The letter, which was a response to an inquiry from TIAA regarding one of the firm’s custom TDF products, attempts to clarify existing agency guidance on how TDFs with annuities can comply with QDIA protocol.
One of the existing requirements for an investment to qualify as a QDIA is that participants must be able to transfer their investment from one product to another qualified option after three months.
TIAA’s Income for Life Custom Portfolios invest a portion of a participant’s savings into an annuity sleeve. The allocation increases according to the fund’s glide path. The funds cap a participant’s allocation to the annuity sleeve at 50 percent.
With TIAA’s custom TDFs, participants can transfer the assets invested in the annuity sleeve to another in-plan QDIA for the first 12 months after the initial investment.
After the first year, participants can only transfer funds from the annuity sleeve on a restricted basis. During the next seven years, participants can move money out of the annuity sleeve, but only in limited installments. Such liquidity restrictions are of course protocol for most annuity investments.
In its letter to TIAA, the DOL says the annuity sleeve in the ILCP target-date fund does not qualify as a QDIA under a strict interpretation of the existing regulatory language.
But the letter then goes on to explain that plan sponsors can use TDFs with annuity features and still satisfy their fiduciary obligations.
In order for an investment to qualify as a QDIA, the regulatory language says participants must be able to transfer assets from one qualified investment to another “with a frequency consistent with that afforded participants and beneficiaries who elect to invest in the QDIA, but not less frequently than once within any three month period,” according to the information letter.
But in the information letter, the DOL suggests plan sponsors have more latitude to use TDFs with annuities than is implied in the existing regulatory language.
“The Department’s overarching focus when developing the QDIA regulation, including the types of investment alternatives that could be QDIAs, was on the long-term accumulation of retirement savings as a way to ensure adequate retirement income,” according to the letter.
Since establishing the QDIA requirements, annuities’ potential value to retirement savers has emerged as a central issue among investment experts, industry stakeholders, and policy makers on Capitol Hill.
“The Department (of Labor), along with the Treasury Department and other stakeholders, identified the need for lifetime income as an important public policy issue and has supported initiatives that could lead to broader use of lifetime income options in defined contribution plans as a supplement to and enhancement of accumulation of retirement savings,” the letter says.
In the spirit of that effort, the letter says a plan fiduciary could use a TDF featuring an annuity as a QDIA, in spite of the limitations in the existing regulatory language.
The letter notes that plan fiduciaries must nevertheless engage in an “objective, thorough and analytical process” when using a TDF with an annuity as a qualified default investment alternative in a 401(k) plan.
The cost of the annuity, the specifics of the liquidity limitations of a given annuity, and the demographics of participants in the plan must be considered by prudent fiduciaries, the letter says.
Moreover, sponsors must consider the extra communication efforts necessary to adequately educate participants on the liquidity limitations of annuities.
Ultimately, whether a TDF with an annuity feature qualifies as a QDIA depends “on the facts and circumstances” of a specific plan, the letter says.
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