DOL Proposes Adding Variable Annuities to 401(k) Plan Default Option List

QDIAs hold the assets of the many retirement plan participants who fail to make active choices about retirement plan asset allocations. They hold about one-third of the $10 trillion in 401(k) plan assets.

Officials at the Employee Benefits Security Administration, the DOL benefits arm, included an example in the draft showing how a plan fiduciary could show that the fiduciary had taken a prudent approach to making a variable annuity that provides a lifetime stream of retirement income a QDIA, even if that meant locking a participant's assets into the annuity contract.

The example involved an annuity with assets that would grow until the participant reached age 65, start generating a lifestream of monthly income payments, and provide a 90-day period when the participant could take the assets in the annuity out without facing significant penalties. After the 90-day withdrawal period window ended, a participant who took a big lump sum out would have to pay a penalty and see the value of the annuity adjusted to reflect the interest rates and investment market conditions prevailing at the time of the withdrawal.

"Plan fiduciaries must appropriately consider the potential participant-level events that may trigger a plan' need for immediate liquidity, and must determine that the designated investment alternative, at the time of selection, will have sufficient liquidity to meet the anticipated liquidity needs of the plan," according to the text of the draft regulations.

"When assessing the liquidity needs of the plan, the plan fiduciary in this example must balance the restrictions on liquidity under the annuity contract with the value of the guaranteed monthly payments under the annuity contract, recognizing that such guarantees help plan participants manage investment and longevity risk," officials said. "The fact that a designated investment alternative is fully allocated to an illiquid product, like an annuity, does not foreclose its selection, including, for example, where the fiduciary determines within its discretion that the lack of liquidity is justified by a commensurate expected increase in return on investment, certainty with respect to future payments, or both."

The draft is set to appear in the Federal Register Tuesday.

Comments will be due in 60 days.

What it means: Life insurers that want to write group annuities could end up getting access to a new 401(k) plan QDIA market.

For retail advisors and agents, implementation of the variable annuity QDIA provision could mean that more retirement savers could come to them with streams of private protected retirement income already in place.

The sift could mean that some retirement savers who would have an easy time rolling 401(k) plan assets into something new today may have little or no ability to roll their assets into a new arrangement and may less ability to come up with the lump sums of cash they might need to cope with home repair bills or other emergencies.

Reactions: David Chavern, the president of the American Council of Life Insurers, welcomed inclusion of the lifetime income provisions in the draft regulations and said annuities act much like a traditional pension.

"More than 4 million Americans reach retirement age next year, and they need tools that can provide steady income they can't outlive," Chavern said.

The Insured Retirement Institute said it's "encouraged by the inclusion of lifetime income strategies" in the draft regulations.

IRI will discuss the proposal with its members and provide detailed comments later, the group said.

looks forward to working with DOL and providing the Department with detailed comments.

Andy Banducci, a senior vice president at the ERISA Industry Committee — a group for large employers — welcomed the release of the draft regulations, including the lifetime income strategies provision.

"We are carefully reviewing the details and expect to offer comments to the department," Banducci said.