Retirement R X

“EXPERIENCED CARE FOR YOUR CORPORATE RETIREMENT PLAN”

                           401(k), 403(b), 457

                            Defined Benefit

                             Profit Sharing

_____________________________________________________________________________ Securities offered through GWN Securities, Inc.

11440 Jog Road, Palm Beach Gardens, FL 33418

561.472.2700 Member FINRA, SIPC

Carlos E. Tocabens

QPA, QKA, CRA, CRC

P.O. Box 279432, Miramar, FL 33027

786.375.5136z Fax 786.427.1375

CTocabens@GWNSecurities.com

April 5, 2010 

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

Room N-5655 

US Department of Labor 

200 Constitution Avenue, NW 

Washington, DC 20210 

Following are responses to the following: REQUEST FOR INFORMATION REGARDING 

LIFETIME INCOME OPTIONS FOR PARTICIPANTS AND BENEFICIARIES IN RETIREMENT 

PLANS, RIN- 1210-AB33.

Opinions expressed here are those of the author and not GWN Securities, Inc. and are not 

intended to constitute investment or tax advice. 

Sincerely, 

Carlos Tocabens 
Carlos E. Tocabens

P.O. Box 279432, Miramar, FL 33027

786.375.5136z Fax 786.427.1375

CTocabens@GWNSecurities.com

2

REQUEST FOR INFORMATION 

REGARDING LIFETIME INCOME OPTIONS 

FOR PARTICIPANTS AND BENEFICIARIES 

IN RETIREMENT PLANS. 

RIN- 1210-AB33

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? 

Advantages 

• Ability to ensure they do not run out of retirement income 

• Reduced need to manage their own savings during retirement 

Disadvantages 

• Limited access to cash values to help with immediate cash needs 

• Limited ability to grow invested assets during retirement 

• The promised income may be at risk due to insolvency of the insurer 

• Additional complexity during the plan enrollment or distribution decision process 

2. Currently the vast majority 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 decisionmaking 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? 

There are many factors including all the ones mentioned in the question that explain low usage: 

• Many plan participants and individuals do not accumulate sufficient savings to begin 

with, so the monthly annuity benefit may be viewed as unsubstantial. 

• Due to a the dynamics of the modern workforce (that experiences more frequent job 

changes, layoffs, relocations, etc.), choosing a lifetime income option may not be the 
Carlos E. Tocabens

P.O. Box 279432, Miramar, FL 33027

786.375.5136z Fax 786.427.1375

CTocabens@GWNSecurities.com

3

optimal choice for a substantial portion of account balances available for distribution 

because they are: 

o owned by individuals who are far from retirement age 

o owned by individuals who still have many working years ahead of them and the 

situation at retirement may be uncertain 

o probably not significant in accumulated value 

o needed immediately to alleviate current financial duress. 

• Annuity products can have many complicated features that are hard to quantify, hard to 

compare, and can require individual consultation to understand. By contrast, a lumpsum amount has a clear economic value that is easily understood. 

• The individual consultation needed to understand and choose among annuity options 

may be unaffordable for many smaller plans, and for individuals/participants with 

smaller balances. 

• Employers, particularly smaller employers, have limited resources and little time to 

dedicate to employee benefits education. They often focus the majority of their efforts 

on just trying to get employees to join the plan and contribute at sufficient levels, while 

having little time available to dedicate to educating the employees who may at or near 

retirement age. 

• Many participants may not realize they can split their retirement distribution choice - 

allocating a portion of the distribution to a lifetime income product while retaining 

another portion as an account balance that can be accessed at any time. 

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 

Under DB Plans: 

In a DB plan, the default payment is a lifetime income stream. However, the participant 

generally may elect an alternate payment option (such as a joint life, or a 10-year 

certain payment, or lump-sum) or may select early or delayed retirement. However, the 

calculation of the adjustment needed to convert the normal benefit at 65 to another 

payment option is prescribed by plan formula and generally not subject to financial 

market results or annuity product variables. (Married participants may be required to 

receive the benefit in the form of a Joint and Survivor annuity, subject to authorized 

waiver from the spouse.) 

• Some DB plans pay the required benefit as a check drawn on the trust assets. 

Though the future viability of those payments could be at some risk that the 

trust would become insolvent, the benefits of typical corporate DB plans are 

insured by the PBGC (within certain limits). 
Carlos E. Tocabens

P.O. Box 279432, Miramar, FL 33027

786.375.5136z Fax 786.427.1375

CTocabens@GWNSecurities.com

4

• Some DB plans may transfer the funding to an insurance carrier by purchasing 

an annuity that will provide the required benefit payment. The annuity is not 

purchased until the participant reaches the distributable event (i.e. retirement). 

The future viability of the benefit payments could be at some level of risk that 

the insurance carrier would become insolvent. 

• Other DB plans may employ a fully-insured approach. Each year they would 

purchase accumulation units from an insurance carrier that will provide the 

promised benefit at retirement. 

