Feds Allow Annuities into Target Date Mutual Funds
November 5, 2014 by Arthur D. Postal
WASHINGTON – Federal agencies are allowing target date mutual funds (TDFs) to include deferred income annuities as qualified default investment alternatives in employer-sponsored retirement plans.
The agencies’ guidance clears legal hurdles that had discouraged some employers from offering lifetime income options for older workers nearing retirement, according to the American Council of Life Insurers (ACLI) and a Legal Alert by Carlton Fields Jorden Burt (CFJB).
The guidance was issued by the Internal Revenue Service through Notice 2014-66. The Department of Labor has confirmed that TDFs serving as Qualified Default Investment Alternatives (QDIAs) may include annuities among their fixed income investments, the Legal Alert said.
ACLI officials said in a press release that the action occurred because, “Treasury and Labor recognize the essential role of the annuity, a life insurance industry product, in the financial and retirement security of America’s workers and retirees. It comes on the heels of Treasury rule this summer on ‘deeply’ deferred annuities – also known as longevity annuities – that protect those planning for the long term by providing payments at later ages, for example, at age 85.”
The ACLI also said that Treasury noted in its guidance that retirees in qualified plans and IRAs would not have to include these annuities when calculating their required minimum distributions, the payments from tax-qualified plans that must begin at age 70½.
The CFJB Legal Alert said to qualify, the series of TDFs must be designed to serve as a single integrated investment program under which the same investment manager manages each TDF using the same generally accepted investment theories.
“The only difference between each TDF must be the mix of assets selected by the investment manager resulting solely from the intent to achieve the level of risk appropriate for the participants in that TDF,” the Alert said.
Moreover, the Alert said, none of the annuity contracts in the TDFs available to older participants can provide a guaranteed lifetime withdrawal benefit or a guaranteed minimum withdrawal benefit in order to comply with the rule.
Arthur D. Postal has covered regulatory and legislative issues for more than 30 years in Washington, D.C. He can be reached at arthur.postal@innfeedback.com.