Selling deferred income annuities inside IRAs and defined contribution plansArticle added by Michael Pinkans, CFA on July 21, 2014
Mike Pinkans

Michael Pinkans, CFA

Freehold, NJ

Joined: July 18, 2011

The Treasury Department and the Internal Revenue Service (IRS) just provided IRA owners and defined contribution (DC) participants — those having 401(k)s, 403(b)s and 457 plans — the ability to purchase longevity annuities (also known as deferred income annuities or DIAs) within these plans. And there's an interesting twist: These DIAs could be excludable from any required minimum distribution (RMD) calculation requirements. With over $9 trillion of IRA and 401(k)-like assets1,2 in plans across the U.S., this is a real sales opportunity you don’t want to miss.

Section 401(a)(9) prescribes RMD rules for a qualified trust under Section 401(a). In general, distribution of each employee’s entire account must begin by the required beginning date — known as the RMD rules. The required beginning date is generally April 1st of a given calendar year following the later of (1) the calendar year in which the employee attains age 70½ or (2) the calendar year in which the employee retires.

The final DIA regulations provide clients with the ability to guarantee income while avoiding some of these RMD calculations.

However, now your clients can invest in DIAs to provide a much-needed guaranteed income stream during retirement, without having to worry about including the DIA premium in the RMD calculation.

Specifically, the Treasury Department’s final rule on DIAs does the following:
  • IRA owners and 401(k)-like plan participants can invest up to 25 percent of their account balance (or up to $125,000, whichever is less) in DIAs without worrying about any RMD calculation issues as long as DIA payouts commence no later than age 85.

  • The purchase of a DIA can be made with a lump sum or through salary deferral with 401(k)-like plans.

  • DIAs used in these plans must be fixed annuities only (not variable or fixed indexed).

  • If available, the DIA can offer a return-of-premium (ROP) feature that is payable both before and after the employee’s annuity starting date.

  • If available, inflation protection DIAs can be used.
But here’s the catch concerning 401(k)-like plans. Currently, there are no insurance carriers that provide DIAs within these plans. While this may change in the future, if a person wants to purchase a DIA with 401(k)-like monies, the money must be moved to an individual IRA. This would be classified as a non-hardship in-service withdrawal, and most 401(k)-like plans do not allow for this type of withdrawal. However, changing the 401(k)-like plan to allow these withdrawals may be as easy as reviewing the plan’s summary plan description (SPD) and changing the plan documents.

So, if a client currently has an IRA, it’s relatively easy to utilize some of the assets for a DIA purchase. But within a 401(k)-like plan, the plan documents may need to be modified to allow an in-service, non-hardship transfer of investments into an IRA to purchase the DIA.

When discussing this opportunity with a 401(k)-like plan participant, make sure you look over the SPD. If the plan documents need to be modified (and as long as the plan sponsor agrees), it should usually be an easy fix. And if the plan administrator has questions, we’d recommend speaking with a firm with a solid history of employee benefit expertise.

1 “Top 1% of plans hold more than 71% of all 401(k) assets.” LifeHealthPRO.com, 2/19/2014. http://www.lifehealthpro.com/2014/02/19/top-1-of-plans-hold-more-than-71-of-all-401k-asset

2 American Benefits Council, “401(K) Fast Facts: Updated April 2014.” http://www.americanbenefitscouncil.org/documents2013/401k_stats.pdf
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