Under 401(k) DC Plans: 

• Some plans provide alternate distribution options that include annuity distribution 

options. Often, this may include a single life or joint & survivor options. This is a 

selection that the participant generally makes upon exiting the plan, not during the 

accumulation period. The account value is used to purchase the annuity and the 

conversion calculation is generally based on the particular insurance carrier’s pricing. 

Under this model, the participant may be able to take his account value and shop for a 

different carrier and/or a higher guaranteed payment stream. 

• Some plans are now providing an in-plan insurance option for participants to select a 

lifetime guaranteed income option while still in the accumulation phase – long before 

they actually terminate employment. The guaranteed minimum payment may be 

purchased (a) through additional fees added to a group of select investment funds – 

usually some version of asset allocation funds, or (b) by purchasing accumulation units 

of a special fixed interest account that may not directly participate in or benefit from 

stock market results, where the crediting interest rate is reduced by the cost of 

insurance. 

Under 403(b) DC Plans: 

• Many 403(b) plans are traditionally funded with annuity products – tax sheltered 

annuities. The products may include a guaranteed minimum benefit, a minimum death 

benefit, as well as various annuity distribution options. Additional fees to cover the cost 

of the death benefit and guaranteed minimum benefit insurance (mortality & risk fees) 

may be incorporated into the accumulation units, while the annuity distribution options 

would work similarly to the 401(k) alternate distribution options discussed above. 

o Unlike most 401(k) plans (were the funding vehicles were limited to those 

offered by a single vendor selected by the Plan Fiduciaries), participants in many 

TSA plans could independently shop among a wide array of Tax Sheltered 

Annuity products and vendors. Indeed, one participant may have contributed to 

several different TSA accounts set up with multiple insurance carriers. The 

various products were treated more like IRA’s in their ownership status than 

typical 401(k) plans. (This model was viable due to the total lack of employer 

involvement and control. This resulted in all sorts of compliance problems. More 
Carlos E. Tocabens

P.O. Box 279432, Miramar, FL 33027

786.375.5136z Fax 786.427.1375

CTocabens@GWNSecurities.com

5

recently, the IRS has issued new 403(b) regulations that have resulted in many 

employers reducing or eliminating the ability of participants to shop for vendors.) 

o Other 403(b) plans behaved more like a 401(k), in that there was only one TSA 

provider that offered the funding vehicles for all plans. 

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? 

Under 401(k) DC plans: 

• Traditionally, under most 401(k) plans, lifetime income options were only available as a 

distribution choice selected by the participant upon exiting the plan at termination or 

retirement. 

• More recently, some vendors are offering options where the selection must be made 

during the accumulation phase (in some cases the accumulation period must meet 

minimum requirements – such as five or more years of accumulation before benefits 

may begin). The participants pay an additional fee, during the accumulation period as 

well as during the distribution period. 

o Many DC plans use asset-allocation or target date funds as the accumulation 

vehicle. These plans often offer lifetime guaranteed income coverage as an 

optional “wrap-around” benefit. Investors selecting the asset-allocation or target 

date investment alternatives are not generally required to choose the lifetime 

income coverage. However, if they do select coverage, they can only get 

coverage for those savings which are retained in the alternatives that are part of 

the lifetime income platform (i.e. the asset-allocation or target-date funds). 

Savings transferred out or withdrawn generally will lose the insurance coverage. 

Coverage is provided for an additional fee, generally tacked onto the assets in 

the covered funds only (therefore, the investment experience for covered savings 

will be lower than those who are invested in the same investment alternatives 

but who do not elect coverage). 

o Other DC plans use a fixed interest account as the accumulation vehicle. These 

plans provide the lifetime guaranteed income coverage as part of investing in the 

account. Selecting to contribute to this investment option automatically provides 

the insurance coverage. Savings transferred out or withdrawn from the account 

generally will lose the insurance coverage. The fees for the insurance coverage 

are generally collected by reducing the interest rate that the account would 

otherwise receive if it did not provide the benefit. 

5. To what extent are 401(k) and other defined contribution plan sponsors using 

employer matching contributions or employer nonelective contributions to fund 
Carlos E. Tocabens

P.O. Box 279432, Miramar, FL 33027

786.375.5136z Fax 786.427.1375

CTocabens@GWNSecurities.com

6

lifetime income? To what extent are participants offered a choice regarding such 

use of employer contributions, including by default or otherwise? 

• Some sponsors may allow the ability to split the investment directives of the employer 

match. This may be limited by the complexity and added cost of having split directives. 

Currently, I know of no 401(k) plans that offer split directives and in-plan annuities. 

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 (out-of-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? 

• Any individual or participant who has cashed out of their retirement plan has a wide 

variety of lifetime income products to choose from. Although a lifetime income product 

might not be offered by the financial institution where their personal accounts reside, 

generally there are many sources for purchasing all sorts of annuity products, including 

fixed annuities, fixed with automatic annual inflation increases, variable, deferred, index, 

etc. The product choices may be limited by their state of residency and some other 

factors, but there are still a plethora of choices for someone to select when cashing out 

of their retirement plan. 

