One of the biggest challenges facing the task of wider implementation of retirement security through use of DC lifetime income has been the question of relevance. Quite frankly, plan sponsors and their advisors really have not seen the whole idea of lifetime income as relevant to their own plans and practices. It really hasn’t been clear to them how “DC annuities” could actually fit into the everyday realities of operating the typical 401(k) plan. There seems to be a prevailing view that we are somehow trying to fit a square peg into a round hole (note the “suits” in the accompanying picture). That is very far from accurate, for many reasons, but perceptions often mean much.
IRS Notice 2014-66 and the related DOL Information Letter look to have had the effect of addressing that problem. In a surprising way, they may have made lifetime income relevant to large parts of the market virtually overnight. This was done by making it a necessary component of any serious future discussion of target date funds. Its almost like Treasury has turned on a light for many to see what really has been there for a while: lifetime income is a valuable tool in any platform, whether it be based on mutual funds, advisory services, equities or insurance. Now, throw on top of that the reminder from the DOL letter which accompanied the notice that, yes, certain annuity contracts can be actually be part of a QDIA and Voilà! NOW it makes some sense, being attached to something advisers can wrap their arms around.
The legal issues in the Notice are really not groundbreaking, and I really admit to have being a bit stumped by why the stakeholders even needed to go in for the advice contained in the Notice. The “deferred annuity” referred to in the Notice is merely the garden variety type of fixed account in a group annuity contract, and restricting participation in the TDF to a particular age group actually has no impact on the operation of the TDF itself. Those restrictions, upon which the IRS granted helpful relief, are really about the deal cut between the insurer issuing annuities at the dissolution of the TDF and the TDF manager. For those contemplating using annuities as part of target date funds, and other arrangements, there are a number of more effective ways to do it than the manner chosen by those stakeholders. The business design issues raised in the Notice could have handily been dealt with by contractual provisions between the interested parties.
But my hats off, again, to IRS, DOL and Treasury staff in their smart choices of incremental changes which really have an impact. This is one of those rare choices which seem to substantially broadened the “conversation” about lifetime income.