You may have noticed that the SECURE Act introduced yet another new twist to the 403(b) world: the Qualified Plan Distribution Annuity Contract (“QPDAC”-you may want to look at my prior blog related to these lifetime income acronyms). Its not that Congress was singling out 403(b) plans, as 401(a) and 457(b) plans now also have the ability to distribute the QPDAC. But, as in all other things 403(b)s, there are a number of unique twists to the rules which exist solely in the 403(b) world.
First let’s describe what a QPDAC is supposed to do. When a plan chooses a vendor to provide a “lifetime income investment” to plan participants, and then later deselects that vendor, a plan may permit participants investing in that “lifetime income product” to take an in-service distribution of that “deselected” product during the 90 day period prior to the date that that product is “no longer authorized to be held as an investment option under the plan.” A “lifetime income investment” is one under which there is a “lifetime income feature” which, for 403(b) purposes, means either an annuity contract or a custodial account which provides distribution rights which are not uniformly available with regard to other investment options under the plan (an interesting distinction….) and which have a feature which guarantees a minimum level of income for the lifetime of the employee.
The purpose of this statutory provision is pretty clear: it is trying to protect participants who have accumulated lifetime income rights under a plan when a fiduciary deems it appropriate to get rid of that vendor. In some products, however, this means the only way to cleanse the plan of all those “tail” issues under legacy contracts would be (where the plan has the right to do so) to liquidate those products. The liquidation necessarily involves causing the participant, then, to potentially lose any accumulated lifetime income rights.
This is a valuable provision for both 401(a) and 403(b) plans. The special 403(b) twists, however, relate to the fact that, unlike 401(a) plans, 403(b) plans are commonly funded, at least in part, with annuity contracts. This raises a whole host issues which need to be addressed. For example, the typical 403(b) annuity contract is something called a “variable annuity” under which a participant accumulates investments and then is provided the right under the terms of the contract to elect distributions be made in the form of lifetime income payments (as opposed to a other types of annuity products, like the fixed income annuity and others, where you are actually accumulating specific sorts of distribution rights). So, key among those issues which need to be addressed include whether or not the mere existence of that right to purchase a lifetime income payout in that 403(b) variable annuity contract qualifies as a “lifetime income feature.” If it does, then, this actually can provide for a valuable, though (given the 90 day election window, when combined with the 30 day 402(f) notice requirements)) limited, planning tool for limiting future “legacy” contract issues. If availability under the contract isn’t the definition, however, difficulties abound in how and where do you draw the “lifetime income feature” line. For example, what of the participant who has elected lifetime income payments under the contract, and who has surrender rights where they can receive cash instead of the lifetime income payments? Given the growing stream of new lifetime income products being brought to the market, whatever definitions the regulators craft need to be sensitive to not hindering the development of innovative lifetime income features.
Then there is the question of the 403(b) custodial account lifetime income feature. A custodial account holds liquid investments (required to be held in registered investment company shares), and is not an insurance contract which can guarantee any sort of payouts without being licensed as an insurance carrier. Does this mean tontines (see my March 12, 2020 post)? Now THAT is an innovative development.
This is but the very tip of a very large iceberg, and there are similar sorts of issues which need to be addressed on the 401(a) side as well. Congress attempting to address the serious issues of portability of lifetime income under Section 109 is a laudable effort, but it will be incredibly demanding on regulators who will need to become better aware of the crazy world of annuities and lifetime income. Even identifying the issues to be addressed will be a task to itself.