• Yes, typically, vendors who offer “in-plan” annuities do offer a product whereby a 

participant eligible for a distribution may retain the annuity product characteristics by 

rolling into another product of the same vendor and retain their previous annuity rights. 

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 participants with the option of lifetime 

payments, while retaining the flexibility to accelerate distributions if needed? 

The following are all examples of features that can affect the benefit level cost: 

• Ability to direct investments into variable options 

• Survivor benefits 

• Return of principal 

• Term-certain payments (i.e. 10 year-certain) 

• “High-water” or indexing features (that may lock in higher market values for 

purposes of determining minimum benefit payments) 

• Annual cost-of-living increases 

• Unscheduled withdrawals 
Carlos E. Tocabens

P.O. Box 279432, Miramar, FL 33027

786.375.5136z Fax 786.427.1375

CTocabens@GWNSecurities.com

7

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)? 

In-Plan Outside-The-Plan 

Advantages of In-Plan Option Downside Protection 

Some in-plan options may provide the 

ability to lock in a “high water” mark, 

i.e. minimize losses during market 

declines while still in the accumulation 

phase. This may protect the participant 

from significant market losses near or at 

retirement (that may otherwise reduce 

the guaranteed benefit). 

A market downturn near or at 

retirement age may affect the lump-sum 

value available to purchase the lifetime 

income, thereby forcing the participant 

to accept lower payments or delay an 

annuity purchase. 

Disadvantages of In-Plan Options Upside Capture During AccumulatioA participant’s ultimate account value 

may be significantly reduced by paying 

extra fees during the accumulation 

period, thereby actually reducing the 

maximum benefit (compared to 

purchasing an annuity at retirement). 

The participant is not paying added fees 

nor being restricted in investment fund 

choices, so the upside potential may be 

greater in up markets (over In-plan 

options). 

Complexity 

In-plan lifetime income products may be 

confusing for the average participant to 

be able to evaluate – especially when a 

decision made today may not fit their 

situation decades later – and they may 

make decisions based on hype or sales 

pitches that may not be appropriate for 

them. 

Though there is still complexity in 

choosing among distribution options, 

there is a more clear financial picture 

when the participant is at (or close to) 

retirement. Therefore, they may be 

better able to evaluate their particular 

situation. 
Carlos E. Tocabens

P.O. Box 279432, Miramar, FL 33027

786.375.5136z Fax 786.427.1375

CTocabens@GWNSecurities.com

8

Security of the Guarantee 

Unlike a defined benefit pension plan 

whose benefit payments may be 

guaranteed by the federal government 

(via the Pension Benefit Guarantee 

Corporation), there is no such federal 

program for defined contribution benefit 

payments. Therefore, the guarantee as 

to the minimum benefits is generally 

based solely on the guarantor’s ability to 

make those payments. A participant 

using an in-plan option may be making 

a selection for a product he will not be 

using for many years or decades, while 

the financial strength of the insurer 

deteriorates. 

Although the guarantee as to the 

minimum guaranteed benefits is 

generally based solely on the 

guarantor’s ability to make those 

payments, a participant using an outof-plan lifetime annuity option may be 

making a selection (and evaluation of 

the insurer) closer to the actual use of 

the guarantee (thereby possibly making 

his conclusions about risk of default 

more relevant). 

Portability 

Portability at termination of employment 

may be restricted with an in-plan 

lifetime income option. Participants who 

do not elect to leave their funds in the 

Plan (or in a qualifying individual 

investment account with the plan 

investment provider) will lose the 

guarantee (possibly after having paid 

fees during an accumulation period that 

may have lasted many years or 

decades). 

NA. By purchasing the product at cashout from the plan, the participant is 

purchasing an individual product that is 

fully portable. 

Product 

Choice 

The in-plan option may be restricted to 

a single issuer. Participants may 

overpay for the guaranteed income 

insurance because of lack of 

competition. 

The participant is able to choose among 

any number of products, in addition to 

any vendors designated by the plan 

sponsor, resulting in more choices and 

possibly improved competition. 

Management 

of products 

Participants who change jobs frequently 

could accumulate a confusing array of 

in-plan annuity products. 

NA. The participant does not purchase 

a product until he is at or near 

retirement, allowing him to consolidate 

positions and purchase a minimum 

number of products. 
Carlos E. Tocabens

P.O. Box 279432, Miramar, FL 33027

786.375.5136z Fax 786.427.1375

CTocabens@GWNSecurities.com

9

Fees 

Due to the reality of the modern 

workforce (that experiences more 

frequent job changes, layoffs, 

relocations, etc.), the typical account 

balance at distribution is (a) probably 

not significant, and (b) needed 

immediately by the individual to 

alleviate current income needs. 

Therefore, choosing an in-plan lifetime 

income option could result in paying 

fees for a benefit that will often not be 

used. (This may affect lower-paid 

employees disproportionately since they 

are often the ones that only accumulate 

small balances within each plan.) 

NA. The participant does not purchase 

a product until he is at or near 

retirement, allowing him to defer 

purchases until such time as it may be 

more relevant to his needs and perhaps 

saving on the total fees paid. 

