled. The LIMRA Secure Retirement Institute reported that all of 11 companies were offering QLAC products to plan participants as of September of last year.
MetLife was the first - and so far only - insurer to issue a group QLAC for DC plans, the MetLife Retirement Income QLAC. The company has filed the product with all 50 states and most have approved it, according to Roberta Rafaloff, vice president with MetLife. As of last month three plan sponsors are “in the process of implementing it … and we have several others that are going through the negotiation process.”
It remains to be seen if this is a trickle that turns into a flood among sponsors; while some are confident their provider-selection process would stand a challenge under ERISA, says Rafaloff, others say they need additional clarity from the DOL on the process of selecting a provider, even though the DOL addressed many of the concerns in its earlier guidance. Still, Rafaloff believes that more clarification from the DOL can only help spur the adoption of QLACs.
Fredrik Axsater, head of State Street Global Advisors’ global defined contribution business, agrees: “I think that the Treasury and DOL in the November 2014 joint release were quite powerful in describing ways where you can actually incorporate annuities. They didn’t specifically say QLACs but it could be QLACs in target date funds.”
So where are the other DC-QLAC issuers? Axsater describes it as a chicken-and-egg problem. He believes the market interests insurers but they want to see evidence of demand before launching new products. The flip side is that sponsors are more hesitant when there’s only one company providing the program. “You may not have seen it in kind of a big-splash announcement and glowing AUM and so forth, but there was a lot of work behind the scenes with both leading investment management firms, insurance companies and plan sponsors,” he says. Axsater is confident significant progress has been made.
Sponsors in fact are hesitant across the spectrum of lifetime income solutions, according to Lori Latham, director, investment services group with Willis Towers Watson in Chicago, Illinois. “There’s not a lot of activity of plan sponsors actually executing and adopting.”
Latham says sponsors’ compliance concerns remain an obstacle for all types of lifetime income plans. Most plan sponsors are “laser-focused” on the five-point fiduciary harbor and its implications for their liability and the selection process. They also have administrative concerns about integrating annuities into their plans. “When you think about some of the administrative complexities and portability issues that go along with this, record keepers aren’t yet equipped to invite these into plans,” she says. “There’s a little bit of a disconnect. It’s certainly not a well-oiled machine.”
Many consultants tend to be cautious as well. Consultants “try to move along the curve with our clients,” Latham said. “We certainly don’t want to promote something that’s going to create quite a bit of a challenge for our clients. We want them to execute at the right times.”
But Latham says in the past six months, there has been a large increase in sponsors seeking information. Education has been “front and center,” she says.
Rafaloff says interest from plan consultants is also increasing and MetLife’s message to consultants is essentially the same as that delivered to sponsors.
“These solutions need to be simple. Simple for the plan sponsor, simple for the record-keeper and simple for the participant,” says Rafaloff. “If people really start thinking of it in those terms, the costs become less, the product is easier for all parties and at the end of the day the most important result will be people will take advantage of them.”