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May 3, 2010 

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

U.S. Department of Labor 

Submitted via email to e-ORI@dol.gov 

Attention: Lifetime Income RFI 

The American Academy of Actuaries’1

 Pension and Life Practice Councils respectfully request your 

consideration of comments regarding the joint Department of Labor (DOL) and Department of the 

Treasury Request for Information (RFI) Regarding Lifetime Income Options for Participants and 

Beneficiaries in Retirement Plans. We believe that encouraging and supporting methods to address 

longevity risk is important to pursue, and we commend the DOL and Treasury for undertaking this 

project. 

The attachment to this document includes our responses to certain questions posed by the DOL and 

Treasury in the RFI’s Q-and-A section. Please note that we have not responded to all questions in the 

RFI. Rather, we have limited our responses to those where we believe that the actuarial profession 

provides a unique perspective or has particular knowledge related to a specific topic addressed in the 

RFI. 

In addition to our responses to the RFI questions, we have summarized below what we believe are some 

of the most significant issues that relate to addressing longevity risk, grouped into several themes. 

Economic efficiency: 

It is significantly more cost effective for a person to insure longevity risk through risk pooling 

(whether through purchasing an annuity or other lifetime income guarantee or electing a lifetime 

income option in a pension plan) than to bear that risk alone (“self-insuring” it). Longevity risk is a 

true and significant risk. It is far more economically efficient to address longevity risk through the 

methods of risk pooling rather than through individuals saving additional amounts to cover the 

possibility of living beyond life expectancy (which roughly half the population is anticipated to do). 

Annuity income (that is, insured longevity risk) achieves its cost efficiency through both longevity 

pooling and making full use of both principal and investment earnings. In contrast, depending on the 

 

1 The American Academy of Actuaries is a professional association with over 16,000 members, whose 

mission is to assist public policymakers by providing leadership, objective expertise, and actuarial advice 

on risk and financial security issues. The Academy also sets qualification, practice, and professionalism 

standards for actuaries in the United States. 
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method used to “self-insure,” 50 percent to 75 percent more money would need to be set aside than if an 

individual participated in a risk-pooling arrangement, a comparatively inefficient use of scarce 

retirement resources. Of course, many people choose not to provide for longevity risk at all. This can 

also be considered as socially inefficient, since the resources for those who will outlive their assets must 

be provided in some manner from other private or public sources. 

From the standpoint of utility theory, guaranteed lifetime income has high value for participants, 

employers, and society—up to a point. For taking care of basic physical needs and reasonable social 

needs, the value of a guarantee is high. At some point beyond that, the value of guaranteed income drops 

significantly and the value of a bequest to heirs increases correspondingly. An overriding policy 

question is "How much guaranteed income should policy be designed to facilitate/encourage/incent?" To 

the extent that guaranteed income is of high value, the cost efficiency of risk pooling validates the effort 

to try to facilitate such arrangements.

Education and behavior: 

Education about the financial impact of longevity risk is one of the foundations on which progress 

must be built. Consumers first need to understand the many dimensions of longevity risk and then need 

guidance on how to address it. Among these dimensions are the income level required to meet essential 

needs and the impacts of inflation and longevity. Social Security provides only a basic floor of 

retirement income; consumers need to understand their total income needs and any gaps between need 

and available sources of income. The impact of substandard health also must be recognized. As they 

learn to take all of these factors into account, consumers will be in a position to address their individual 

needs using annuities or other products. 

The approach to financial education is also important. Education, together with the provision of 

relevant and accessible information, should be encouraged and facilitated. Standardized communication 

requirements and model disclosures and educational materials would provide uniform information, 

simplify administration, reduce fiduciary risk for plan sponsors, and enhance participant understanding. 

Education should include general education upon enrollment, plus reinforcement at future dates (e.g., 

each plan year). We believe providing personalized quantified communication with each annual benefit 

statement is also important. In designing standardized communications and model documents, input 

from retirement security practitioners is critical to making these tools effective and understandable. We 

offer help in that regard. 

We believe further that financial literacy education should begin in secondary school. Establishing a 

sound lifetime financial literacy curriculum may require multiple agency efforts. 

While education is critically important, it can only go so far, and policy changes also need to be 

formed with the lessons of behavioral finance in mind. Consumer decision-making is determined by 

both rational analysis and human psychology. Behavioral finance strategies must be considered in 

establishing policy in order to achieve greater use of lifetime income options. These strategies may 

include (a) reframing language and presentation and (b) restructuring choices and defaults.
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Forms of lifetime income that could facilitate more widespread use: 

Partial annuitization is an important strategy that should be facilitated. Any policy encouraging 

annuitization should include partial annuitization options. Partial annuitization options more readily 

allow taking into account each individual’s unique situation and retirement income needs. 

Modification of the required minimum distribution (RMD) rules to accommodate additional 

longevity insurance would be helpful. Some annuities purchased by individuals who are near 

retirement guarantee an income that begins many years later, commonly at age 80 or 85. These deferred 

income annuities are sometimes referred to as “longevity insurance.” Although all income annuities 

provide some degree of longevity protection, these deferred income annuities should be distinguished 

from the more common type of deferred annuities that provide cash values at all points in the deferral 

period. Single-premium immediate annuities, which also protect against longevity risk, are exempt from 

RMD requirements while deferred income annuities are not. 

One strategy for providing retirement security would be to meet shorter term needs through savings and 

other exhaustible resources and meet the risk of longer-than-expected lifetimes through deferred 

annuities. For many retirees, this strategy would be an attractive alternative to immediate annuities. 

Modification of the RMD requirements to put deferred income annuities on an equal footing with 

immediate income annuities would broaden options for retirees. 

Refund-type annuity options within plans could lead to significantly higher annuity election rates. 

These could take the form of cash refund annuities or life annuities with a guaranteed “certain” period. 

Although these annuities are slightly more expensive and thus provide somewhat less longevity 

protection, the refund feature addresses the common concern of dying early and “losing” the money paid 

for the annuity. 

In-plan options simplify the process. In-plan options would facilitate annuitization for plan 

participants. These options might include incremental annuitization, a potentially helpful way to 

facilitate annuity offerings within a defined contribution plan. By purchasing annuities over the 

individual’s career, the concept of dollar cost averaging mitigates the interest rate risk of making a 

single purchase at retirement. However, gender neutral requirements with regard to in-plan conversion 

of accounts raise the issue of annuitization rates that could be significantly less attractive for males. 

Requirements and accommodations: 

We support a policy, accompanied by a set of reasonable and practical regulations, requiring that 

some form of guaranteed lifetime income be one of the investment or distribution options offered 

in individual account plans. Tax-qualified programs that are intended to help encourage retirement 

security should offer the most reliable form of retirement security, a guaranteed lifetime income. 

However, it is essential that a set of comprehensive, manageable regulations be in place concurrently 

with the start of any such requirement so that plan sponsors (both large and small) can carry out this 

requirement without exposure to excessive fiduciary risk. Absent workable regulations and fiduciary 

support, employers would be discouraged from sponsoring these plans and as a result participants would 

fail to benefit from their potential. 
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Individual plan sponsors also should be permitted to make an annuity the default option, but at 

present, sponsors should not be required to make this the default option. Many complexities are 

involved in determining the appropriate level of annuitization for individual participants, including their 

Social Security income, other annuity income sources, out-of-plan retirement savings, other assets (e.g., 

real estate, including reverse mortgage arrangements) and participants’ overall health. The complexities 

involved in evaluating each individual’s situation mean that any default requirement would need to be 

considered carefully. 