Fees 

Participants may be locked into a 

distribution election many years in 

advance of their retirement date. 

Altering that election later may result in 

having paid for a benefit the participant 

eventually did not use. 

NA. Elections are made at or near 

retirement. 

Collateral Damage 

If participants are limited to a specific 

set of investment funds (that qualify for 

the lifetime income protection), the 

participant may be adversely affected by 

the actions of a Plan Fiduciary who later 

deletes the funds from the plan’s 

investment menu (as required by the 

plan’s investment policy) due to 

performance issues. 

NA. Actions taken by the plan fiduciary 

to delete designated plan investment 

alternatives should have no affect on 

the guaranteed income insurance since 

it is purchased outside the plan. 

Collateral 

Damage 

A participant’s rights may be eliminated 

by a Plan Fiduciary’s decision to transfer 

all plan assets to a new service provider 

if it is not feasible, or if it too costly, for 

the new service provider to record-keep 

and administer “outside assets”. 

NA. Actions taken by the plan fiduciary 

to transfer all plan assets to a new 

service provider should have no affect 

on the guaranteed income insurance 

since it is purchased outside the plan. 

Access to 

Funds 

A financial hardship withdrawal or loan 

default could significantly reduce the 

guaranteed minimum benefit even 

though the participant may have paid 

extra fees during the accumulation 

phase. 

No affect. 
Carlos E. Tocabens

P.O. Box 279432, Miramar, FL 33027

786.375.5136z Fax 786.427.1375

CTocabens@GWNSecurities.com

10

9. What are the advantages and disadvantages from the standpoint of the plan 

sponsor of providing an in-plan option for lifetime income as opposed to leaving to 

participants the task of securing a lifetime income vehicle after receiving a plan 

distribution? 

Advantages of In-Plan Option

• For In-Plan Options that provide a “high water” mark to lock in minimum 

guaranteed lifetime income, participants may be reassured that they will receive 

a benefit that may be protected from certain market losses while still employed. 

Disadvantages of the in-Plan Option

The fiduciary responsibility standards imposed by ERISA clearly apply to any decision by 

an employer to include in-plan lifetime income options. This is particularly challenging 

for smaller employers already struggling with administering 401(k) plans. 

• The Plan’s Investment Policy Statement may need to address the inclusion of the 

lifetime income benefit and how the annuity provider(s) or guarantor(s) will be 

selected and monitored. 

• The Plan fiduciary may be making the selection of an annuity provider years or 

decades before many participants are even eligible for a payment. During that 

period, the financial condition or situation may deteriorate significantly and affect 

their ability to make payments. 

• If participants are limited to a specific set of investment funds (that qualify for 

the lifetime income protection), the Plan Fiduciary may later find itself in a 

quandary if those investments perform poorly and would need to be unilaterally 

removed from the plan to satisfy the Investment Policy Statement and to meet 

its fiduciary duty. 

• Actions by the Plan Fiduciary to transfer the plan to another vendor could have 

an adverse impact on current and former participants who have balances in the 

annuity product. The Plan Sponsor may not be able to afford the record-keeping 

and administration costs for the old annuity balances. 

• Educating participants is often a critical challenge for employers. Educating 

participants on the benefits and features of in-plan annuity products may result 

in more confusion and lower participation rates during initial enrollment. 

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 
Carlos E. Tocabens

P.O. Box 279432, Miramar, FL 33027

786.375.5136z Fax 786.427.1375

CTocabens@GWNSecurities.com

11

and would this likely make a difference in whether participants select a lifetime 

annuity option? 

The prototype plan documents historically used by a large number of 401(k) plans have 

offered the ability to provide a plethora of distribution options, including installment 

payments for a fixed period, single-life and joint annuities, along with lump-sum 

distributions. Generally, the participant could elect to divide the distribution among the 

options as needed, so it would not be accurate to say that plan sponsors did not allow it 

but that participants just didn’t make the selection. 

More recently, annuity distribution options have been less common in 401(k) plans. 

Some of the reasons why fewer plans have offered annuity choices as distribution 

options include: 

• Rarely did any participants elect an annuity option, 

• Explaining annuity options is a complex task, while everyone understands a 

lump-sum, 

• By having a joint annuity option, the plan may be subjected to additional 

restrictions in the cases where a participant requests a loan or in-service 

withdrawal, 

• Increased fiduciary liability from the selection on an annuity vendor. 

One way to increase the use of lifetime annuity use at distribution could be to require 

plans to designate an annuity as the normal form of distribution, unless a participant 

makes another designation (such as lump-sum). However, this should only apply to 

distributions where the participant makes an affirmative application for benefits (i.e. it 

should not apply to any automatic (small amount) cash-outs or automatic rollovers. It 

also would not apply to Required Minimum Distributions, hardships and in-service 

withdrawals. 

