O’Brien: Let’s Inflate the QLAC Market
February 11, 2015 by Kim O'Brien, kobrien@innfeedback.com
Some reporters have mis-characterized the fixed annuity industry’s interest in removing the exclusion of fixed index annuities from the IRS Rule regarding required minimum distributions (RMD). One writer commented on an annuity association’s most recent submission to Treasury by suggesting it was a “Hail Mary.”
Before being a cheerleader for annuities, I led cheers for football at Ripon College, where my husband was also a football player. So, we “get” football in our house. For those of you who may not live and breathe football, a Hail Mary is a last gasp effort by a losing team to throw one final long pass and snatch victory from the jaws of defeat. Unfortunately, it is the wrong metaphor.
For background: On Feb. 3, 2012, the IRS announced a proposed rule regarding the change to required minimum distribution rules from a commencement date of 70½ to no later than 85. Since then, participants in the fixed index annuity industry, myself included, have sought to include FIAs as products that can be developed or amended to meet the qualifications of a longevity annuity.
But the critics are making erroneous assumptions about the industry’s motivation as well as the writer’s reference to the “pass”! In addition, some critics of the FIA market have stated that the IRS specifically intended to exclude “high commission” products in the rule. However, a careful reading of the entire 13,000-plus word bulletin shows that the word “commission” is never even used. In fact, I never once heard from anyone in the industry or from a trade association (who was actually present at meetings with Treasury and the IRS) that “high commissions” were discussed or even alluded to.
Instead, the IRS Internal Revenue Bulletin 2014-30 issued on July 21, 2014, under Section D “Other QLAC Requirements, specifically states the rationale and intent: “The Treasury Department and the IRS believe that because the purpose of a QLAC is to provide an employee with a predictable stream of lifetime income a contract should be eligible for QLAC treatment only if the income under the contract is primarily derived from contractual guarantees.
Because variable annuities and indexed contracts provide a substantially unpredictable level of income to the employee, these contracts are inconsistent with the purpose of this regulation. This is true even if there is a minimum guaranteed income under those contracts.” Unfortunately, it appears that at the core of this reasoning is a fundamental misunderstanding of the predictable income afforded through an FIA’s guaranteed lifetime withdrawal benefit.
Total FIA new business premium is approaching $50 billion a year. It provides lifetime income to 10 times more consumers than that provided through other lifetime annuities — and guaranteed lifetime income was the intent of the annuity focus in the first place. The only thing “unpredictable” about the income stream is how much more income you receive from the power of earning indexed interest during positive markets combined with a no losses during negative ones (not forgetting that the zero-interest floor resets the index calculation start point)!
Now, let’s get back to the “Hail Mary” metaphor. At the end of Section 1 in the Rule, the IRS states that: “The final regulations provide that a QLAC does not include a variable contract under section 817, an indexed contract, or a similar contract. However, the final regulations also provide that the Commissioner may provide an exception to this rule in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin” [emphasis added].
It is clear from the last statement that the IRS did intend to further assess their decision on including indexed annuities (as well as variable) and was open to providing an exception to the rule. Note: One recent article incorrectly called it a “law” not a “rule,” which is significant because it is much easier to amend rules than laws! Nonetheless, given this distinct invitation from the IRS, any comment or action since the Rules publication looks more like a new season opening play from the line of scrimmage.
Perhaps most importantly, the IRS explained in its bulletin that its intent in revising the RMD rules was to “facilitate the purchase of deferred annuities that begin at an advanced age.”
“Facilitating purchase” means consumer choice, open competition and speed to market. And a successful marketplace needs all of these elements! There is little doubt from the 2014 sales numbers that indexed annuities are an extremely popular choice to today’s annuity buyers and in particular, FIAs with GLWBs.
Allowing those who own existing qualified FIAs (approximately 50 percent of the total FIA owners by most reports) to simply amend their contract to meet QLAC guidelines is an astounding victory for those saving for retirement because not only will it facilitate purchase, it will expedite purchase, too. Indexed annuities with GLWBs offer one more great choice for retirement saving, retirement safety and income predictability that cannot be matched by risk-based security products.
Also, the benefit of deferring the RMD is a very beneficial tax strategy for those who do not need or want the income at age 70½. DIAs are great news for retirement savers! And adding the already built, filed, system-supported and suitability-driven FIAs meeting QLAC standards should not be excluded simply because they are misunderstood.
Our industry cares deeply about what annuities can do for retirees. And, of course, it’s understood that they would like some of those sales, too (their continued profitability and financial strength demand it). Since capitalism first appeared in the middle ages, providing an open and competitive marketplace only serves to benefit all who participate. Increased choices and availability will directly benefit the annuity buyer.
So, to use a more recent football metaphor, why deflate the marketplace by providing one team with a competitive advantage. Let’s inflate the marketplace for longevity annuities and, we’ll also inflate income potential for retirees.