Accommodations may be needed for small plans. For example, mandatory participant education 

requirements could prove overly burdensome for small plan sponsors, leading them to choose not to 

sponsor retirement plans. A standardized set of minimum educational material could address this. 

Providing a means to make group pricing rates available to small plan sponsors who are unable to obtain 

more favorable rates due to their smaller covered population also would encourage annuitization. 

More details on these and other issues can be found in our responses to the individual questions 

contained in the accompanying document. We again thank you for the opportunity to comment on these 

very important retirement security issues—issues that we think will become even more important as our 

population continues to age. 

We would be happy to discuss any of these items with you at your convenience. Please 

contact Jessica M. Thomas, the Academy’s pension policy analyst (202-785-7868, 

thomas@actuary.org), if you have any questions or would like to discuss these items 

further. 

Sincerely, 

Ethan E. Kra, FSA, MAAA Arthur V. Panighetti, FSA, MAAA 

Vice President – Pension Vice President – Life 

Chairperson, Pension Practice Council Chairperson, Life Practice Council 

John H. Moore, FSA, MAAA Cande Olson, FSA, MAAA 

Chairperson, Pension Committee Chairperson, Life Products Committee 
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Lifetime Income RFI 

ANSWERS TO SPECIFIC QUESTIONS 

General 

1. From the standpoint of plan participants, what are the advantages and disadvantages for participants 

of receiving some or all of their benefits in the form of lifetime payments? 

Our comments on this question are focused specifically on annuity arrangements, not other forms of lifetime 

payments such as guaranteed lifetime withdrawal benefits (GLWB). 

The advantages of annuity arrangements are: 

a) lifetime income security, since the purchaser will never run out of income, 

b) reduction of investment management responsibilities when getting older, 

c) payment structure flexibility that can cover dependent as well as participant needs (e.g., survivorship 

annuities), 

d) avoidance of adopting an overly limited lifestyle from fear of outliving income, and 

e) economic efficiency of risk pooling. 

The disadvantages of annuity arrangements are: 

a) lack of access to ready money, if needed, 

b) inflation indexing and/or increasing payments that require lower starting income and may be 

inflexible, 

c) consumer fears of being on the “losing” side of the insurance function (dying early and “losing” most 

of the principal) , 

d) annuity purchases in a low-interest environment that lock in low returns, and 

e) loss of financial planning flexibility if all benefits are in the form of lifetime payments. 

Additional commentary on the advantages and limitations of participants receiving their benefits in the form 

of lifetime payments is provided below. 

It is much less expensive to pool longevity risk via an annuity than to self-insure. Annuity income offers the 

additional advantage of being able to make full use of principal and investment earnings. Depending on the 

method used to self-insure, 50 percent to 75 percent more money would be needed to guarantee lifetime 

income on one’s own than via a pooled approach. This is because self-insurance of the longevity risk requires 

having enough assets to provide an income to a very advanced age and to have a cushion for poor investment 

results. In contrast, an annuity will be priced roughly to life expectancy. The difference in assets required is 

substantial and has a great impact on the lifestyle that retirees can afford. 

In general, guaranteed lifetime income has high value for participants, employers, and society—up to a point. 

For basic individual needs and reasonable social needs, the value of a guarantee is high. At some point 

beyond that, the value of guaranteed income drops significantly and the value of a bequest to heirs increases 

correspondingly. An overriding policy question is “How much guaranteed income do we want to 

facilitate/encourage/incent?” Once that question is answered, then the specific questions about how to provide 

guaranteed income can be addressed more fully. 
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2. Currently the vast majorities of individuals who have the option of receiving a lump sum distribution 

or ad hoc periodic payments from their retirement plan or IRA choose to do so and do not select a 

lifetime income option. What explains the low usage rate of lifetime income arrangements? Is it the 

result of a market failure or other factors (e.g., cost, complexity of products, adverse selection, poor 

decision-making by consumers, desire for flexibility to respond to unexpected financial needs, 

counterparty risk of seller insolvency, etc.)? Are there steps that the agencies could or should take to 

overcome at least some of the concerns that keep plan participants from requesting or electing lifetime 

income? 

Many participants place value on having their money in hand. The desire for control and flexibility from 

retirement through death overwhelm potential feelings of security that might be generated by purchasing an 

annuity, which won't prove its worth until another 25 years or more. Other factors driving the low usage of 

lifetime income options include: 

a) inadequate education on the value of lifetime income, 

b) as mentioned in Question 1, fear of being on the “losing” side of the insurance function, 

c) attraction to what appear to be substantial windfalls (lump sum amounts) without properly 

considering economic equivalencies, 

d) fear of inflexibility after the annuity is purchased, 

e) low usage by others, which creates word of mouth advice to not annuitize, 

f) belief that Social Security provides sufficient guaranteed income, 

g) discouragement or lack of encouragement from some financial planners—and even from some 

insurance agents—concerning the use of immediate annuities, 

h) availability of other methods of creating income streams, e.g., 4 percent withdrawal programs with 

mutual funds, 

i) low interest rates, resulting in low payments, when the option is exercisable, 

j) perception by some that the interest yields paid by insurance companies are low, 

k) some concern about the risk of insurer solvency, lack of knowledge about the extent of state insurance 

guarantees, and the absence of a federal equivalent of the FDIC, 

l) plan sponsor neutrality or unwillingness to appear to offer advice, 

m) unattractiveness of an annuity if the person is in poor health and a substandard annuity is not available 

or believed not to be available, 

n) complex choices that impede decision making and lead to the seemingly simplest choice, the lump 

sum, and 

o) in defined contribution plans, the unequal value provided to males and females with any in-plan 

gender neutral annuitization, making an annuity option relatively less appealing to males (and in 

defined benefit plans, making the lump sum relatively more appealing to males). 

One initiative in particular that would help address the problem of low usage of lifetime income options 

would be more thorough financial education, delivered in the work environment and other venues. This 

education should emphasize the nature of basic needs, coverage from Social Security, and residual needs. 

Quantitative guidance would be helpful. (We believe further that financial literacy education should even 

begin in secondary school. A sound lifetime financial literacy curriculum may require a multiple agency 

effort.) 

3. What types of lifetime income are currently available to participants directly from plans (in-plan 

options), such as payments from trust assets held under a defined benefit plan and annuity payments 

from insurance contracts held under a defined contribution or defined benefit plan? 

Lifetime income options are always available to participants in defined benefit plans. But some defined 

benefit plans are hybrid types, such as cash balance and pension equity plans, which present benefit accruals 
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primarily as lump sums and lead to an extremely high prevalence of lump sum elections. Some defined 

contribution plans offer a lifetime income option, but most do not. 

4. To what extent are the lifetime income options referenced in Question 3 provided at retirement or other 

termination of employment as opposed to being offered incrementally during the accumulation phase, 

as contributions are made? How are such incremental or accumulating annuity arrangements 

structured? 

In both defined benefit and defined contribution plans, the benefit election, applicable to all prior accruals or 

accumulations, is generally made at the point of retirement, not incrementally during the working years. 

Incremental elections could have two potentially significant advantages. First, for both defined benefit and 

defined contribution plans, the comparison would be against much smaller lump sums (just one year’s accrual 

or contribution), blunting the allure of large single sum amounts. Second, for defined contribution plans, 

incremental annuity purchases greatly reduce the interest rate risk of making a single annuity purchase at 

retirement—when interest rates might be at a low point and annuities relatively expensive. 

The downside of the incremental approach is (a) locking in a decision about future needs many years in 

advance, and (b) making incremental purchases at interest rates that might end up being less than what would 

have been available at retirement. 

