IRS and DOL Issue Favorable Guidance on Lifetime Income Provided Through Target Date Funds in Retirement Plans

by Eversheds Sutherland (US) LLP

On October 23 and 24, the Internal Revenue Service (IRS) and the Department of Labor (DOL) issued coordinated guidance on lifetime income provided through target date funds held by retirement plans. According to an accompanying press release from the Treasury and like the final regulations on longevity contracts issued in July 2014, the guidance is intended to encourage and expand the availability of retirement income options in defined contribution plans. It thus continues the pattern of resolving regulatory uncertainties that can impede the utilization of these options in 401(k) and other plans.

The guidance considers a retirement plan investment option structured as a series of target date funds (TDFs) that may buy, as part of their fixed income allocation, deferred income annuity contracts providing specified amounts of lifetime or periodic income commencing (usually) in the future. Each TDF is available to participants of a specific age or in an age band, in part because the price of the future annuity income actuarially varies with the age of the participants. The investment manager manages each age-restricted TDF to become more conservative as the age of the participant cohort advances, which may increase the allocation to the annuity. The annuities are distributed to the participants at the target date.
IRS Notice 2014-66

In Notice 2014-66, the IRS considered the permissibility of this structure under the IRC section 401(a)(4) nondiscrimination requirement for qualified retirement plans, and specifically the rules that:

  • Benefits, rights and features under the plan must be currently available to a nondiscriminatory classification of employees, and
  • The group of employees to whom benefits, rights and features are effectively available must not substantially favor highly compensated employees.

Age-restricted TDFs at older ages could disproportionately be available to highly compensated employees because older employees often tend to be more highly paid than younger employees. As a tax policy matter, however, the regulations under section 401(a)(4) specifically allow social security supplements and optional forms of benefits that include age restrictions. Noting those tax policy judgments, the IRS exercised its authority under the regulations to publish in the Notice a special rule that a series of age-restricted TDFs would be treated as a single “right or feature” for these purposes, thus avoiding the need for each TDF to qualify separately, if:

  • The series of TDFs is designed to serve as a single, integrated investment program managed by the same manager applying the same generally accepted investment theories, with the result that the only difference among the TDFs is the mix of assets selected for the level of risk appropriate at each age band.
  • Each TDF is treated in the same manner with respect to rights and features – e.g., the manner in which fees and administrative expenses are determined and paid – other than the mix of assets.

Sutherland Comment: These two conditions appear intended to ensure that the TDFs are not otherwise treating older and younger participants in a discriminatory manner. For example, the Notice requires that the fee structure, including any portion paid by the plan sponsor, be determined in a consistent manner among the TDFs. The Notice presumably is not intended to require that the TDF glide path manager, the manager of the equity sleeve and the manager of the fixed income sleeve are all the same entity, but only that each of those separate functions is consistently carried out by a single entity.

  • Some of the TDFs available at older ages include deferred annuities that do not provide guaranteed lifetime withdrawal benefits or guaranteed minimum withdrawal benefits (GLWBs or GMWBs).
  • The TDFs do not hold employer securities as described in Employment Retirement Income Security Act (ERISA) section 407(d)(1) unless they are readily tradable on an established securities exchange.

Sutherland Comment: Other than with respect to GLWBs and GMWBs, about which the Treasury is still considering guidance, and employer securities, presumably to avoid familiar issues when plans hold untraded employer securities, the Notice does not appear prescriptive with respect to the form of the annuities or the TDFs, which would need to comport with applicable ERISA, banking, insurance, securities or other requirements. The tax guidance contemplates that the TDFs may be either a default or a regular investment option under the plan.

DOL Information Letter

In an information letter dated October 23, DOL confirmed that a properly structured TDF that includes a deferred annuity will be a qualified default investment alternative (QDIA) and that a responsible plan fiduciary who prudently appoints the TDF investment manager will generally not be liable for the manager’s selection of an annuity provider.

  • Under the QDIA rules, the plan fiduciary responsible for plan investments is liable as an ERISA fiduciary for the selection of the QDIA but not for the consequences of the participant’s investment in the QDIA by default. So long as the TDF otherwise meets the QDIA requirements – including a more conservative investment allocation among fixed income and equities as the target date approaches, specified notice to participants, unrestricted transferability during the first 90 days and quarterly transferability thereafter subject to fees, if any, that do not difference between investment by default or affirmative direction – DOL confirmed that, pursuant to its regulations, neither the presence of unallocated annuity contracts in the TDFs nor the distribution of the annuities at the target date would cause the TDF to fail to be a QDIA.
  • DOL also confirmed that, under the usual rules for the allocation of ERISA fiduciary responsibility, the responsible plan fiduciary is responsible for selecting and monitoring a section 3(38) investment manager, but that manager is responsible for its investment decisions including the selection of the annuity provider pursuant to DOL’s optional safe harbor for such selections in defined contribution plans or otherwise.

Sutherland Comment: The information letter specifically addresses “unallocated” annuity contracts – i.e., contracts held for the TDF without allocation to individual participants – and the Notice in an example contains a similar reference. Thus, it is clear that allocation in the contracts of specific annuity benefits to specific participants is not necessary to the results in the guidance. We see no reason why properly structured allocated contracts should be treated differently than unallocated contracts for these purposes.

■ ■ ■ ■ ■

Sutherland assisted in requesting this guidance.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Eversheds Sutherland (US) LLP | Attorney Advertising

Written by:

Eversheds Sutherland (US) LLP

Eversheds Sutherland (US) LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.