Guidance Issued for Including Annuities in TDFs

The guidance was published as Notice 2014-66 and provides that plan sponsors can include deferred income annuities in target-date funds (TDFs) used as a qualified default investment alternatives (QDIA) in a manner that complies with plan qualification rules. The guidance makes clear that plans have the option to offer TDFs that include such annuity contracts either as a default or as a participant-elected investment. This option is voluntary for plan sponsors and participants, the agencies point out.

As Treasury and the IRS explain, a deferred income annuity provides an income stream that generally continues throughout an individual’s life but is not intended to begin until sometime after it is purchased.  This can provide a cost-effective solution for retirees willing to use part of their savings to protect against the risk of outliving the rest of their assets, and can also help them avoid overcompensating by unnecessarily limiting their spending in retirement.

Under the new guidance, a TDF may include annuities allowing payments, beginning either immediately after retirement or at a later time, as part of its fixed-income investments, even if the funds containing the annuities are limited to employees older than a specified age.

In an accompanying letter, the Department of Labor confirms that TDFs serving as default investment alternatives may include annuities among their underlying fixed-income investments. The letter also describes how Employee Retirement Income Security Act (ERISA) fiduciary standards can be satisfied when a plan sponsor appoints an investment manager that selects the annuity contracts and annuity provider to pay the lifetime income.

“As Boomers approach retirement and life expectancies increase, income annuities can be an important planning tool for a secure retirement,” explains J. Mark Iwry, a senior adviser to the Secretary of the Treasury and Deputy Assistant Secretary for Retirement and Health Policy. “Treasury is working to expand the availability of retirement income options for working families. By encouraging the use of income annuities, today’s guidance can help retirees protect themselves from outliving their savings.”

In July, the Treasury Department and IRS issued final rules on the use of longevity annuities—a type of deferred income annuity that begins at an advanced age—in 401(k) plans and individual retirement accounts as part of a broader coordinated effort with the Department of Labor to encourage lifetime income and enhance retirement security. The latest guidance, according to the agencies, is another step reflecting the continuing commitment of the federal government to work in a variety of ways to further bolster retirement security and saving.

Notice 2014-66 is available in full here.