 

6. What types of lifetime income or other arrangements designed to provide a stream of income after 

retirement are available to individuals who have already received distributions from their plans (outof-plan options), such as IRA products, and how are such arrangements being structured (fixed, 

inflation adjusted, or other variable, immediate or deferred, etc.)? Are there annuity products under 

which plan accumulations can be rolled over to an individual retirement annuity of the same issuer to 

retain the annuity purchase rights that were available under the plan? 

Income options available to individuals who have already received distributions from a plan include: 

a) single premium immediate annuities, 

b) deferred annuities that can be annuitized at a later date at the then-prevailing rates, 

c) deferred-start income annuities that determine the payout amounts at the time of purchase but for 

which the income does not begin for many years, (e.g., 20 years), 

d) mutual-fund-structured withdrawal programs (e.g., 4 percent annually-inflated withdrawals), which 

are guidelines that are intended to have a high probability of providing withdrawal amounts for the 

entirety of life if the withdrawal amount is sufficiently conservative. However, they do not guarantee 

that the funds will be sufficient (and the amount withdrawn each year will be significantly less than 

the amount that could be provided through an income annuity—see answer to Question 7). 

e) guaranteed lifetime withdrawal benefits (GLWB). A GLWB guarantees that a specified amount may 

be withdrawn each year, even if the account value has fallen to zero (although this specified amount 

will be significantly smaller than that available through an income annuity—see answer to Question 

7), and 

f) IRS required minimum distributions determined under the annual recalculation option, which 

technically would last a lifetime, but doesn’t guarantee level or increasing income. 

There are annuity products that include inflation protection, either in the form of a fixed annual increase or 

true inflation, but possibly with an annual cap. Their popularity is limited by the fact that the initial income 

amount is reduced (as discussed in the Question 7) in return for the increasing benefit. 

7. What product features have a significant impact on the cost of providing lifetime income or other 

arrangements designed to provide a stream of income after retirement, such as features that provide 
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participants with the option of lifetime payments, while retaining the flexibility to accelerate 

distributions if needed? 

Various features can affect the cost of a guaranteed income stream. 

a) An inflation adjusted annuity has a higher cost for the same initial income (or provides less initial 

income for the same premium). The cost differential will vary with market expectations regarding 

inflation (which can be gauged by looking at the difference in yield rates between regular Treasury 

securities and inflation-adjusted Treasury securities, or TIPS). If markets expected future inflation to 

average about 3 percent annually, as has been the case during some recent market conditions, then 

inflation protection would result in about a 20 percent to 30 percent reduction in initial income to a 

65-year-old male on a pure actuarial basis. 

b) An installment or cash refund feature guarantees that the total of all payouts will be no less than the 

premium. The cost varies by age, but it could reduce payouts by approximately 10 percent for singlelife immediate income annuities and as little as 4 percent for 100 percent joint-and-survivor annuities. 

c) Guaranteed lifetime withdrawal benefit provisions in annuities provide guaranteed continuation of 

income after the account value has been depleted. This can sometimes reduce guaranteed income by 

as much as one-third when compared to an income annuity. This lower guaranteed income is due to 

(i) the cost of preserving access to account values (in contrast to the structured consumption of 

principal in an income annuity), (ii) the only partial pooling of longevity risk compared to the pooling 

that occurs in an income annuity, and (iii) providing a floor of protection in the form of an income 

stream when the account value is depleted by withdrawals and low returns. 

d) A mutual-fund-structured withdrawal program is not guaranteed, but it could provide an income for 

life depending on how the market performs, how much is withdrawn to cover income needs, and how 

long the retiree lives. The typical suggested withdrawal of 4 percent, annually-inflated, is only half of 

what might be available under an annuity (although it could be as much as three-quarters of initial 

income compared to a more expensive inflation-protected annuity) because the program is designed 

to primarily draw upon earnings rather than including a structured consumption of principal. This is 

the cost of retaining access to principal. Retaining this access to principal exposes the consumer to 

early significant drops in the market and a variable income throughout the retirement years. 

e) Deferred-start income annuities (DSIA) are one way to insure against living too long (e.g., by 

purchasing at age 65 a guaranteed income that will begin at age 85). In its purest form, this product 

provides no benefits other than the deferred income (i.e., if the annuitant dies before the income 

begins there are no benefits). The cost of a lifetime income that is purchased at age 65 and begins at 

age 85 is approximately 10 percent to 15 percent of the cost for an annuity with the same income 

amount beginning immediately. This purest form of “longevity insurance” is functionally the same as 

the life-contingent portion of a certain-and-life annuity. (This could be an ideal complement to a 

withdrawal-based income prior to the commencement of annuity income.) If a purchaser wishes to 

have a death benefit or some other withdrawal rights before the annuity income begins, these benefits 

make the DSIA more expensive because sharing of mortality gains is reduced or eliminated. 

f) In any situation where annuitization is by choice (as opposed to being the only option for all, as in 

many defined benefit plans), adverse selection will increase costs as the healthier people select 

annuities at a higher rate. We estimate that costs could increase on the order of 10 percent when 

annuitization is by choice rather than mandatory. This is a consideration for any policy approach to 

achieving a higher prevalence of guaranteed lifetime income and to holding down costs. 

 

8. What are the advantages and disadvantages for participants of selecting lifetime income payments 

through a plan (in-plan option) as opposed to outside a plan (e.g., after a distribution or rollover)? 

The advantages to participants of in-plan annuitization are: 
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a) ease of implementation by the participant, 

b) possible availability of periodic purchases rather than at a single point in time, which can mitigate the 

risk of making all purchases at a time of low interest rates, 

c) more favorable (low expense) rates may be negotiated by a defined contribution plan (or provided 

through a defined benefit plan), 

d) potential for lower rates by avoiding the costs of adverse selection, and 

e) higher level of due diligence resulting from plan sponsors’ fiduciary responsibilities, as well as the 

plan sponsor’s superior ability to evaluate the financial stability of potential annuity providers and to 

restrict available providers to those best able to meet their lifetime commitment to the participants. 

The disadvantages to participants of in-plan annuitization are: 

a) required use of gender neutral rates that are relatively unfavorable for males, such that the incongruity 

of having such rates within plans and sex-distinct rates outside of plans could lead to females 

primarily electing in-plan annuities at actuarially favorable rates and males electing out-of-plan 

annuities at actuarially fair rates or electing annuities less frequently, 

b) lack of flexibility and/or alternatives, 

c) possible unavailability of attractive rates for individuals in poor health, 

d) inability to comparison shop, 

e) possible limitations on how much or little one can annuitize, and 

f) tax laws that favor lump sums by immediately taxing annuity benefits but allowing for deferral of 

taxes on lump sums that are rolled over to an IRA until the participant begins withdrawals, thus 

allowing the participant to maintain some measure of control over the timing of taxation when a lump 

sum is elected. 

9. What are the advantages and disadvantages from the standpoint of the plan sponsor of providing an inplan option for lifetime income as opposed to leaving to participants the task of securing a lifetime 

income vehicle after receiving a plan distribution? 

In general, an in-plan annuity option could be an efficient vehicle to provide stable retirement income that 

mitigates investment and longevity risk inherent in a retirement plan. However, if the in-plan option does not 

allow the purchase of insurance company annuities, the plan sponsor will have created a defined benefit plan 

subject to the funding, plan provision, Pension Benefit Guaranty Corporation (PBGC) premium and 

participant disclosure, and notification requirements of ERISA, as well as financial accounting and disclosure 

requirements for defined benefit plans. Most plan sponsors likely would not willingly convert a defined 

contribution plan to a plan subject to the more onerous current defined benefit plan requirements. Over the 

past several years, plan sponsors have migrated to defined contribution plans with the primary objective of 

eliminating these requirements and the volatility related to the investment and mortality risk associated with 

defined benefit plans. 

