Sorting Out the Confusion Between QLACs and Broker-Dealers
Along with new retirement funding products comes hiccups among carriers and broker-dealers.
The latest "it" product in the world of annuity products is the "qualified longevity annuity contract" (QLAC), which has spawned a number of administrative hurdles when it comes to rolling them out.
Last year, the Treasury Department announced a new rule that would allow participants in IRAs and 401(k)s to use up a maximum of 25 percent of their account balance, or $125,000, to purchase a QLAC. This money is then excluded from the required minimum distribution rules, which encourages participants to protect their savings from running short before their time of death.
Effects of the QLAC Rollout
A qualified longevity annuity contract is a variation of a deferred income annuity, whereby participants purchase the annuity contract today and receive regular payouts into the future, particularly when retirement begins.
If you'd like to see a QLAC calculation, simply enter your age, income start date, and amount to invest, in our QLAC Annuity Calculator, and click the Get My Quote button. Your quote will appear instantly on the next page.
With a traditional 401(k) or IRA, participants need to begin taking required minimum distributions shortly after reaching the age of 70½. Before the new rules came into effect, if an individual bought a deferred income annuity in a traditional IRA that does not pay out until well past that age point, there could be an issue. Since the annuity is illiquid, there could be a situation where the liquid IRA amount isn't sufficient enough to satisfy the required minimum distributions.
Today, this is not a concern any longer. Under the new rule, the annuity's value wouldn't be part of the value of the IRA or 401(k) when the required minimum distributions are calculated, as long as the annuity meets the criteria to be a QLAC.
Financial and insurance advisors are indeed encouraging investors to make deferred income annuities along with their QLAC versions part of their income and investment portfolios.
But one question remains: who is responsible for making sure that the contract applications meet the guidelines specified by the Treasury?
Administrative Obstacles - Policing Contribution Limits
The Treasury has been clear that a cap of $125,000 (or 25 percent of total IRA holdings, whichever comes first) must be placed on a participant's contribution to a QLAC. But who's in charge of making sure that this limit isn't exceeded? Is it the carrier or the broker-dealer? And if these limits are surpassed, what are the penalties enforced?
Life insurers themselves are shouldered with the responsibility of making sure their contributions are made within the Treasury's guidelines. But broker-dealers also bear some of the burden. Right now, however, broker-dealers are leaving it up to insurance carriers to take charge by asking clients to fill out a form confirming that their purchases meet the criteria set forth by the Treasury.
We had heard about annuities and were investigating them for our IRAs. We also heard bad things about pushy brokers over the years. So when we went to the ImmediateAnnuities.com site we were skeptical about calling them. But whenever we called their staff was really friendly. They answered all our questions and one of their reps even told us that at our ages there was no advantage to buying the annuity with our IRAs. These guys are really honest!
Of course, it's highly possible that more than one QLAC purchase can be made through an insurance carrier if the client doesn't disclose this information to his or her financial adviser. Without communication between the two entities, situations like this could certainly happen more often than not.
One thing is for certain: these annuity products are becoming increasingly popular. Sales of deferred annuity contracts hit the $2.7 billion mark in 2014, an increase of 22% from the previous year.
Over the long run, QLAC contracts should prove to be highly sound additions to an individual's retirement income portfolio. Should the consumers non-annuity assets decline in value, they'll surely appreciate having the forethought to have purchased a QLAC contract or other form of annuity. These products offer a great deal of cash flow for every dollar invested.