University of California folds annuity into target-date funds

Being first at anything is hardly ever easy.

So it was with the University of California, the first employer that dared to offer participants in its 403(b) retirement plan a qualified longevity annuity contract, or QLAC, by having it embedded in the plan's UC Pathway target-date funds.

The feat was difficult because it had never been done before, but for Marco Merz, one of two joint winners of an Excellence & Innovation Award, the hard work was well worth the effort.

With new employees increasingly choosing to participate in the university's defined contribution plan over its defined benefit plan, the university felt it was important to give its DC participants some form of guaranteed income to protect them from outliving their savings in retirement, said Mr. Merz, managing director and head of defined contribution, UC Investments at the University of California in Oakland, Calif.

By incorporating deferred lifetime income into the target-date funds, DC plan participants are able to purchase a guaranteed income stream at a time when they most need it, he said. The offering officially rolled out in August 2021.

As a result of the effort, participants between the ages of 62 and 69 can now buy a QLAC in an amount ranging from $10,000 to $145,000, with monthly payments starting at age 78.

A 62-year-old single participant looking to buy a QLAC in the amount of $100,000, for example, would receive lifetime monthly payments of $1,254 beginning at age 78, according to an interactive estimator on the university's website. Participants pay for the QLAC with the assets in their target-date fund.

The QLAC is also available in the university's 457(b) and 401(a) plans.

The challenges were many.

The university had to create "virtually everything from scratch," secure buy-in from numerous stakeholders and overcome difficult legal and operational issues, Mr. Merz said.

"We had to build everything from the ground up," he said. "There was nothing we could leverage that already existed for the most part."

The legal structure, in particular, was tricky. The university entered into a group annuity contract with the insurer, MetLife Inc. but the individual participant contracts are held outside of the plan, an arrangement that involved a great deal of coordination with Fidelity Investments, the record keeper for the three plans, Mr. Merz said.

Participant communication was also a huge challenge, said Hyun Swanson, University of California's interim executive director, systemwide human resources, in Oakland, Calif., who also received an Excellence & Innovation Award as a joint winner.

"QLACs are unfamiliar to most of our participants, and so we had to educate people on what a QLAC is," she said, adding that biases around annuities were persistent.

Individuals were reluctant to pay for the QLAC upfront not knowing whether they would live long enough to recoup their money back, she said.

Ms. Swanson assured participants that the QLAC offered a "return of premium" feature that not all annuities have. A return of premium provision gives the employees' beneficiaries the right to receive the remaining premium not paid out prior to the employee's death.

Getting buy-in from the multiple stakeholders – human resources, labor unions, the retirement system advisory board, the retirement savings advisory committee and the board of regents, to name a few – was also challenging but worthwhile given the "superior solution" it wound up with, Mr. Merz said.

Originally, the university wanted to default participants into the QLAC, but after discussions with its stakeholders, decided to have participants "opt-in" of their own volition instead.

Defaulting participants into an unfamiliar structure like a QLAC "was just not palatable," Mr. Merz said.

"We can't have participants that have never heard potentially about a QLAC automatically be defaulted unless they say no," Mr. Merz said.

Judges praised the university for taking on such a technically and logistically complex project and lauded the communications campaign built around it.

"Bravo," said one of the judges. "Indeed, a herculean effort," said another.