An alternative approach is a defined contribution plan design where the defined contribution plan 

“underwrites” the annuity and measures mortality gains/losses annually, adjusting all annuitants’ benefits 

accordingly, similar to the way a variable annuity would adjust for investment results on a plan's portfolio. 

The following advantages and disadvantages address the in-plan annuitization approach to providing lifetime 

income from the point of view of the plan sponsor. 

The advantages of the in-plan annuitization approach are: 

a) the ability to negotiate better annuity purchase rates on a volume basis and, thus, to provide more 

retirement income for each dollar of account balance than the participants could obtain individually, 
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b) a retiree’s ability to eliminate, through an annuity purchase option, the longevity and investment risk 

that could otherwise jeopardize the ability of the plan to provide lifetime retirement income. Such an 

annuity offering, if communicated effectively, would increase appreciation by participants of the plan, 

its offerings, and the sponsor’s efforts, 

c) the opportunity to educate participants about the role of inflation in eroding retirement financial 

security over time as well as the longevity risks inherent in lump sum payments, and the opportunity 

to address that by providing annuity products including variable or inflation adjusted annuities. 

Providing these services can help build good relations with employees, and 

d) the ability to insure the longevity risks of the plan participants without tying up capital in insurance 

company risk margins or profits—and at potentially lower administrative costs. 

The disadvantages of the in-plan annuitization approach are: 

a) the fiduciary risk of selecting and continuing to offer specific annuity providers, particularly if an 

annuity provider becomes unable to meet its commitments, even temporarily. (The plan sponsor could 

reduce this risk somewhat by using several different annuity providers, albeit at an increase in cost.), 

b) the fiduciary risk of deciding what types of annuities to offer, particularly whether to offer potential 

inflation protection through variable annuities or cost-of-living options, and, if so, the appropriate 

underlying fund options, 

c) the potential participant agitation and/or discontent if another annuity provider not offered in-plan 

would provide a larger annuity payment, regardless of its financial stability, 

d) the future political, administrative and compliance risk for an ever-expanding list of requirements, 

notifications, filings, disclosures and tests, as well as additional recordkeeping costs and the potential 

need to continue administering benefits for the participant even after he or she leaves for another 

employer, 

e) the expectation by retirees of continued help and support by the sponsor, particularly with addressing 

difficulties with payment delays by the annuity provider, and 

f) the plan sponsor’s need to manage the investment risks of the underlying assets if the plan is insuring 

the longevity risks. 

10. How commonly do plan sponsors offer participants the explicit choice of using a portion of their 

account balances to purchase a lifetime annuity, while leaving the rest in the plan or taking it as a lump 

sum distribution or a series of ad hoc distributions? Why do some plan sponsors make this partial 

annuity option available while others do not? Would expanded offering of such partial annuity 

options—or particular ways of presenting or framing such choices to participants—be desirable and 

would this likely make a difference in whether participants select a lifetime annuity option? 

Partial lump sum options are rare in single-employer defined benefit plans and defined contribution plans. 

Generally, the lump sum option in a defined benefit plan (if offered) is all or nothing. Some multiemployer 

defined benefit plans offer partial lump sums, such as 10 percent or 30 percent, and these are somewhat 

popular, as they allow the participant to use immediate funds to transition from a working lifestyle to 

retirement, such as by paying off a mortgage or relocating. Partial lump sum options are most prevalent 

within the public sector. Plans sponsored by governmental entities frequently offer all, or a limited group of 

long-term employees, some version of a partial lump sum. These are often programs originally designed to 

encourage long-time service workers to remain in place and are commonly referred to as DROPs (deferred, or 

delayed, retirement option programs), in which continued service beyond a specified retirement age allows 

the participant to build up an account that will be paid as a lump sum at actual retirement. Partial lump sums 

are also quite common in plans that require employee contributions. The accumulated employee contributions 

often are the source of the lump sum, with the residual employer-funded portion of the benefit paid as an 

annuity. 

 
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We believe that expanding the options available in plans that currently offer lump sums would be desirable. 

This would permit the participant to elect to preserve some element of “longevity insurance,” especially if 

designed such that the more distant portions of the annuity stream are protected (e.g., beyond age 80, or the 

participant's “life expectancy”), with the near term portion converted to the lump sum. 

 

Branding the partial lump sum as a “longevity” or “safety net” approach should help with the popularity of 

such options, especially if employer communications are designed to explain the potential benefits available 

(as compared to the naive assumption that retirement planning only needs to consider the average life 

expectancy) and the relatively low cost of the annuity (e.g., the lump sum might only be reduced by 10 

percent to 15 percent to provide the deeply deferred annuity). 

11. Various “behavioral” strategies for encouraging greater use of lifetime income have been implemented 

or suggested based on evidence or assumptions concerning common participant behavior patterns and 

motivations. These strategies have included the use of default or automatic arrangements (similar to 

automatic enrollment in 401(k) plans) and a focus on other ways in which choices are structured or 

presented to participants, including efforts to mitigate “all or nothing” choices by offering lifetime 

income on a partial, gradual, or trial basis and exploring different ways to explain its advantages and 

disadvantages. To what extent are these or other behavioral strategies being used or viewed as 

promising means of encouraging more lifetime income? Can or should the 401(k) rules, other plan 

qualification rules, or ERISA rules be modified, or their application clarified, to facilitate the use of 

behavioral strategies in this context? 

In our view, “behavioral” strategies for achieving greater use of lifetime income arrangements should be 

facilitated and encouraged, as one element of an overall plan for achieving this objective. Greater financial 

education, while critically important and necessary, is still not sufficient, and can only take us so far, since 

decision making is a product of both rational analysis and human psychology. Behavioral strategies involve 

reframing language and presentation, or restructuring choices and defaults, and could include some or all of 

the following: 

a) Reframing language and presentation: 

i. Use clear and relevant terminology. “Guaranteed lifetime income” is likely a more effective term 

than “Annuity.” Better still is “Guaranteed income for as long as you live,” and “One-time lump 

sum payment” instead of just “Lump sum.” 

ii. Require presentation of accrued benefits in the form of guaranteed lifetime income, and give such 

presentation primacy over any presentation of lump sum amounts. Individuals respond to 

perceived “signals” in making decisions (an example is the “normal retirement age” in a pension 

plan), and presenting guaranteed lifetime income as the first option shown could be such a signal. 

iii. Require disclosure of certain financial risks associated with retirement. This would include 

longevity risk (the risk of outliving your assets), the likelihood of living to certain advanced ages, 

and the benefits of guaranteed lifetime income in addressing longevity risk. The DOL could 

provide a model disclosure. Retirees’ desire to not “burden their children” could be worked in as 

well, in counterpoint to the desire to leave a bequest. 

iv. Where a plan includes an annuity option that would be covered by a private insurance company, 

disclose information about the degree of state guarantee in the event of the insolvency of such 

insurer. (A more ambitious change, put forward by some and which would require legislation, 

would be the establishment of a national uniform guarantee of annuity benefits up to certain 

amounts, which could give annuities the same stamp of assurance that FDIC insurance gives to 

bank accounts.) 

b) Restructuring choices and defaults: 
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i. Require that some form of lifetime income option be offered. 

ii. Allow for or facilitate the use of different forms of lifetime income, such as: 

1. Partial annuitization 

2. Deeply deferred annuitization 

3. Incremental deferred annuity purchases during the accumulation period. This can be 

particularly valuable to avoid the significant interest rate risk of a one-time purchase at 

retirement. 