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? 
Carlos E. Tocabens

P.O. Box 279432, Miramar, FL 33027

786.375.5136z Fax 786.427.1375

CTocabens@GWNSecurities.com

12

We use automatic savings features successfully in several plans we work with. So, I 

agree that “behavioral” strategies to increase plan participation and savings 

accumulation are very desirable. 

However, I would caution that use of automatic features to increase use of lifetime 

income products could actually serve to erode the very savings they are meant to 

protect if they are not thoughtfully structured. 

Furthermore, although a 401(k) is thought of as a retirement plan, many participants 

don’t view it that way. A 401(k) is primarily funded by the participant foregoing current 

salary. Compare that to a traditional pension plan where the employer primarily funds 

the plan as true pension benefits without reducing the participant’s salary. Therefore, 

401(k) participants should have more input as to how they spend their deferred salaries. 

Clearly ERISA and 401(k) rules need to modified whether or not use of lifetime 

guaranteed is desirable, since many such products are being marketed. Smaller 

employers in particular may not have the expertise to make informed evaluations about 

such complicated products. Since employees put a great deal of faith (and their 

retirement nest eggs) in their employers, appropriate guidance should be rendered 

promptly. 

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? 

Great question, except I think the question assumes that most participants would have 

accumulated sufficient savings to truly have a choice. Much of the research implies that 

many (if not most) participants have not saved enough for retirement – regardless of 

whether they annuitize or keep their savings invested. 

For those who accumulated sufficient savings, covering basic expenses should be the 

goal of an annuity strategy. 

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? 

Whereas (in the past) it was more common for an employee to work for a single 

employer throughout their career and receive a single pension benefit, today’s workforce 

is more mobile than ever. Many individuals find themselves working for many different 

employers and may even have several career changes. They may even accumulate an 

array of 401(k) and IRA’s, some significant, many not-so-significant. They may even 

need to dip into those savings for unexpected emergencies or large commitments. 

There should not be a mandatory distribution option. To begin with, it could complicate 

an individual’s ability to manage their financial affairs. For example, some individuals 
Carlos E. Tocabens

P.O. Box 279432, Miramar, FL 33027

786.375.5136z Fax 786.427.1375

CTocabens@GWNSecurities.com

13

my find that they wish to defer the receipt of income so they could use their savings for 

travel or other unscheduled needs. Others may find that they prefer to work beyond 

retirement age and use a lump-sum cash-outs or withdrawals to meet their needs. 

Such a requirement in a defined contribution plan might also handcuff the ability of 

small plan sponsors to design plans that fit their particular situation. The added 

complexity could reduce plan participation. The certain increase in administrative, 

compliance, and audit costs will do nothing to help increase plan sponsorship. More 

complexity rarely results in increased plan sponsorship. 

I am certain that many in the industry may push for default lifetime income options. If, 

as a matter of policy, if using lifetime income features is desirable, it should be 

promoted first through the expansion of the required notices when a participant applies 

for a distribution. 

If increase use of lifetime income becomes a desirable policy objective, they should only 

be allowed as the default 401(k)/DC election as follows: 

o For In-Service Withdrawals or distributions after age 59-1/2 

o For accounts that meet a specific minimum cash value (i.e. $50,000) 

o As a lifetime income stream that provides minimum survivor benefits 

(such as Single-Life with 15 Year Certain) 

o For a portion of the distribution not to exceed 50% of the cash value of 

employee contributions (for employer contributions, 100%) 

o It should not be allowed at all for “In-Plan” lifetime income products. 

(Forcing a participant into investment choices that may carry extra fees 

during accumulation for an insurance coverage that may never be used 

will only serve to further erode their retirement savings.) 

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? 

All the following are impediments: 

• Potential expanded fiduciary liability in the selection of the annuity providers 

• Complexity of products and features 

• Lack of comparative data on products 

• Increased administrative and compliance complexity 

• Increased audit/accounting burden (and associated increased in audit costs) 
Carlos E. Tocabens

P.O. Box 279432, Miramar, FL 33027

786.375.5136z Fax 786.427.1375

CTocabens@GWNSecurities.com

14

• Lack of participant demand 

• Additional cost to the participant 

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? 

Annuities, and the other financial products (mentioned in the question), can be an 

important part of a thoughtful financial plan. These products are readily available 

through the individual marketplace. 

Some larger employers may be offer some or all of these products through the worksite 

– the products are offered as an array of products delivered by various vendors. 

However, employees generally do not have the expertise and time to appropriately 

assemble and coordinate the coverage /products on their own, and may purchase 

unsuitable products based on pitches in group meetings. 

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? 

Of course there are differences. For example, women generally have a longer life 

expectancy than men. Women sometimes also have smaller earnings during their 

lifetimes from which to accumulate retirement savings, due to exiting the workforce to 

raise families or because of pay disparity. 

I’m not aware of adjustments that could be made using existing authority. I’m also not 

aware of how you could positively impact most disparities through a retirement plan, 

other than requiring the use of unisex assumptions in establishing annuity benefit levels. 

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? 

