October 9, 2014

October 2014 Spotlight, "Helping Participants Manage 'Longevity Risk': New Rules on Qualifying Longevity Annuity Contracts Are Only a First Step and Plan Sponsors Should Proceed with Caution"


On average, more than 10,000 baby boomers - those born between 1946 and 1964 - will retire in the U.S. every day between now and 2030, when the youngest of this post-World War II generation will have turned 65. While Social Security and, to a lesser extent, private defined benefit (DB) pension plan payments will provide some portion of a retiree's income in retirement, individual retirement savings - including from an employer's defined contribution (DC) retirement plan and an individual retirement account (IRA) - play a significant role. There is virtually universal acknowledgement that the U.S. has a retirement-income-adequacy problem, stemming from the fact that, for an increasing stream of retiring employees, less of their retirement income is coming in the form of guaranteed payments over their lifetime and more from the drawdown of their DC accounts or IRAs. This is, of course, not only an employee problem but also an employer problem because employees' inability to retire can thwart talent management and succession-planning objectives, as well as diminish workforce productivity.

One sign that the government is taking steps to address the problem is the publication by the Department of the Treasury and the Internal Revenue Service of final rules intended to make it easier for DC plans to offer lifetime income payment options to participants by removing the technical barrier to one of those options: a certain type of longevity annuity, called a qualifying longevity annuity contract (QLAC). However, while these regulations remove a small impediment to hedging longevity risk within employer-sponsored DC plans and IRAs and may help plans offer solutions to participants concerned about "outliving their money," they are not a panacea. As discussed in this Spotlight, these new rules are just one step and should be considered in the context of all the issues sponsors face in helping their employees attain retirement income adequacy.