4. “Test-drive” or “trial” annuities, structured as a temporary initial default into an annuity for 

one or two years, followed by a final election. The idea is to get retirees accustomed and 

attracted to the idea of getting a monthly check rather than managing a lump sum (though 

such a feature increases the cost of the annuity because of greater opportunity for antiselection). 

5. Cash-refund or other annuities that provide a full or partial return of principal. Though such a 

feature necessarily increases the cost of the annuity and thereby decreases the longevity 

insurance component, it can boost annuity election rates by helping to overcome concern 

about dying early and “losing” most of the money. 

iii. To go a step further, make some form of annuity option the default form of distribution. 

However, the use of default annuitization should be approached carefully. 

1. Whereas current defaults in other areas, such as participation election or default allocation 

during accumulation, provide a somewhat universally good outcome, provide some floor of 

protection, and are somewhat reversible, default annuitization is not as simple. Each 

participant’s situation is different in terms of future base income needs, expected Social 

Security income, and other sources of predictable income, e.g., rent payments, other available 

assets, and health status. 

2. Some participants will have account balances too small to provide for retirement regardless of 

whether it is taken as a lump sum (that may last just a few years) or as an annuity (guaranteed 

for life but in an amount insufficient to cover current expenses); it is not clear what is the 

right answer in such situations, which might depend in part on the structure of the overall 

social safety net. (If a default annuitization structure were to be pursued, one approach could 

be to make the default a lump sum for amounts below a certain level, such as the $5,000 level 

used in defined benefit plans, and make the annuity the default only for account balances 

above that level.) 

3. For all these reasons, immediate default annuitization of the entire account balance at 

retirement could be a poor fit for some participants. Any such default might best be designed 

initially as only a partial annuitization, perhaps also incorporating the concept of incremental 

annuity purchases and a deeply deferred element. 

iv. Standardize products to some degree to potentially help individuals make better choices, even at 

the cost of limiting some flexibility. Consumers can suffer from decision paralysis when there are 

too many choices or when it is difficult to compare products. Standardization of products and 

such mechanisms as regulated exchanges could also have the potential to make markets more 

transparent and efficient, potentially reducing prices, and price disparities, for consumers. On the 

other hand, if standardization is done in the wrong way, the results could be counterproductive. 

Standardization requires additional government involvement, and any such effort would have to 

be approached carefully. 

 

12. How should participants determine what portion (if any) of their account balance to annuitize? Should 

that portion be based on basic or necessary expenses in retirement? 

Annuitization should fill the gap between basic income needs and predictable income sources. The first level 

of needs is basic living needs such as housing, food, clothing, transportation, healthcare, and other such 
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predictable needs. The next level is discretionary spending, including the decision of whether to fund any or 

all of this with guaranteed income or to rely on withdrawals from savings. Predictable income sources include 

Social Security and any defined benefit income from another plan. Another consideration is whether 

annuitization is needed or if some or all of the needed income, at least in the initial years of retirement, could 

reasonably be generated by structured withdrawals from these or other funds. Regardless, the participant 

should consider longevity risk and the fact that it is significantly cheaper to provide for lifetime basic needs 

and desired discretionary spending by pooling longevity risk through annuitization; significant educational 

efforts are needed in this area. (Special considerations apply to low-income/low-wealth individuals—see our 

answer to Question 11.) 

Another perspective is that not too much should be tied up in annuitization if it conflicts with other objectives, 

such as having adequate liquid emergency funds and leaving desired amounts to heirs. Having liquidity for 

emergencies is important, but emphasis on liquid emergency funds in lieu of lifetime income can also be 

overstated. First, one can sometimes structure payment of emergency expenses over a period of time. Also, 

drawdown of emergency funds can just leave one short of retirement income thereafter. Because of the desire 

to leave amounts to heirs, retirement income needs and bequest motives can easily become conflated in 

thinking about retirement planning, potentially leading to inefficient decisions about the retirement income 

component. One helpful approach is to separate bequest motives from retirement security planning and 

consider the degree to which resources are available for each. 

All considerations of annuitization should include the health status of the annuitant. If an appropriate 

substandard annuity is not available for an annuitant in poor health, annuitization may not be appropriate for 

such individuals, except perhaps if the annuity includes a long “period certain.” 

 

13. Should some form of lifetime income distribution option be required for defined contribution plans (in 

addition to money purchase pension plans)? If so, should that option be the default distribution option, 

and should it apply to the entire account balance? To what extent would such a requirement encourage 

or discourage plan sponsorship? 

Some form of annuity option should definitely be available. (See also our answer to Question 11.) It is 

unlikely that it should be the default distribution option, however, unless substantial efforts were undertaken 

to educate plan participants about the nature of life income options. Each person’s situation is different and it 

is unlikely that a singular default option would fit all participants. For the same reason, any annuitization 

default should not apply to the entire account value. Also, if the lifetime income distribution is in-plan, then 

the unfavorable impact of gender neutral rates on males would have to be considered. 

We recommend that a lifetime annuity option be required to be offered from a defined contribution plan. 

Doing so would provide the option for a form of “longevity insurance,” which is a key feature of retirement 

income security. However, we support this only if the requirement is accompanied by a clear set of 

regulations that will allow for their effective implementation without driving plan sponsors out of the system. 

(Plan sponsors must be able to offer these options and educate their employees about them without exposing 

themselves to undue risk. If they cannot do this, then the requirement could cause sponsors to exit the 

system.) Finally, we think it would be reasonable to allow a plan sponsor an exemption from offering an 

annuity option if that sponsor provided a defined benefit plan that met certain benchmarks regarding coverage 

and benefit levels (and perhaps without a lump sum option as well). 

At the outset of such a requirement, we do not believe that the lifetime income should be required to be the 

default distribution in a defined contribution plan. In general, we believe that the default options should be 

selected by the plan sponsor, who has the best knowledge of its employees and can factor in the other benefit 

programs it may provide (such as a defined benefit plan) as well as the administrative implications of any 

default option. In this particular area, where substantial education and understanding of the options is needed 
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initially, it is likely premature to require a default annuity option. Over time, a required default annuitization 

option might be considered if the level of education and comfort increases. 

Each person’s situation is different and it is unlikely that a singular annuity option would fit all participants. 

For the same reason, any annuitization requirement should probably not apply to the entire account value and 

could be selected from among the following alternatives: 

a) an annuity derived from a set portion (e.g., 50 percent) of the account value with the remainder payable as 

a lump sum, 

b) a high annuitization rate (e.g., 100 percent or 80 percent) applied to a portion of the account value until a 

basic needs threshold of annuity income is reached, with a lower annuitization rate (e.g., 0 percent or 20 

percent) applied to the rest of the account balance, without creating a deemed violation of 

nondiscrimination regulations, 

c) a deferred annuity (selected at retirement) scheduled to start at an advanced age, such as 75, 80, or 85; the 

account value would be reduced by the actuarial value of that income stream. (The annuity payment 

amount could be set by calculating immediate annuitization of the full account, but this option would only 

reduce the account by the value of the annuity payments beyond the specified age), or 

d) a deferred annuity that begins at a fixed future point (e.g., 10-15 years after the retirement date), with the 

remainder of the account value available as an immediate lump sum. 

If there is a default requirement, multiple varieties could be offered as a safe harbor, with the decision on the 

type of default left for the plan sponsor to decide (and to change periodically for new retirees, as 

circumstances warrant). 

Depending on the success of the default approach, and the political desire or need for a more structured means 

of enhancing retirement security in the future, these concepts could conceivably be extended to constitute 

mandated minimum lifetime income requirements. 