Critical information that participants must receive includes: 

• That benefit payments are guaranteed solely by the issuer(s) 
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• The projected amount of replacement income which the product will provide 

• The cost-of-living adjustments that may apply to benefit payments 

• The restrictions on, and affect of, any withdrawals and loans 

• Any requirements that contributions be restricted to specific investment options 

• Fees applicable to the lifetime income option: 

o during the accumulation period 

o during the distribution phase 

o the maximum fees that apply and under what condition the fees may 

change 

o to any optional features (and fees) 

o any sales or surrender fees 

• Conditions which could adversely affect the income guarantee, including: 

o Future changes to plan service providers 

o Future changes to the underlying investment options 

• The lack of the product’s portability 

• Any free-look period 

The information should be provided by the Plan Fiduciary (as is all investment 

information is currently required to be provided). Any contracts, prospectuses, or 

disclosures may be prepared by the insurer or other third-parties, but (as with all 

investment disclosures currently required) the plan fiduciary should be responsible for 

providing information on any in-plan or designated lifetime income options. The 

information should be provided at least 30 days prior to the participant being able to 

select the lifetime income option. 

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? 

Yes. Expenses for providing education should only be payable from plan assets if the 

guidance is truly independent and unbiased. Such guidance should be akin to the 

guidance applicable to investment advice, since the selection of one distribution or 

annuity option over another could provide a direct or indirect benefit to those who 

provide the guidance. 

19. What specific legal concerns do plan sponsors have about educating participants 

as to the advantages and disadvantages of lifetime income or other arrangements 
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designed to provide a stream of income after retirement? What actions, regulatory 

or otherwise, could the Agencies take to address such concerns? 

The legal concerns are focused on increased Fiduciary Liability:

In each of the situations below, a participant that makes a selection that later goes sour 

may sue the plan sponsor (many years after terminating from the plan) claiming that 

they were misinformed, did not receive sufficient disclosure about the risks, or were 

provided incorrect investment advice. Such a claim would be difficult to validate many 

years after the employee has left employment. 

(a) If not properly handled, describing the advantages / disadvantages of lifetime 

income products could be akin to providing investment advice (which could increase 

fiduciary liability). 

(b) Some participants may misunderstand and believe that lifetime income is equivalent 

to ”sufficient” income. 

(c) Providing education about in-plan or designated lifetime income products could be 

perceived as an endorsement of the product vendor. 

(e) In some cases, there may be a requirement that a participant invest in specific 

investment alternative (in order to receive the lifetime income benefit), which may 

provide poorer investment results (and hence low guaranteed income) than alternate 

investments. 

(f) The plan sponsor may be required to take actions (such as terminating a poorperforming fund or vendor) which may unilaterally affect the guarantee provided 

participants. 

(g) Variances in investment results could have a significant impact on the ultimate value 

of the guaranteed benefit. 

Recommended Agency Action

Regulatory agencies should include publishing model language that can be provided to 

terminating participants, which may be similar to the Tax Notice, describing the different 

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? 

For plans that have “in-plan” lifetime income options, plan fiduciaries should be required 

to provide sufficient information and education for participants to make informed 

decisions about all their distribution choices. They should also be reminded of The 

Department of Labor’s regulation 29 CFR 2550.404a-4 which contains a fiduciary safe 
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harbor for the selection of annuity providers for the purpose of benefit distributions from 

defined contribution plans. 

For plans that do not provide in-plan lifetime income options, plan sponsors should be 

encouraged to provide balanced education about all distribution options (including 

lifetime income/annuities” and that participants can purchase lifetime income products 

from various sources. Regulatory agencies should publish model language that can be 

provided participants, which may be similar to the Tax Notice that is required to be 

provided to participants who are eligible to receive a distribution. 

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. However, the information should only be required to be provided on an annual

basis. 

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 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? 

The information provided may depend on whether the plan offers designated 

products/vendors and whether a specific product has been selected by the participant. 

Therefore, plans that offer that are selected during the accumulation phase will need to 

depict more “customized” information that is specific to the product/features selected by 

the participant. 

For plans that provide in-plan lifetime income products, the projections provided should 

be specific to the product(s) selected by the participant and based on assumptions 

specific to the participant. If a participant has not selected a product, the assumptions 

should provide for a “default” product selection. Disclosures should advise participants 

that the actual income received and guarantees may differ and should highlight the 

factors that can affect the income. 

For plans that do not provide in-plan lifetime income products, the projections should be 

based on a universal default product based on an agency-published table. Disclosures 
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should advise participants that the information is only provided for retirement planning 

purposes and does not depict any specific product or guarantees. 

Projections should otherwise include certain uniform features (so it is easier for 

employers to communicate those features using standardized language and easier for 

employees to evaluate projections and compare products as their employment changes 

from one employer to the next). This would include the following uniform features: 

• Retirement age (67) 

• Benefit frequency (Monthly) 

• Benefit type (Payable as a single-life annuity with 15-year certain survivor 

benefit*) 

• Annual cost-of-living increases (3%) 

The benefit depicted by the uniform features should be designated as a payment option 

that must be available to participants if the plan allows lifetime income options. 

