Americans are living longer, potentially straining retirees' ability to stay afloat for the duration of their lives. For the second time since July, the U.S. Department of Labor and the IRS gave their blessing to one way that your employees can add more security to retirement plans by using annuities. Here's the latest.

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Phone: 281.880.6525
Be Prepared for a New 401(k) Safe
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2. The authorities on tracking the expectancies of Americans is known as the
Society of Actuaries. The information they collect and process is then used for
pricing insurance contracts and making pension benefit cost projections.
Recently, they have reset the longevity averages for Americans age 65 and
up. For women, it's 88.8 years, an increase from 86.4 just 14 years ago. For
men, the number jumped to 86.6 from the previous life expectancy of 84.6.
That sounds good unless you or your employees weren't expecting to live
quite that long and have based your retirement savings accordingly.
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3. 401(k) Plan Backstop
Annuity contracts issued by insurance companies -- like the traditional
pension plans that have become scarce among private employers -- generally
guarantee an income stream for life. They can therefore provide an
important backstop to a standard "defined contribution" retirement plan, like
a 401(k).
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4. A relatively new annuity category called the longevity annuity is designed to
kick in once the policyholder reaches a certain advanced age, such as 80. That
gives the retiree peace of mind knowing that if his or her retirement funds
are virtually depleted by the specified age, a new stream of monthly checks
will begin.
Before last July, buying a longevity annuity with retirement plan assets and
keeping it in the plan would have run afoul of the required minimum
distribution rules. These rules stipulate that qualified retirement plans must
begin distributing assets when account owners reach age 70-1/2. That
requirement would have defeated the longevity annuity's purpose.
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5. Exempting "QLACs"
IRS regulations* finalized in July exempted the value of "qualifying longevity
annuity contracts," or QLACs, from those required minimum distributions. A
QLAC is:
• Subject to a 25-percent-of-plan asset limit, up to a maximum of
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$125,000, and will be indexed for inflation.
• It must also be designed to begin streaming out payments no later than
age 85, and
• It must be a fixed annuity. That is, payout amounts cannot be variable,
linked to stock market performance, for example.

6. In its latest regulations on this topic (Notice 2014-66), the IRS has said that a
set of deferred annuities can be folded into target date funds held in a
retirement plan. Deferred annuities include those you buy before retirement,
and which begin at retirement, or at any future date. Longevity annuities,
therefore, qualify as a form of deferred annuity.
Target date funds, as a "qualified default investment alternative," have
become the most popular 401(k) investment option for new plan participants
in recent years.
The new IRS /Department of Labor rule will "help ensure that American
workers and their families can attain guaranteed retirement income that
cannot be outlived," states the Insured Retirement Institute, a trade
association representing annuity providers.
Previously, using an annuity in a target date fund was essentially an all-or-nothing
proposition. Now, you and your employees "can use a portion of
[your] savings to purchase guaranteed income for life, while retaining other
savings in other investments," according to the IRS announcement.
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7. Goal: Confident Retirement Spending
The IRS says its goal is not simply to keep people from going broke in
retirement, but to enable retirees to spend more money in retirement
without having to worry about becoming destitute.
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8. The price employees will pay for the annuities they purchase will vary
according to their age, as would be the case if they purchased an annuity
contract independently. Ordinarily allowing some retirement plan
participants to pay more or less than another participant based on age would
be barred as a discriminatory practice. The new rule, however, takes the
common sense approach of overruling that limitation for this purpose.
It also allows target date funds that incorporate a series of deferred annuities
to be limited to older plan participants, who happen to be the hottest
prospects for an annuity-laden fund.
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9. Anti-Discrimination Standards
More specifically, the new rule bypasses anti-discrimination rules if four
requirements are met:
1. The target date fund series is designed to serve as a single integrated
investment program "under which the same investment manager
manages each date fund and applies the same generally accepted
investment theories across the series of target date funds.
2. The annuities within target date funds offered to older employees cannot
feature a guaranteed minimum withdrawal benefit (an arrangement
available to annuity buyers outside retirement plans).
3. The target date fund cannot invest in employer stock.
4. Each target date fund in the series "is treated in the same manner with
respect to rights or features other than the mix of assets." Therefore, for
example, fees and administrative expenses for each target date fund
must be set "in a consistent manner."
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10. When the target date fund reaches its target date, the series of annuity
contracts that have accumulated over the years is converted to an annuity
certificate "representing the participant's interest in the annuity contract
held in the TDF," or target date fund, according to the IRS. The participant's
non-annuity target date fund assets can be invested in other investment
options in the plan.
Of course retiring employees can also roll assets into an IRA and invest in
whatever else they wish.
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