Finally, we do not see an obvious impact on the plan sponsor's decision to maintain a plan, so long as there is 

flexibility on both the types of annuity offered or mandated as a default, and plan sponsors have the ability to 

source the annuity. The sourcing can be (i) within the qualified defined contribution plan (requiring a pricing 

mechanism and actuarial management of that segment), (ii) within an existing companion defined benefit 

plan, or (iii) with an insurer (with some regulation to ensure a “safe annuity”). 

Note that if the lifetime income distribution is offered within the qualified plan, then the relatively 

unfavorable impact of unisex rates on males (with the corresponding subsidization of rates for females) would 

have to be considered. The reason for being concerned about gender neutral rates is that they could 

disproportionately lead males to fail to annuitize, jeopardizing their retirement security as well as that of their 

spouses. 

 

14. What are the impediments to plan sponsors' including lifetime income options in their plans, e.g., 

401(k) or other qualification rules, other federal or state laws, cost, potential liability, concern about 

counterparty risk, complexity of products, lack of participant demand? 

Concerns about potential liability, counterparty risk, complexity of products, and lack of participant demand 

are all impediments to plan sponsors including lifetime income options in their plans. So too are increased 

recordkeeping and other administrative costs and the potential need to continue administering benefits for the 

participant even after he or she leaves for another employer 
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There is a wide range of options currently available and the products can have features that are difficult for 

lay people to understand. For many participants, the right choice of features can be important. However, 

making everything available to the participant inside the plan could be administratively expensive. 

Many investment platforms may offer one type of proprietary annuity. However, they do not tend to offer a 

variety of annuities from different vendors and with different features. Adding options outside the investment 

platform can significantly increase the administrative burden for employers. 

Selecting the best set of options, as well as the best provider, leaves the plan fiduciaries with significant 

liability for that choice. 

15. What are the advantages and disadvantages of approaches that combine annuities with other products 

(reverse mortgages, long term care insurance), and how prevalent are these combined products in the 

marketplace? 

The advantage of combining annuities with reverse mortgages is that it creates a vehicle to withdraw value 

from what is the primary retirement asset for many households while addressing a significant guaranteed 

income need. If structured appropriately, it can be an efficient method to address needs while avoiding 

duplication of sales expenses. Because it is the combination of two dissimilar products, each of which has its 

complexities, assurance of strong education and counseling is imperative, as well as adequate coordinated 

regulatory oversight to the extent that elements of these combined products fall under multiple jurisdictions. 

There are no inherent disadvantages if the two components are priced reasonably and reflect reasonably low 

sales costs. 

The advantage of annuity/long-term care (LTC) combinations is that they provide a way to partially pay for 

part of the LTC benefit by drawing down value in the deferred annuity. This reduces the cost of subsequent 

LTC benefits, because they have a long waiting period within the combination plan. In the absence of the 

annuity/LTC combination, either special assets would have to be set aside for LTC emergencies or separate 

LTC insurance would have to be purchased. The combination annuity/LTC creates a middle ground in which 

benefits are prefunded at an efficient cost. The disadvantage is that if other retirement income sources prove 

inadequate for other needs, then it may be necessary to withdraw funds from the annuity and, thus, water 

down the LTC benefits. 

 

16. Are there differences across demographic groups (for example men vs. women) that should be 

considered and reflected in any retirement security program? Can adjustments for any differences be 

made within existing statutory authority? 

The most significant demographic difference is the longer expected lifetime of females vs. males (as a result, 

the actuarial value of an immediate annuity for a 65-year-old female is roughly 7 percent greater than the 

corresponding value for a 65-year-old male). The requirement of unisex annuitization within qualified plans is 

an impediment to annuitization by males under in-plan options. The current solution for males lies in taking 

lump sum distributions and then annuitizing outside the plan on a sex-distinct basis. Broader use of this 

solution could increase the cost of unisex annuitization within plans. 

Another demographic issue is how differences in health status affect the price of income and its availability. 

Standard annuities are poor investments for annuitants in poor health. Substandard annuities are offered by a 

few insurance companies. Although some allowance is made for significantly impaired substandard annuities 

in statutory reserving, it may not be adequate to encourage the offering of a full range of substandard 

annuities. 
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A third demographic issue is found in the socioeconomic composition of a group. A group of white-collar 

employees will have longer life expectancies than blue-collar groups, and the cost of in-plan annuities may or 

may not vary accordingly. As above, the limited market in “substandard” annuities means that lump sum 

distributions provide only limited opportunities for the latter group to take advantage of what could be better 

annuity pricing for them. 

Participant Education 

The Department of Labor issued Interpretive Bulletin 96-1 (29 CFR 2509.96-1) to clarify that the provision of 

investment education, as described in the Bulletin, will not be considered the provision of “investment advice,” 

which would give rise to fiduciary status and potential liability under ERISA for plan participants' and 

beneficiaries' investment decisions. 

 

17. What information (e.g., fees, risks, etc.) do plan participants need to make informed decisions 

regarding whether to select lifetime income or other arrangements designed to provide a stream of 

income after retirement? When and how (i.e., in what form) should it be provided? What information 

currently is provided to participants, who typically provides it, and when and how is it provided to 

them? 

In order to make an informed decision, a participant needs to understand: 

a) the need for and value of longevity protection, 

b) various approaches to address the issue, including both annuities and self-managed programs such as 

systematic mutual fund withdrawal programs, 

c) death benefits and income guarantees for surviving family members after the death of the participant, 

d) the costs and available income amounts of the various approaches, 

e) the limitations within the approaches, e.g., the varying levels of illiquidity in different annuity 

products and the uncertainty of the sufficiency of a systematic withdrawal program, 

f) the risks of the various approaches, e.g., purchasing an annuity when interest rates are low, tradeoffs 

between income amount and guarantees of minimum returns, the impact of a market fall in the early 

part of a mutual fund withdrawal program, the impact of inflation if the income stream does not 

protect against it, 

g) the basics of annuity products, especially in rollover situations, and 

h) the risk of the temptation to spend down segments of a lump sum or to take undue investment risk 

with it, including education about the differences between “expected” returns and the possible range 

of returns. 

 

Information should be provided on at least an annual basis throughout employment, perhaps with greater 

depth and intensity during the ten-year period prior to the normal retirement date. A combination of 

educational booklets and annual benefit statement communications should be the medium for all employees. 

Additionally, preretirement seminars should be offered for employees approaching retirement within the next 

10 years. This information should also be available to the participant on request during the participant’s 

working years in order to begin the process of planning for future events. 

Currently, plan sponsors commonly provide generic articles on retirement preparedness issues, but there is 

little individualized information beyond a statement of current benefits provided by the retirement plan. Some 

employers provide preretirement seminars 10 years before retirement age; however, these may focus more on 

important broad retirement issues rather than an individualized discussion of financial issues and options. 

Especially in situations where an individual is making decisions outside of a sponsored plan, such as with a 

401(k) rollover, individuals would benefit from some understanding of what is a fair price for an annuity, how 
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to shop for one, and the degree of state or other government guarantee. Greater educational efforts and 

standardization of certain products would help in this regard. 

Education is critically important, but education alone is not enough. Please see our answer to Question 11 for 

more in this regard. 

 

18. Is there a need for guidance, regulatory or otherwise, regarding the extent to which plan assets can be 

used to pay for providing information to help participants make informed decisions regarding whether 

to select lifetime income or other arrangements designed to provide a stream of income after 

retirement, either via an in-plan or out-of plan option? 

The answer may differ between defined benefit plans and defined contribution plans. In a defined benefit 

plan, the assets do not determine benefits; consequently, any cost flows back to the employer without an 

impact on the participant. The question then becomes how much the employer should be expected to spend 

for providing the education. 

