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Lifetime Income and Retirement Security Through the IRA?

Robert Toth

It was telling. In early 2012, the Treasury released its new regulations enabling the qualified longevity annuity contract (QLAC), along with an extraordinarily helpful revenue ruling which provided the technical clarification needed for the simple distribution of these (and other) annuities from defined contribution plans. These are seminal actions in the wonkish world of lifetime income. Taken together, they lay out the basis by which DC plans can provide lifetime income.

Something strange then happened. While assisting a client in using these new regulatory tools to design a program by which they could transform the typical DB plan into a more flexible and useful DC plan with lifetime income, we discovered that retirement plan annuity providers were reluctant to take advantage of these new opportunities. The cupboards were bare, and we had a difficult time finding the retirement plan products which we could use. This was not the case, however, with the IRA “side” of their houses, which dove in quickly. Within a very few months of the issuance of the QLAC rules, there were a dozen or more annuity carriers which had IRA products on the street which took full advantage of the new rules- offering them in a broad range of products.

Since then we have seen a growing innovation movement within the IRA marketplace, driven largely by a new generation of Fintech. Incredible tools are being created by a number of companies which are using Fintech to not only develop fascinating iterations of retirement income, and investment platforms, but also to integrate these with other important lifestyle features which will provide for a secure retirement. Think about planning your lifetime income around advanced models which take into account a wide range of financial, health and life choice elements to identify key decisions which need to be made. These models also have some ability to bring a measure of scale and selection to the individual marketplace, much in the manner that aggregation models and MEPs do in the retirement plan marketplace.

All of this is tied to IRAs, not retirement plans. Add to this the movement by the majority of states to develop universal IRA platforms -which may well also bring scale to the individual marketplace — and one can begin to see an evolving picture of where the future of retirement security may lie.

There is really quite bit of arrogance in the retirement plan marketplace, especially when it comes to dealing with IRAs. Most of us tend to actively ignore them, or not even give them a second thought (except to the extent we may need to perhaps support a “deemed IRA” inside of a plan). The high degree of technical skill needed to maintain plans seems to engender this attitude. But it also has fostered a great deal of resistance to innovation. Even Fintech seems to run into a brick wall when it comes to dealing with retirement plans: think of the graveyard of failed IT projects in which most service providers have interred what seemed at their inception to be great IT plans.

IRAs, for whatever reason, are stealthily changing the retirement future. When you look closely at their structures, they can be designed to be incredibly flexible (though often “off-the-shelf” IRAs are not). There are a number of major “houses” which provide the technical and legal support for “plug and play” investment arrangements (though, admittedly, there are a few Securities and Exchange Commission rules which need to be changed to make them really work well). They provide a personal platform through which retirees can consolidate their assets in a way which can better serve their retirement in ways an employer sponsored DC or DB plan cannot.

Please do not be mistaken in believing that IRAs are the “be all” and “end all” of retirement security: their increased success will continue to generate regulatory  pressure similar to that brought under the DOL’s fiduciary rule; and there are a number of shortcomings in the marketplace which will need to be addressed. They should be viewed in conjunction with employer sponsored plans, and as a possible path by which to successfully pull off “de-cumulation.” DC plans designed as “IRA feeders” may eventually put 401(k) and 403(b) plans on par with DB plans as strong retirement platforms, should the IRA marketplace continue in its innovative ways.

Robert J. Toth, Jr. is principal in the Law Office of Robert J. Toth, Jr., LLC and is a member of the NTSA Communications Committee.

Used by permission. Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.

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