Plan sponsors can offer target-date funds that include deferred-income annuities to older, higher-income earners without breaching ERISA's non-discrimination requirements, the IRS said Friday in a special ruling.
The ruling is expected to boost the popularity of lifetime-income options, helping employees hedge against the potential of running out of money in retirement.
In issuing its special ruling, the IRS said, "a TDF that holds deferred annuities should not be expected to permit participants whose ages fall outside the designated age-band for the TDF to hold an interest in that TDF."
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"Today's guidance provides plan sponsors an additional option to make it easier for employees to consider using lifetime income," the Treasury Department said in a statement. "Instead of having to devote all of their account balance to annuities, employees use a portion of their savings to purchase guaranteed income for life while retaining other savings in other investments."
Plan sponsors and advisors had sought the clarification from the IRS.
"This guidance demonstrates the Treasury Department's commitment to, and ongoing support for, making lifetime income more accessible in workplace retirement plans," Insured Retirement Institute President and CEO Cathy Weatherford said.
She said the ruling could "help ensure that American workers and their families can attain guaranteed retirement income that cannot be outlived."
Along those lines, the IRS in July issued final rules allowing defined contribution participants to invest a maximum of $125,000 in qualifying longevity annuity contracts that guarantee income later in retirement. Assets in those longevity annuities are not subject to the annual distribution requirements of 401(k) assets that begin at age 70 ½, according to the IRS.
At the request of the IRS, the Department of Labor reviewed the special ruling.
Phyllis Borzi, assistant Secretary of Labor, wrote that the use of deferred annuity contracts as fixed-income instruments in certain TDFs "would not cause the funds to fail to meet the requirements" of ERISA, as long as investment managers "satisfy each of the conditions of the annuity selection safe harbor" when choosing annuities.
Under the annuity selection safe harbor, fiduciaries must engage in a "thorough and analytical search" in selecting annuity providers, fully consider the provider's ability to make future payments, and take the costs and fees of annuities in consideration when selecting them, according to the DOL.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