In a defined contribution plan, if there are no direct or indirect fees to reimburse the employer for the costs of 

the education, then the situation is the same as for a defined benefit plan. If the employer does receive 

administrative expense reimbursement from the plan, then there might be a need to limit the amount that can 

be drawn from the plan assets. 

 

20. To what extent should plans be encouraged to provide or promote education about the advantages and 

disadvantages of lifetime annuities or similar lifetime income products, and what guidance would be 

helpful to accomplish this? 

Plans should be encouraged to provide education about lifetime income products (how they work, key 

features, pros and cons, etc.) and the options available to them. While customized material about specific 

options within the plan should be encouraged (often prepared by the vendor), the DOL could provide a notice 

(similar to the tax notice currently provided by the IRS on distributions) that would provide generic 

information on the importance of income guarantees extending for life. This should include illustrations of the 

probability of survival to various ages beyond average life expectancy at retirement, using one of a set of 

standard mortality tables. Plan sponsors could also provide information on their company intranet site or 

during company-run HR/union meetings. 

Disclosing the Income Stream That Can Be Provided From an Account Balance 

ERISA section 105 requires defined contribution plans to furnish to each participant an individual benefit 

statement, at least annually, that includes the participant's “accrued benefits,” i.e., the individual's account 

balance. 

 

21. Should an individual benefit statement present the participant's accrued benefits as a lifetime income 

stream of payments in addition to presenting the benefits as an account balance? 

Yes. Translating account balances into income streams should be a dynamic part of the education process that 

is needed. Doing this as part of the individual benefit statement will refresh and reinforce the education 

annually. 

 

22. If the answer to question 21 is yes, how should a lifetime stream of income payments be expressed on 

the benefit statement? For example, should payments be expressed as if they are to begin immediately 

or at specified retirement ages? Should benefit amounts be projected to a future retirement age based 

on the assumption of continued contributions? Should lifetime income payments be expressed in the 
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form of monthly or annual payments? Should lifetime income payments of a married participant be 

expressed as a single-life annuity payable to the participant or a joint and survivor-type annuity, or 

both? 

Whatever is provided should be enough to be informative and educational but not so much as to overload the 

participant with information, nor to overburden the plan sponsor with overly complex administrative 

requirements that could discourage plan sponsorship. Important concepts are currently funded (“accrued”) 

income at two or three target retirement ages (possibly the traditional age 65 or the Social Security eligibility 

age, as well as the value if retirement is delayed to a later age, such as the latest Social Security 

commencement age) and projected funded income if contributions continue at the current rate. If the plan 

includes an option for a partial annuity/lump sum combination, then the illustration should also address that, 

especially if the partial annuity can be deferred to an advanced age (such as 75 or 80). 

The income amounts (either monthly or annual) should include both single (perhaps with some guaranteed 

certain period) and joint-and-survivor annuities, since the status at retirement is unpredictable. 

Disclosures could include both the lifetime income equivalent of current account balances as well as the 

lifetime income equivalent of the current year’s contributions. 

 

23. If the answer to Question 21 is yes, what actuarial or other assumptions (e.g., mortality, interest, etc.) 

would be needed in order to state accrued benefits as a lifetime stream of payments? If benefit 

payments are to commence at some date in the future, what interest rates (e.g., deferred insurance 

annuity rates) and other assumptions should be applied? Should an expense load be reflected? Are 

there any authoritative tools or sources (online or otherwise) that plans should or could use for 

conversion purposes, or would the plan need to hire an actuary? Should caveats be required so that 

participants understand that lifetime income payments are merely estimates for illustrative purposes? 

Should the assumptions underlying the presentation of accrued benefits as a lifetime income stream of 

payments be disclosed to participants? Should the assumptions used to convert accounts into a lifetime 

stream of income payments be dictated by regulation, or should the Department issue assumptions that 

plan sponsors could rely upon as safe harbors? 

It might be simplest and easiest for participants to understand if all plans’ statements were consistent with 

each other. This could include mandated mortality, interest, expense, and annuitization assumptions (either 

fixed by regulation and updated as necessary, or tied to certain market rates). Current plan-specified factors 

should be used if the annuity is to be paid from a companion defined benefit plan. 

Use of such mandated factors would narrow the plan sponsor’s responsibilities and lower its costs. The 

mandated factors could be readdressed periodically. Appropriate caveats should be stated. Assumptions could 

be in footnotes but should be disclosed. 

One complicating factor is that the allocation of assets among different asset classes will vary from participant 

to participant. If the asset accumulation assumption were to vary from participant to participant based on an 

estimated return for each asset class, simplicity and comparability would be lost. Even more importantly, 

participants with more aggressive asset allocations would see amounts that failed to take into account the 

degree of risk assumed. A better approach might be for the accumulation assumption to be the same for all 

participants and to mirror something like a high quality bond rate. 

 

24. Should an individual benefit statement include an income replacement ratio (e.g., the percentage of 

working income an individual would need to maintain his or her pre-retirement standard of living)? If 

so, what methodology should be used to establish such a ratio, such as pre-retirement and post-
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retirement inflation assumptions, and what are the impediments for plans to present the ratio in a 

meaningful way to participants on an individualized basis? 

This issue is part of the broadly needed education of participants. It would appear too heavy a topic to address 

in a benefit statement, particularly since retirement needs are very individualized. An individual replacement 

ratio analysis ideally should include Social Security, defined benefit plan coverage, part-time work, plans 

sponsored by prior employers and non-plan savings sources, as well as any spousal retirement income. This 

comprehensive treatment is obviously not appropriate for an employer benefit statement. 

As an alternative, participants might be given tools—e.g., a structured set of questions, perhaps online—to fill 

in this information themselves. 

401(k) and Other Plan Qualification Rules 

Income Tax Regulations that apply specifically to lifetime annuities include: 26 CFR 1.401(a)-11, 26 CFR 

1.401(a)-20, 26 CFR 1.401(a)(9)-1 through 26 CFR 1.401(a)(9)-9, 26 CFR 1.417(a)(3)-1, and 26 CFR 1.417(e)-1. 

25. How do the 401(k) or other plan qualification rules affect defined contribution plan sponsors' and 

participants' interest in the offering and use of lifetime income? Are there changes to those rules that 

could or should be made to encourage lifetime income without prejudice to other important policy 

objectives? 

The required minimum distribution rules discussed in Question 28 limit the extent to which payments from a 

qualified plan may be deferred and define minimum amounts that must be distributed upon attainment of the 

participant’s required beginning date under IRC Section 401(a)(9) (generally April 1 following the calendar 

year of attainment of age 70 1⁄2). Requiring participants to commence benefits by their early 70s limits a plan’s 

ability to provide adequate longevity insurance (via a lifetime income option) for those living beyond their 

life expectancy. Longevity insurance could be promoted by allowing the benefit payment to begin later than 

otherwise required if it is taken in the form of a life annuity. 

 

An additional approach to increasing the offering and use of lifetime income arrangements would be to 

change the relative tax treatment of lump sum and lifetime income arrangements—by either giving a tax 

break to income taken in the form of guaranteed lifetime income arrangements or applying a tax penalty on 

qualified retirement distributions taken as a lump sum. The rationale for such a change in the tax code would 

be two-fold. First, it would promote greater retirement security. Second, one could argue that lump sums 

impose a social cost relative to lifetime income arrangements, in that electing a lump sum instead of a lifetime 

income arrangement increases the likelihood of later running out of money and requiring government 

assistance (e.g., Medicaid, welfare, SSI). Adjusting tax rates would be a way of offsetting this public subsidy. 

