New research from the non-profit Employee Benefit Research Institute shows qualified longevity annuity contracts have the potential to significantly increase some 401(k) participants' retirement readiness.
And that potential will only increase as interest rate rise, which would make longevity annuities cheaper for retirement savers, according to analysts at EBRI.
Last year, the U.S. Treasury Department issued guidance allowing 401(k) participants to move up to 25 percent of plan assets, or a maximum of $125,000, into a longevity annuity that begins paying benefits at age 80 or 85.
Under the new rules, assets in QLACs are not subject to required minimum distributions imposed on 401(k) assets at age 70½.
In its new analysis, EBRI models two scenarios under which a QLAC could be utilized in a 401(k) plan.
In the first scenario, a participant converts 15 percent of plan assets over a 10-year period to a longevity annuity, and in the second, a sponsor converts the accumulated value of its matching contributions to a participant into a QLAC at retirement.
Analysts applied the scenarios to EBRIs proprietary Retirement Security Projection Model, thought by many in the industry to be the most comprehensive modeling system for gauging retirement readiness.
Accounting for longevity risk is a core factor in estimating retirement readiness.
