Defined Contribution Plans Offer Options for Older Participants

Recently there is more information released on older participants with defined contribution plans. The information released refers to qualified plans that will be allowed to provide lifetime income to plan participants by offering funds that would include deferred annuities. The notice from the IRS explained how target date funds (TDFs) could offer deferred annuities without violating the nondiscrimination requirements.

Target date funds are funds offered to participants in a specific age groups designed to change the investment mix as the group ages. TDFs are usually restricted to particular age groups, usually older employees. This allows them to invest in deferred annuities allowing older participants to increase their portfolio quicker. The older participants have the potential to reach greater earning than someone who is younger doing the same thing.

Some TDFs also offer the deferred annuities. These are distributed when the participant reaches their target age. The target age usually come within a few years of the groups’ normal retirement age. As the group age increased, more of the portfolio is invested into deferred annuities. The IRS understands that most deferred annuities are based on the purchaser’s age, and do not expect participants outside that range to hold an interest in the TDF. The largest concern is that they favor highly compensated employees, but a TDF will not violate the nondiscrimination requirements if they:

  • Offer a series of TDFs under a defined contribution plan that serve as an integrated investment program in which the same investment manager manages each TDF and applies the same generally accepted investment theories across the series of investments.
  • Some of the TDFs available to the older participants offer deferred annuities and none of the annuities offer a guaranteed lifetime withdrawal benefit or guaranteed minimum withdrawal benefit.
  • None of the TDFs holds employer securities that are not tradable on an established securities market.
  • Each of the TDFs are treated in the same manner as any of the other TDFs. They all need to offer the same options.
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