QLACs could improve retirement readiness — EBRI

Using qualifying longevity annuity contracts, commonly known as QLACs, increases retirement readiness, according to Employee Benefit Research Institute modeling.

EBRI decided to take a closer look at QLACs, which provide monthly benefits after a significant deferral period in retirement, after the IRS issued final rules last year exempting them from required minimum distributions when 401(k) participants hit age 70½.

One EBRI scenario had participants converting 15%, through a 10-year ladder of 1.5%, of a 401(k) balance with a current employer to a QLAC premium.

EBRI found that increases in its Retirement Security Projection Model's Retirement Readiness Ratings ranged from 1.9% for early baby boomers and 3.5% for Generation Xers in the longest relative longevity quartile. These numbers increased to 4.5% and 6.7%, respectively, with a 30% reduction in premiums.

“We found that at even at today's interest rates, it was a relatively decent impact” on retirement readiness for people who live longer, said Jack VanDerhei, EBRI research director and author of the report, in an interview. “For employees, it certainly seems a cost-effective hedge against longevity risk.”

A second scenario assumed that some plan sponsors would be willing to convert the accumulated value of the employer 401(k) contributions to a QLAC purchase at retirement age, with employees either opting in or opting out. That showed an increase in EBRI's Retirement Readiness Ratings ranging from 6.7% for early boomers to 8.7% for Gen Xers.

The IRS change “has basically opened up the whole deferred annuity concept in ways it never had before,” Mr. VanDerhei said.

The analysis, “How Much Can Qualifying Longevity Annuity Contracts Improve Retirement Security?” is available on EBRI's website.