*Since actual marital status at retirement is impossible to project decades in advance, I 

think illustrating a joint-life to married individuals while showing a single life to others 

would not acknowledge the reality that many married individuals mat divorce and single 

individuals may marry later, others may not marry but may have life-partners, and yet 

others will want to leave some benefit to their heirs. A single-life annuity with 15-year 

certain survivor benefit may provide a safer middle ground that could help make it 

easier for plan fiduciaries to explain. 

Illustrations should include (both) a benefit that only incorporates current account 

values alongside one that assumes continued contributions. This will help promote the 

value in continuing contributions as well as the possible consequence of breaking the 

pattern. 

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? 
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As discussed in #22, the assumptions may depend on whether the plan offers 

designated products/vendors and whether a specific product has been selected by the 

participant. Therefore how the benefit is depicted could be affected by product features 

and pricing. 

For plans that make available in-plan lifetime income products, the assumptions used 

should be specific to the product(s) selected by the participant and based on 

assumptions specific to the participant. If a participant has not selected a product, the 

assumptions should assume a “default” product selection. 

Otherwise, assumptions should be mandated by regulation and should be uniform 

assumptions (available from a table published from the appropriate government 

agency). Using uniform assumptions for plans that do not offer specific products would 

help: 

• Avoid the cost of hiring actuaries 

• Provide consistent results among different employers and vendors 

• Avoid confusion among employees 

• Facilitate cost-effective universal education efforts 

• Promote savings goals 

Uniform actuarial assumptions should include: 

• Expense load 

• Unisex Mortality* 

• Conservative pre-retirement interest rate assumption of 7% for calculating 

accumulations 

Caveats about plan assumptions should be included and full disclosure should be made 

available to participants. 

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-retirement inflation 

assumptions, and what are the impediments for plans to present the ratio in a 

meaningful way to participants on an individualized basis? 

No, income replacement ratios should not be depicted. 

Although income replacement ratios can be useful when an individual is calculating their 

retirement income needs, as a practical matter they may be difficult for an employer to 

establish when they do not have all of an employee’s financial data. Additionally, yearto-year fluctuations in income and market performance can skew the projections in 
Carlos E. Tocabens

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opposite directions year-after-year. This could result in projections that are not 

meaningful and potentially counter-productive. 

For example: Assume that an employee is experiencing a period of unusually low 

income – such as during unpaid leave, reduced work hours, etc. By incorporating the 

lower income into an income replacement ratio calculation, the individual may be lead to 

believe that their current account balance will provide a much bigger portion of their 

retirement income needs (than it actually may). 

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? 

While life expectancy has risen significantly, most individuals are not accumulating 

significant retirement assets. Focusing on making small balances “last” overlooks the 

obvious need to first ensure individuals accumulate savings that can make a real 

difference. No changes should be made to encourage the use of lifetime income options, 

unless significant changes are made in making it easy for employers to offer successful 

plans that are successful at accumulating significant savings. 

26. Could or should any changes be made to the rules relating to qualified joint and 

survivor annuities and spousal consents to encourage the use of lifetime income 

without compromising spousal protections? 

Yes. Spousal consent rules are outdated and reflect a period in our history when men 

were primarily the ones covered by pension plans and non-working spouses needed 

protection. Revised rules should allow individuals more freedom to decide what to do 

with their deferral savings. 

27. Should further guidance clarify the application of the qualified joint and survivor 

annuity rules or other plan qualification rules to arrangements in which deferred inplan insurance annuities accumulate over time with increasing plan contributions 

and earnings? 

Yes. 

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 
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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? 

The goal of Required Minimum Distribution (RMD) rules is to accelerate the receipt of 

deferred retirement income and the collection of tax revenue, while lifetime income 

options are concerned with providing a minimum guaranteed lifetime income. 

RMD rules apply to qualified plans, IRAs, and generally apply to Qualified Plan 

Distributed Annuities. They require that minimum payments begin by age 70-1/2 (or, 

for qualified plans, at actual retirement from employment if later). These requirements 

may be at odds with an individual’s desire to conserve savings and postpone receipt of 

income (in order to maximize the amount of the payout at a later time). 

Longevity insurance is a form of lifetime income that defers the payout to an advanced 

age (i.e. 85), providing for minimum guaranteed income (for someone who expects to 

live beyond the normal life expectancy) with minimal or no survivor benefits to maximize 

the payout. The goals of RMD is at odds with the goals of longevity insurance. 

As life expectancy continues to increase, many individuals may find that they have not 

accumulated enough assets for a long life in retirement. They may elect to work much 

longer, perhaps into their 80’s. Others may have accumulated assets, but wish to 

preserve part of those assets due to the longer lifespan. The RMD rules are in conflict 

with these objectives. 

Clearly the outdated RMD rules could result in many individuals being forced to deplete 

retirement savings while they may still have many years to life. It could be particularly 

onerous on single individuals. The RMD rules should be eliminated or revised in a 

manner that allows one to preserve retirement assets until much later by changing the 

required beginning date to Age 85, and allow for distributions that assumes life 

expectancy to age 121. 

