In recent years, there has been quite a bit of focus on lifetime income solutions and decumulation strategies, but in considering such solutions, a new survey finds that defined contribution plan sponsors may be taking a closer look at qualified longevity annuity contracts (QLACs).
This comes as more Americans are reaching the traditional retirement age of 65 in the same year than at any time in history, creating more than 4 million potential new retirees this year alone.
In fact, findings from MetLife’s 2024 Qualifying Longevity Annuity Contract Poll show a vast majority (91%) of plan sponsors are concerned that their future retirees will run out of money in retirement. When asked about what percentage of future retirees will run out, 83% of plan sponsors believe more than 1 in 4 retirees will deplete their retirement savings prematurely.
The poll also found that many plan sponsors underestimate longevity risk. When asked about the chances that an individual will live beyond age 86, 54% of plan sponsors underestimate that half of individuals will live beyond average life expectancy. Additionally, most plan sponsors (78%) underestimate the number of centenarians—those who reach the age of 100—projected for the United States in the future.
Longevity Risk
Given those findings as a backdrop, the poll suggests that plan sponsors have been looking at offering additional solutions that provide guaranteed streams of income to address longevity risks.
When shown a hypothetical example of how much yearly income an immediate income annuity and a longevity annuity would provide, a majority (81%) of plan sponsors say they would consider offering an immediate income annuity, while 66% would consider offering a QLAC.
For those plan sponsors who identified longevity as the greatest retirement risk, 72% would consider offering a QLAC. What’s more, not only are plan sponsors open to offering these solutions to participants, 70% of plan sponsors say they would consider purchasing a QLAC for their own retirement, MetLife notes.
Additional findings show that three-quarters of plan sponsor respondents (76%) say they are familiar with how a QLAC works, including 25% who are very familiar. The most attractive features of a QLAC, according to plan sponsors, are that it “solves for longevity risk by providing the participant with guaranteed income that cannot be outlived” (55%) and “allows the participant to receive higher monthly income payments with a smaller purchase amount than an immediate income annuity due to the long deferral period” (54%).
“By using a QLAC to insure their longevity risk, plan participants will have an easier time determining how much they can draw down from their retirement savings before benefit payments begin,” explained Roberta Rafaloff, vice president and head of Institutional Income Annuities at MetLife. “Because of this, MetLife believes that QLACs and other retirement income solutions should be given careful consideration by plan sponsors to help protect their participants’ retirement security.”
Rafaloff adds that they are seeing sponsors take action by discussing these options with their advisors.
According to the poll, 94% of plan sponsors say their DC plan consultants or advisors discuss retirement income options with them. For QLACs, 82% of plan sponsors report they are being discussed with their DC plan consultants or advisors.
What’s a QLAC?
As a reminder, regulations issued by the Department of Treasury in 2014 helped pave the way for QLACs to be offered as a distribution option from qualified retirement plans.
A QLAC is a fixed deferred annuity provided as a distribution option and is typically purchased at the point of retirement, with the guaranteed benefit commencing at an advanced age, typically age 80 or 85. In addition, the portion of the DC plan balance that participants use for a QLAC is excluded for purposes of determining the required minimum distribution (RMD), allowing more money to remain in the plan.
The SECURE 2.0 Act of 2022 and the SECURE Act of 2019 also helped pave the way for broader adoption by making QLACs more accessible for DC plan participants. For instance, Section 202 of SECURE 2.0 eliminates the 25% threshold and increases the dollar limit to $200,000 (indexed for inflation), among other provisions.
MetLife’s poll was fielded by MMR Research Associates between Jan. 9–16, 2024, among 250 plan sponsors in human resources/benefits, treasury, and finance whose organizations have one or more DC plans. Respondents had either final decision-making authority or a lot of influence regarding their company’s retirement benefits and programs, and they had to be familiar with the various DC plan retirement income options available today. The average size of the DC plans represented was $513 million.
To read the full MetLife QLAC Poll report, visit http://www.metlife.com/QLACPoll/.
