I have spent much of my career studying and practicing in the law of annuities as it applies to retirement plans-starting even prior to my long stint with an insurance holding company, when the Master Trust of the Fortune 100 company for which I was in-house ERISA counsel formulated its own synthetic, pooled GIC for the fixed account in its newly formed 401(k) plan back in 1986-87.

So it should have been no surprise when some very smart colleagues (whom I hold in high regard) were wondering about my enthusiasm about Treasury’s newly released guidance on annuities (though there are a few others who do share this enthusiasm). After all, the rulings and the proposed regulation really seem minor in the grand scheme of things.  They did not resolve a number of issues, and almost seemed to raise more questions than they answered.

Sometimes, it seems, one can get too close to an idea and think that-of course-everyone sees what I see!

So, I’ve attached a graphic of how DC annutization works to help explain why the Treasury guidance is so fundamental and crucial to the next steps.  I invite you to take a close look at the chart in the first 4 pages of the patent application that Dan Herr and I filed in 2007, after actually working on it for a few years (it was assigned to my former employer, who has never used it; the patent was initially denied, never has been granted, and don’t think it ever will (or can be)). It shows how your basic mutual fund 401(k) plan can serve as an annuity processing platform; how the distribution of annuities from the plan works; and why things like spousal consent and annuity starting date are so important to making it work.

The chart shows one way its possible to set up a QLAC with an automatic withdrawal program, using the plan’s mutual fund, separate account, or even pooled investments which are then backed up with a QLAC or other lifetime guarantee. The chart is complex, in that the lifetime income demonstrated can be a set lifetime amount (such as a QLAC), variable annuitization, or even a GMWB.  It also shows how to do it within the plan itself, or to be distributed out of the plan, and how to do it using either an "in-plan" or "distributed" GMWB as well as a QLAC.

I was invited to Treasury’s de-brief in DC the day the guidance was released, and it became clear to me then how this 6+ year old chart really puts the QLAC to great use (even for rank and file), and takes great advantage of the clarity provided in 2012-3.  Now can you understand my enthusiasm?

It ain’t easy (yet), and it ain’t pretty (yet). I caution that the description is in bureaucratic-speak, written by a patent lawyer in the way engineers are trained to do. But take some time on the charts, as they may help understand a few things about what may be going on with these things. 

The chart shows that Treasury actually answered key questions with its guidance. But my point is not that DC annuities are the "be all and end all" of retirement security, though they have an important place in making the system work right.  Nor is it that the insurance industry is the knight in shining armor (clearly, I know  its underbelly well) for which I am some apologist.  Its just that we now have the basic structure in place under which an important set of other operational and legal questions can be identified, asked and answered in an identifiable framework;  the argument-so to speak-has been framed. The rulings importantly  recognized that DC annuities will be treated as investments, with some strings attached to protect spousal rights; that there is a basic annuity starting date rule; that there is a forfeitability approach; and that Treasury is thinking about reporting and disclosure. Given this, we now know what even to ask.

Join us, by the way,  for a teleconference by the ABA’s Joint Committee on Employee Benefits on March 1, where we will go over some of this stuff, in English….