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October 24, 2014 at 05:20 AM
The Treasury Department and Internal Revenue Service issued Friday guidance designed to expand the use of annuities in 401(k) plans.
The guidance (Notice 2014-66) clarifies that plan sponsors can include deferred income annuities in target date funds used as a default investment, in a manner that complies with plan qualification rules.
This option is voluntary for plan sponsors and participants, the guidance says.
“Today’s guidance provides plan sponsors an additional option to make it easier for employees to consider using lifetime income,” the Treasury 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.”
Treasury and IRS issued final rules in July to make longevity annuities — which provide regular payments that begin at an advanced age and continue throughout the individual’s life — accessible to the 401(k) and IRA markets.
Under Friday’s guidance, a target date fund may include annuities allowing payments, beginning either immediately after retirement or at a later time, as part of its fixed-income investments, even if the funds containing the annuities are limited to employees over a specified age.
The guidance clarifies that plans have the option to offer target date funds that include such annuity contracts either as a default or as a regular investment alternative.
