Data and Research April 8, 2024

MetLife Poll Shows Increased Demand for QLACs to be Offered In-Plan

Plan sponsors are expressing interest in qualified longevity annuity contracts as a way help participants protect against longevity risk and inflation.

Reported by

The demographic milestone known as “Peak 65” has arrived, as 2024 is a year when more Americans are reaching the traditional retirement age of 65 than at any other time in history. This could mean more than four million potential new retirees in 2024 alone. 

As a result, the issue of having sufficient retirement income is becoming increasingly more critical, and according to MetLife’s 2024 Qualifying Longevity Annuity Contract Poll, many plan sponsors are considering offering longevity annuities, such as QLACs, to protect against longevity risk. 

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

The survey found that 92% of plans sponsors are concerned their current retirees will deplete their retirement savings, and on top of that, 91% are concerned their future retirees will deplete their retirement savings.  

MetLife surveyed 250 U.S. defined contribution plan sponsors in late 2023 to understand their knowledge about longevity and other risks DC plan participants will face in retirement.  

While plan sponsors are worried about their participants running out of funds in retirement, they also underestimate the longevity of their employees.  

According to MetLife, an individual who reaches age 65 has an average life expectancy of 86. However, when asked about the chances that individuals will live beyond 86, more than half of plan sponsors underestimated that 50% of individuals will live beyond average life expectancy. In addition, many plan sponsors were unaware of how many centenarians—Americans who have reached the age of 100—there are in the U.S. today. Only 18% of plan sponsors correctly answered that there are currently about 89,000 centenarians alive in the U.S., which is the fastest growing age cohort in the country. 

Although more than half of plan sponsors identified inflation risk as the greatest threat to retirement savings, Roberta Rafaloff, vice president and head of institutional income annuities at MetLife, argues that longevity is a much greater risk. 

“The fact that you [may] live many years longer than you expected [is] going to erode your dollars even quicker than inflation,” Rafaloff says.  

Opportunity with QLACs 

When offering an immediate income annuity or a QLAC, Rafaloff says a plan would be well-served by offering participants both options.  

“There are some people who really do not want to be responsible for managing their assets until later in life when things like cognitive decline could creep in,” Rafaloff says. “So I think either an immediate income annuity [or] a QLAC are critically important for people so that they do have guaranteed income in retirement.” 

Rafaloff pointed out that the SECURE 2.0 Act of 2022 made it easier to purchase a QLAC by eliminating the 25% limit on retirement account balances, or $125,000, and raising it to a maximum dollar amount of $200,000.  

In the survey, plan sponsors were shown a hypothetical example of how much yearly income an immediate income annuity, which provides guaranteed income for life with payments starting within one year of purchase, and a longevity annuity, which provides guaranteed income for life, but payments are deferred until later in life, would generate. An immediate annuity would result in lower yearly payments, as opposed to a deferred annuity, which would be higher payments due to waiting longer to receive them. 

After seeing this example, 81% of plan sponsors said they would consider offering an immediate income annuity and 65% would consider offering a QLAC. However, among plan sponsors who identified longevity as the greatest retirement risk, the percentage who would consider offering a QLAC climbed to 72%.  

MetLife also found that three in four plan sponsors said they are familiar with how a QLAC works. More than half of sponsors also agreed that the most attractive feature of a QLAC is that it “solves for longevity risk by providing the participant with guaranteed income that cannot be outlived.”  

In addition, when asked if they would consider purchasing a QLAC for their own retirement, 70% of plan sponsors said they would.  

Rafaloff says she sees more recordkeepers starting to offer solutions like QLACs on their platforms. According to the survey, 66% of plan sponsors would be more likely to offer a QLAC if it were offered on their recordkeeper’s platform.  

While 94% of plan sponsors said their DC plan consultants or advisers discuss retirement income options with them, only 36% said they often discuss longevity annuities with their consultants and advisers. Rafaloff notes that there is an opportunity for consultants and advisers to have more of these discussions with plan sponsors.  

“Some [advisers and consultants] are setting up dedicated retirement income practices within their organizations … so that they can provide the consultative approach that the plan sponsors are looking for,” Rafaloff says. “We definitely see a shift there, and we expect to see that grow even more in the future.” 

Compliance April 8, 2024

PLESA Match Manipulation Not a Concern, Chamber of Commerce Says

Other SECURE 2.0 implementation issues are a much bigger worry.

Reported by

The U.S. Chamber of Commerce informed the Internal Revenue Service that there is little concern that plan participants will abuse pension-linked emergency savings accounts to obtain matching contributions to their retirement accounts.

PLESAs, or side-car accounts, are after-tax accounts that participants can contribute to for discretionary uses. The accounts are invested in lower risk assets and contributions must cease if the balance reaches $2,500. Sponsors with a PLESA must allow participants to withdraw from the account at least once a month. Making such withdrawals would not trigger a 10% tax penalty and participants making withdrawals are not required to show a hardship.

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

Since PLESA contributions are matched, assuming the sponsor offers a match, there was some concern among regulators that participants would contribute to the PLESA, obtain the match to their retirement account, and then immediately withdraw from the PLESA. This practice was referred to as “manipulative” or “potentially abusive,” in an IRS request for comment and interim guidance in January.

The Chamber of Commerce responded to the IRS that “We have not heard from our members that there is concern that individuals would use contributions to PLESAs to manipulate the matching contribution.” The comment period ended on April 5. A total of eight comments were submitted, but only one has been made public so far.

The letter argued that any risk of manipulation is already addressed by the statute. For one, participants can only receive up to $2,500 in matching contributions per year for PLESA contributions, or even less if the sponsor sets the maximum balance at a lower number. Secondly, sponsors can limit PLESA withdrawals to once per month, which would limit the liquidity to those trying to game the match.

Chantel Sheaks, the vice president for retirement policy at the Chamber of Commerce and the author of the letter, says “this was not a concern,” and “I was a little confused that this was even an issue.” She adds that “it would take a lot of work,” to manipulate the match for any considerable benefit and that highly compensated employees cannot even have a PLESA, so those who would manipulate it may not even have the means to do so.

In the January interim guidance, the IRS said that some measures to reduce manipulation are unreasonable and would not be allowed until further guidance is issued. These include forfeiting matching contributions, suspending eligibility for the PLESA and suspending eligibility for matching contributions.

The guidance also clarified that sponsors are not required to police manipulation at all if they do not want to.

The Chamber of Commerce commented in its letter that it “does not believe further guidance is needed with respect to the anti-abuse provisions for PLESAs.”

 

«