Let’s Enable More Edelivery

The electronic data revolution has been a blessing in many, many ways.  It has had a few bumps in the road, to be sure.  Data breaches in the systems of major retailers have put sensitive customer data at risk.  We’re all familiar with the communications monitoring and data sharing that has taken place between phone and internet providers and government agencies, which some of us find troublesome from a privacy standpoint.  Theft of laptops, hacking of computers, and high-profile security leaks by so-called whistleblowers are further examples of the risks involved when information is stored electronically.

That said, very few of us would want to go back to paper shuffling and hard-copy transmission, storage and retrieval of information where we don’t have to.  Losing the electronic efficiencies we now almost take for granted would be like stabling a horse in the garage instead of a sedan or an SUV, and feeding hay and grain instead of gasoline.  From internet banking and investing to online purchasing, just about any action or transaction you can name has – or likely soon will have – an electronic dimension or means to execute.  I suspect that very few of us would really want to roll back the clock.   

The world of retirement plans is pretty comfortable with electronic functions, too.  A 401(k) plan participant can change investments, request a distribution, apply for a plan loan, and generally interact with their employer’s plan at its web site with a few keystrokes.  The tax return of a retirement plan, Form 5500, is typically submitted electronically to the Department of Labor on behalf of the sponsoring employer.  The same is true of the information returns that track qualified plan and IRA transactions, Forms 1099-R and 5498 among them. 

But not all dimensions of retirement plan administration are as electronically streamlined as they could be.  One example is what I believe to be the unnecessarily conservative posture of the Department of Labor’s Employee Benefits Security Administration, which we know more familiarly by its acronym EBSA.  In many electronic communication situations in the wider world there is a presumption that information will be delivered electronically.  If a person wishes to receive that information in paper form they must indicate this.  If they fail to do so, they are “defaulted” to electronic delivery.  This is the “new normal” in a great and growing share of communications in modern commerce.

EBSA’s preference – reflected in its regulations governing electronic delivery of retirement plan communications of many kinds – requires that plan participants and beneficiaries affirmatively declare their willingness to receive notices, election requests, summaries and other information, electronically.    Many in our industry, myself included, believe EBSA should be more flexible and more in line with the rest of financial industry in this area.  Given the inclination of many people to put off decision making, or to fail to take action simply out of inertia, it is likely that the lack of an election to receive communications electronically is not necessarily a rejection of that form of delivery.  An argument often made in favor of more automatic enrollment and automatic escalation of deferrals in 401(k) plans – without affirmative election beforehand – is that people often simply fail to act, for no good reason and that this "negative" consent method results in increased participation.   This same logic seems to apply to other plan related communication as well.

I’m not oblivious of the need for safeguards to avoid harming the interests of participants and beneficiaries who are unable or unwilling to receive plan communications in electronic form.  Their rights must be protected, and not everyone chooses to do things in the most modern and up-to-date way.  The option to request things in paper must be preserved.  But it is worth noting that the IRS is onboard with a more streamlined, almost negative consent method for electronic delivery of some important plan communications.  It's clear EBSA seems not to be.  I believe EBSA should take another step into the modern electronic world and relax its current electronic delivery requirements.

IRS Verdict is in, But Buyer Jury is Out, on QLACs

The Internal Revenue Service took a needed step toward making delayed or longevity annuities a viable option for retirement savers, with its July issuance of qualifying longevity annuity contract (QLAC) final regulations.  This action will make it more attractive for savers to use retirement assets to purchase longevity annuities, which begin their payment stream at an advanced age, such as age 80 or 85.  The key to QLAC appeal will be the ability to exclude annuity contract costs from required minimum distribution (RMD) calculations, and the resulting taxation that generally begins at age 70 ½ .  Up to 25 percent of aggregate IRA and employer retirement plan accumulations – not to exceed $125,000 – can be used for QLAC purchase and still be excluded from the balances that will determine taxpayer RMDs.

The question no one is able to answer at this point is how attractive this investment option will be to those with assets accumulated in IRAs or employer plans.  It is a safe assumption that it will take time for interest to grow.  Longevity annuities are not actually a new product, but until now they did not offer the tax benefits provided by these final regulations. 

Another term some use for longevity annuities is “death insurance.”  If structured to begin payout at an advanced age and to last throughout the annuitant’s lifetime, he or she can be assured that they will not outlive these funds.  A valuable assurance to be sure.  Until now, longevity annuities have typically been purchased with nonqualified assets as part of a comprehensive financial plan intended to provide for an individual or a couple throughout their retirement years. 

At the risk of over-generalizing, it is likely that the buyer of a longevity annuity is a person of above-average wealth, able and willing to part with a substantial sum to purchase a contract whose promised return does not begin until at a date that may be 10, 15 or 20 years in the future.  The younger the buyer, the less expensive the longevity annuity, but the longer one will wait before seeing a return on the investment.  In some cases, depending on how a longevity annuity is structured, there could be no return if the annuitant dies and there is no residual payment stream guaranteed to a beneficiary.  Given these realities, the longevity annuity has understandably been a niche product to date.

The QLAC, after years of congressional and public policy advocacy for it, now offers the special tax incentive of excluding the purchase value from RMD calculations.  Will workers and younger retirees seriously consider this option?  How will it mesh with today’s qualified retirement plan environment?  Will QLACs be embraced, or remain a niche investment product that lacks the broad appeal its advocates have hoped for?

It’s no secret that there is a certain amount of hesitation on the part of plans participants and IRA owners today to annuitizing an IRA or retirement plan balance.  In an earlier time when defined benefit pension plans were common, a “promise to pay” was accepted with less hesitation.  But in today’s largely defined contribution world, in which I will include IRAs, there is greater reluctance to give up control of a large sum of money in exchange for a promise to pay.  Failures of insurance companies, the source of annuities, are not an everyday event.  But high-profile insurance company failures of the past, and the late financial meltdown that led us into the recent recession, have made many savers reluctant to give up control of their assets.  A longevity annuity that does not begin payments until well into the future may take some getting used to for a lot of savers.  Even in cases where this is an alternative that should be considered. 

In the employer-sponsored retirement plan realm, with the exception of defined benefit pension plans, most participants receive lump sum payouts.  The defined contribution plan world has to an increasing degree moved away from annuitized distributions.  If a QLAC is purchased under an employer plan the assets would essentially leave that plan when paid to an annuity provider, but continue to be accounted for as a plan investment in order to enforce the QLAC purchase limits.  It’s clear that shifts in both philosophy and logistics may be needed if QLACs are to make inroads in DC plans. 

For these reasons some feel that QLACs are most likely to gain initial acceptance as IRA investments.  This, in turn, has led to speculation as to whether there could be some “asset flight” from employer plans when a plan participant eligible for a distribution wants to purchase a QLAC when it is most affordable.  For many this will be while they are still in the work force. 
With QLACs, more so than many retirement issues today, the operative expression is “more to come.”