Insured Retirement Institute: Let Taxpayers Use RILAs as QLACs

What it means: A retirement saver could use a hot new product — a RILA — to shield a source of protected lifetime income against the effects of inflation.

IRI's list: IRI is a group for financial services organizations with an interest in pension plans and other types of retirement savings arrangements.

Both Republicans and Democrats support IRI's goals, and IRI has succeeded at getting many of its proposals on its earlier retirement security lists enacted, including in the Setting Every Community Up for Retirement Enhancement Act and the SECURE 2.0 Act.

Many of the proposals on the new IRI recommendation list, such as one that would let very young workers participate in their employers' retirement plans, would apply to employer-sponsored retirement plans.

One proposal that could have a direct effect on clients and advisors in the retail market would let all registered investment companies send documents through electronic delivery systems, while also letting investors opt out of receiving those documents through electronic delivery systems.

Another retail market proposal could help users of SIMPLE IRAs manage their accounts. The proposal could make the rollover rules for SIMPLE IRAs more like the rules for other types of individual retirement accounts.

The QLAC backdrop: QLACs are supposed to help retirement savers who live a long time use annuities to avoid running out of retirement savings very late in life.

A retirement saver puts cash in a QLAC at one point and sets the QLAC to begin paying a stream of lifetime income later, with a start date before the retirement saver turns 85.

Because the price of the QLAC reflects how long the issuer thinks the purchaser will live, the older the purchaser is when the income stream starts, the cheaper the annuity will be.

Economists have praised QLACs' ability to maximize the amount of income retirement savers get per dollar spent.

Congress blessed the use of QLACs as protection against longevity risk by letting taxpayers keep some of the assets fed into the QLACs out of RMD calculations.

QLAC use has been low, however. One reason may be that people don't understand them, and a second reason may be that people want to leave cash to heirs, but a third reason may be that some 64-year-old retirement savers might be scared of what inflation could do to the value of a QLAC's income stream between now and 2048.

The RILA-QLAC proposal: Today, the products used in QLAC arrangements are traditional fixed annuities. The fixed annuities are designed to pay the same amount of income no matter what happens to inflation and interest rates.

The IRI proposal would let a retirement saver use a variable annuity or an indexed annuity as a QLAC.

The issuer of a variable annuity can tie part or all of the crediting rate to the performance of funds that resemble mutual funds.

The issuer of a RILA can tie the crediting rate of a RILA to the performance of one or more investment indexes.

If a retirement saver used a variable annuity or RILA as a QLAC, the total amount of income coming from the QLAC would be harder to predict, but the variable component of the crediting rate could increase along with prices and help offset the impact of inflation. Adding some inflation protection could make QLACs more popular.

Access to some potential protection against inflation could make the QLACs more popular with clients who see QLACs mainly as a tool for coping with RMD requirements as well as those trying to use a small retirement nest egg to pay the post-retirement bills.

The legislative environment: Paul Richman, chief government and political affairs officer, said IRI continues to see strong bipartisan support in Washington for the kinds of proposals that IRI members back and continues to see room for improving retirement savings incentives and programs.

"While the SECURE Act and SECURE 2.0 have advanced in-plan lifetime income options, significant gaps remain for workers transitioning into retirement and for those saving outside workplace plans," Richman said. "Individual annuities play a critical role here. They work alongside IRAs, 401(k)s, and Social Security to insure against longevity and market risk — risks other savings vehicles cannot fully address... The goal is broader retirement security: steady 'mailbox money' that arrives regardless of market conditions, replacing uncertainty with confidence."