DOL Throws Stumbling Block In Way of Lifetime Income Options
Because of a recent information letter issued by the DOL, it is unlikely many plan sponsors will adopt a lifetime income option as the default investment in their 401(k) plans. This letter, issued to TIAA, makes it clear lifetime income options cannot serve as a QDIA in 401(k) plans.
In recent years, there has been increasing interest in offering 401(k) plan participants a lifetime income option. These options are deferred annuity contracts that provide participants a stream of income in retirement, relieving them of some of the investment risk.
These products annuitize all or a part of a participant’s account at a certain age. Often a laddering approach is used under which a portion of the account is annuitized each year as the participant approaches retirement age. The portion of the account which has been annuitized is always subject to withdrawal restrictions.
The IRS has issued guidance clarifying how these products may be offered in 401(k) plans, especially how to comply with the minimum required distribution rules.
Since the Pension Protection Act cleared the way for auto enrollment in 401(k) plans, many sponsors have adopted this feature. This has made the default investment option more important, as participants who are auto enrolled, often fail to make investment elections.
The Qualified Default Investment Alternative (QDIA) rules are a safe harbor that relieves plan fiduciaries of the liability associated with the type of investment that is selected as the default. The QDIA rules permit the use of lifecycle funds, target date funds and balanced funds. These rules do not address the use of lifetime income options.
TIAA asked the DOL to clarify that its Income for Life Custom Portfolios may serve as a QDIA. The DOL in the information letter, states that an investment can serve as the QDIA only if it allows participants to transfer to other investment options in a plan not less frequently than once every three months. Like virtually all lifetime income products, TIAA’s Income for Life Custom Portfolios do not satisfy this requirement.