Any such differential tax treatment of lifetime income arrangements and lump sums should be designed with 

the following in mind: 

a) The same tax breaks or penalties would apply to both defined contribution and defined benefit plans, so as 

not to favor one over the other (unless that were the goal of policy). 

b) While a penalty on lump sums could be expected to reduce the rate of lump sum elections (and thereby 

increase the rate of lifetime income elections), those who did elect a lump sum despite the penalty would 

be even more likely to outlive their assets. 

c) The effect on election rates of a tax break on lifetime income elections versus a tax penalty on lump sum 

elections is likely to differ. It would be useful to attempt to anticipate potential outcomes, in part by using 

findings from behavioral finance. 
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28. How do the required minimum distribution rules affect defined contribution plan sponsors' and 

participants' interest in the offering and use of lifetime income? Are there changes to those rules that 

could or should be made to encourage lifetime income without prejudice to other important policy 

objectives? In particular, how are deferred annuities that begin at an advanced age (sometimes 

referred to as longevity insurance) affected by these rules? Are there changes to the rules that could or 

should be considered to encourage such arrangements? 

In an indirect sense, required minimum distribution (RMD) requirements can be thought of as a substitute for 

annuitization insofar as RMDs themselves are a form of lifetime income; however, RMDs are inadequate for 

retirement planning due to the unpredictable and potentially decreasing profile of income that they provide. In 

the case of longevity insurance (as defined in this question to be the subset of income annuities that are 

deferred to an advanced age), the value of a qualified annuity is subject to RMDs between the age of 701⁄2 and 

the commencement of income payments. This complicates and discourages the use of longevity insurance 

with tax qualified funds (except in the context of Roth IRAs) unless there is an alternative source from which 

to draw the RMDs generated by the longevity coverage. 

To encourage the purchase of deferred-start income annuities, an exemption from RMD requirements similar 

to that for immediate annuities could be provided. This would exempt all life-contingent deferred income 

annuities from RMD. If loss of tax revenue were a concern, exemption from the RMD requirement could be 

limited to only the pure annuity portion of the payment option—i.e., excluding any death benefits, surrender 

benefits, or certain payments. 

29. Are employers that sponsor both defined benefit and defined contribution plans allowing participants 

to use their defined contribution plan lump sum payouts to “purchase” lifetime income from the 

defined benefit plan? Could or should any actions be taken to facilitate such arrangements? Should 

plans be encouraged to permit retirees who previously took lump sums to be given the option of rolling 

it back to their former employer's plan in order to receive annuity or other lifetime benefits? 

Currently, few sponsors allow participants in employer-sponsored defined benefit plans to purchase lifetime 

income annuities using a rollover from an IRA or the employer’s defined contribution plan. Many defined 

benefit plan sponsors are grappling with issues related to cash contribution, income statement and balance 

sheet volatility, so they currently may be reluctant to offer this option to their employees with the defined 

benefit plan insuring the longevity and investment risk for this portion of the liability. In addition, these types 

of purchases would increase the size of the plan relative to the size of the plan sponsor, a risk factor for 

employers to consider. However, there are techniques available to plan sponsors to mitigate these risks in a 

defined benefit plan setting that are not available to individual participants insuring against those same risks. 

For example, a qualified plan sponsor can receive more favorable pricing on a group annuity contract from an 

insurance carrier than an individual is likely to receive (thus allowing a participant to access a larger monthly 

income stream through an employer’s plan than is available through an individual annuity contract). Also, a 

qualified plan sponsor could implement an immunization strategy for investing the assets supporting 

the portion of their obligation that represents annuities purchased with defined contribution plan rollovers, 

thus mitigating (or even eliminating) the funding status volatility with respect to that portion of the plan’s 

liabilities. In addition, if defined benefit plan sponsors were permitted to provide the annuities at or close to 

the actuarial basis used in determining the Pension Protection Act funding target, the purchases may offer the 

advantage of improving the funded ratio of an underfunded plan. 

Providing lifetime income through a defined benefit plan can be more cost effective than doing so through 

defined contribution plans in the annuity market because of savings in administrative costs and the absence of 

profit margins, among other potential reasons. We believe that employers should be encouraged to offer their 

retirees this feature of purchasing an annuity from the defined benefit plan at the point of retirement as a 

distribution option from the employer’s defined contribution plan. These purchase options could also be made 

available for a portion of the distribution (partial annuitization) or for the purchase of a deferred annuity 
U.S Department of Labor May 3, 2010 

Lifetime Income RFI Page 21 

 

1850 M Street NW Suite 300 Washington, DC 20036 Telephone 202 223 8196 Facsimile 202 872 1948 www.actuary.org 

starting at a later age (for even greater longevity insurance). (See also the response to Question 13.) However, 

it should be recognized that any time a choice is allowed between a lump sum and an annuity, there is some 

amount of anti-selection cost. And allowing retirees who previously took lump sum distributions to purchase 

such an annuity would subject the plan to even greater anti-selection risk. 

One potential stumbling block that would have to be addressed is the coverage by the PBGC of the annuities 

“purchased” from the defined benefit plan. To our knowledge, the PBGC has not formally opined as to the 

“priority category” for such benefits. Since such benefits would be fully funded upon “purchase,” and 

transferred voluntarily from the participants’ own individual accounts, we believe they would logically fall 

into Priority Category 1 under ERISA Section 4044. Moreover, if the benefits were to fall into a low priority 

category, with significantly greater risk of loss, such benefit purchases could be significantly discouraged. 

To further encourage the option of using defined contribution accounts to purchase lifetime income from a 

defined benefit plan, plan sponsors who start a new defined benefit plan for this purpose only could be offered 

safe harbor relief from certain qualification, funding and/or reporting requirements. Plan sponsors offering 

this could also be encouraged or required to offer annuities with a refund feature if the participant dies within 

a certain period of time following the rollover to the defined benefit plan, though this always has a cost and 

may not be needed in a partial rollover situation. 

Comments Regarding Economic Analysis, Regulatory Flexibility Act, and Paperwork Reduction Act 

Executive Order 12866 (EO 12866) requires an assessment of the anticipated costs and benefits of a significant 

rulemaking action and the alternatives considered, using the guidance provided by the Office of Management and 

Budget. In addition, the Regulatory Flexibility Act (RFA) may require the preparation of an analysis of the 

economic impact on small entities of proposed rules and regulatory alternatives. For this purpose, the agencies 

consider a small entity to be an employee benefit plan with fewer than 100 participants. The Paperwork Reduction 

Act (PRA) requires an estimate of how many “respondents” will be required to comply with any “collection of 

information” requirements contained in regulations and how much time and cost will be incurred as a result. 

The agencies in this section of the RFI are requesting comments that may contribute to any analyses that may 

eventually need to be performed under EO 12866, RFA, and PRA, both generally and with respect to specific 

areas identified in Questions 36 through 39. 

 

37. Are there unique costs to small plans that impede their ability to offer lifetime annuities or similar 

lifetime income products as an in-plan option to their participants? What special consideration, if any, 

is needed for these small entities? 

Small plan sponsors may not have the expertise or funds to do a detailed analysis of products available. To the 

extent that their current investment provider has such an option available inside their investment product, 

there is not much impact. However, if they are expected to determine if this is the “best” product that can be 

offered and compare the costs of something inside an existing investment product to other stand alone 

solutions, they may lack the ability to make that determination. They also may find it administratively 

burdensome to select and offer products that are outside the options available from a single investment 

platform being offered. Providing a vehicle through which small plans could access the group purchasing 

power that larger plans can obtain from annuity providers merely as a result of their relative size could 

encourage small employers to make such an option available to their participants. Additionally, small 

employers may not have dedicated HR or benefits personnel and will seek ease of administration in providing 

such a benefit within their plan.