Insurer Urges IRS to Require Retention of Life Annuity Option

Jeanne M. Livermore of John Hancock Mutual Life Insurance Co., Boston, has criticized the Service's announcement of its intent to develop exceptions to the defined contribution plan amendment prohibition under section 411(d)(6). Although generally supportive of the Service's effort, Livermore says that the IRS's intention to permit plans with some form of a life annuity option to drop the option in favor of a nonannuity "extended payment option" is flawed.

According to Livermore, only a life annuity option can protect participants from outliving their retirement savings. Therefore, she urges the Service to require plans with life annuity options to retain at least one.

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August 5, 1998

Internal Revenue Service

Dear Sirs:

[1] We are writing in response to your request for comments made in Notice 98-29 on several proposals that the Service is considering to provide Section 411(d)(6) relief for defined contribution plans and whether any such relief is appropriate for defined benefit plans.

[2] The John Hancock Mutual Life Insurance Company, in addition to being itself a plan sponsor of both defined benefit and defined contribution plans, is also a long time provider of a full range of investment, actuarial and administrative services to both defined benefit and defined contribution plan customers.

[3] We commend the Service for its interest in making the operations of both types of plans more simple and for the thought and actions represented by Notice 98-29. The John Hancock too is in favor of simplifying plan administration and the lowering of plan costs. And it is in favor of the Service's proposals put forth in 98-29 that would permit reduction of the number and the complexity of the benefit distribution options that might otherwise be required by current regulations. We concur with the Service generally that options that are both under utilized, overly complex (or too numerous) or that are only available to a small part of the participant population might indeed be able to be eliminated.

[4] However, we are very concerned that the proposals being considered in Notice 98-29 apparently would permit defined contribution plans that currently have some form of a life annuity option to drop such option in favor of some other nonannuity "extended payment" option.

[5] While not disparaging nonannuity extended payment options, only a life annuity option (whether joint and survivor, single life, contingent annuitant, etc., the form really does not matter) can guarantee a participant/beneficiary that they could not outlive their retirement savings. Other nonannuity options retain the balance of the participant's account in the plan until such balance is exhausted; participants may speed up or slow down withdrawals (subject to minimum distribution requirements) and remain at financial risk for better than normal longevity, investment reverses, the devaluing effect of inflation and spendthrift activity.

[6] Annuities on the other hand are untouchable. They are purchased via a withdrawal from the participant's account, and once thus established are typically payable in a fixed amount for one, or two, lifetimes. They may even be purchased with inflation protection. And these allocated annuities are eligible for substantial protection from insurer insolvency under the state guaranty funds of all fifty states and the District of Columbia.

[7] While commercial annuities might generally be available to plan participants who take lump-sum distributions, our experience suggests that these individual annuities generally come with higher commission and longevity costs. Defined contribution plans that explicitly permit life annuity distribution options are better able to ensure access to their participant/beneficiaries to the lower cost "group" annuity marketplace.

[8] You also asked for comments concerning how Section 411(d)(6) relief might be extended to defined benefit plans. The proliferation of little used and complex benefit distribution options are a problem in defined benefit plans too. We suggest that elimination of such options be permitted with the proviso that core defined benefit options such as single life, joint and survivor or contingent annuitant, level benefit (social security adjusted) annuities and a lump-sum (when permitted) always be retained.

[9] Similarly in cases where multiple versions of core or noncore options exist, for example, 55%, 60%, 65%, 67%, 70% (up to 100%) contingent annuitant options should be permitted to be "condensed" to retain the 50%, 67% and 100% options. In addition, any subsidies that might have been included in the eliminated options should be required to be appropriately included in the retained options.

[10] To sum up, the John Hancock strongly urges the Service, that as part of its Section 411(d)(6) relief for defined contribution plans, to always require that at least one life annuity option be retained in those plans that currently provide annuity options. In this day when 401(k) and other defined contribution plans have become so important to the financial well-being of America's workforce, and in many cases are the sole retirement plan for many workers, it is imperative that a vehicle be given to them that they can use to secure their right to enjoy the benefits of their lifelong savings and investment program in peace of mind.

[11] And judicious relief is also appropriate for defined benefit plans.

[12] Thank you for giving us the opportunity to comment and we hope that the Service is able to develop comprehensive Section 411(d)(6) regulation relief soon.

Sincerely,

Jeanne M. Livermore