IRS verdict is in, buyer jury out on QLACs

The QLAC, after years of congressional and public policy advocacy for it, now offers the special tax incentive of excluding the purchase value from RMD calculations. Will workers and younger retirees seriously consider this option? How will it mesh with today's qualified retirement plan environment?

Will QLACs be embraced, or remain a niche investment product that lacks the broad appeal its advocates have hoped for? It's no secret that there is a certain amount of hesitation on the part of plans participants and IRA owners today to annuitizing an IRA or retirement plan balance. In an earlier time when defined benefit pension plans were common, a "promise to pay" was accepted with less hesitation. 

But in today's largely defined contribution world, in which I will include IRAs, there is greater reluctance to give up control of a large sum of money in exchange for a promise to pay.

Failures of insurance companies, the source of annuities, are not an everyday event. But high-profile insurance company failures of the past, and the late financial meltdown that led us into the recent recession, have made many savers reluctant to give up control of their assets. A longevity annuity that does not begin payments until well into the future may take some getting used to for a lot of savers.

Even in cases where this is an alternative that should be considered. In the employer-sponsored retirement plan realm, with the exception of defined benefit pension plans, most participants receive lump sum payouts. The defined contribution plan world has to an increasing degree moved away from annuitized distributions. If a QLAC is purchased under an employer plan, the assets would essentially leave that plan when paid to an annuity provider, but continue to be accounted for as a plan investment in order to enforce the QLAC purchase limits.

It's clear that shifts in both philosophy and logistics may be needed if QLACs are to make inroads in DC plans. For these reasons some feel that QLACs are most likely to gain initial acceptance as IRA investments.

This, in turn, has led to speculation as to whether there could be some "asset flight" from employer plans when a plan participant eligible for a distribution wants to purchase a QLAC when it is most affordable.

For many this will be while they are still in the workforce. With QLACs, more so than many retirement issues today, the operative expression is "more to come.