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? 

I am not aware of employers that allow purchasing of pension benefits using defined 

contribution balances. 

Terminated and retired participants are already capable of choosing from a large array 

of lifetime income products available in the individual market: 

(a) Since defined benefit plan funding status could be subject to financial market 

performance and the plan sponsor’s ability to make future contributions, it 
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could be riskier for a participant to deposit his DC lump-sum value into the 

defined benefit plan instead of purchasing an annuity directly. 

(b) Depositing the DC lump-sum balance into a DB plan to obtain lifetime income 

through the pension plan may not provide a larger annuity benefit (than 

purchasing an individual annuity) unless the former employer’s defined 

benefit trust is subsidizing the annuity (and the employer is willing to take on 

the potential funding liability). 

(c) Will such converted balances be covered under the PBGC insurance program? 

Will the federal government be taking on additional liabilities for underfunded 

plans? At what levels would benefit amounts be covered? 

Based on these issues, I do not believe these arrangements should be facilitated. 

Selection of Annuity Providers 

The Department of Labor’s regulation 29 CFR 2550.404a-4 contains a fiduciary safe harbor for 

the selection of annuity providers for the purpose of benefit distributions from defined 

contribution plans. 

30. To what extent do fiduciaries currently use the safe harbor under 29 CFR 

2550.404a-4 when selecting annuity providers for the purpose of making benefit 

distributions? 

I am not aware of any plan sponsor that is even aware of the safe harbor when 

selecting annuity providers. 

31. To what extent could or should the Department of Labor make changes to the 

safe harbor under 29 CFR 2550.404a-4 to increase its usage without compromising 

important participant protections? What are those changes and why should they be 

made? 

There is no modification of the safe harbor itself needed except to specifically state that 

it applies to “in-plan” lifetime income providers, as well as designated Qualified Plan 

Distributed Annuities. Additionally, due to the recent increase in the marketing of these 

“in-plan” lifetime income products, the DoL should focus efforts to further educate plan 

fiduciaries regarding their responsibilities with regards to choosing an annuity provider. 

32. To what extent could or should the safe harbor under 29 CFR 2550.404a-4 be 

extended beyond distribution annuities to cover other lifetime annuities or similar 

lifetime income products? To which products should or could the safe harbor be 

extended? 

The DoL should specifically state that fiduciary responsibility and the safe 

harbor apply to all designated lifetime guaranteed income products, whether 

they are “in-plan” products of those provided by the plan to fund 

distributions. 
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ERISA Section 404(c) 

ERISA section 404(c) and 29 CFR 2550.404c-1 provide defined contribution plan fiduciaries with 

limited relief from the fiduciary responsibility provisions of ERISA where a participant or 

beneficiary exercises control over the assets in his or her account. 

33. To what extent are fixed deferred lifetime annuities (i.e., incremental or 

accumulating annuity arrangements) or similar lifetime income products currently 

used as investment alternatives under ERISA 404(c) plans? Are they typically used 

as core investment alternatives (alternatives intended to satisfy the broad range of 

investments requirement in 29 CFR 2550.404c-1) or non-core investment 

alternatives? What are the advantages and disadvantages of such products to 

participants? What information typically is disclosed to the participant, in what 

form, and when? To what extent could or should the ERISA 404(c) regulation be 

amended to encourage use of these products? 

Such products are being actively marketed and we’re seeing many national providers 

offering a version. They are often designed as a directed investment of the participant, 

with the benefit “wrapped” around existing designated/core investment alternatives, 

which are already incorporated as part of the 29 CFR 2550.404c-1 investment 

alternatives. For example, the lifetime income guarantee might be offered (for an 

additional fee) as a benefit for investing in a core group of asset allocation or target 

retirement funds. 

The information provided to participants could be described as a combination of 

marketing materials and disclosures. The materials include illustrations of how the 

lifetime income products may protect participant savings during extended periods of 

poor market returns, particularly during the distribution phase. 

The materials may also describe: 

• The additional fees that are collected for providing the guarantee 

• The investment alternatives which may be used without losing the guarantee 

• The limitations on portability 

There are no changes to ERISA 404(c) that should be made. 

The disadvantages to participants as they relate to exercising control under ERISA 

404(c) are as follows: In contrast to traditional annuities chosen at distribution, in-plan 

lifetime income products collect fees many years in advance of the participant being 

eligible to receive the benefit. If the investment alternatives to which the participant is 

limited-to (in order to receive the benefit) later becomes inappropriate, risky, or 

underperforms, the participant could lose the lifetime income guarantee merely by 

transferring his funds to other investment alternatives (i.e. exercising control). Other 

disadvantages have been discussed under question #8. 
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34. To what extent do ERISA 404(c) plans currently provide lifetime income through 

variable annuity contracts or similar lifetime income products? What are the 

advantages and disadvantages of such products to participants? What information 

about the annuity feature typically is disclosed to the participant, in what form, and 

when? To what extent could or should the ERISA 404(c) regulation be amended to 

encourage use of these products? 

Many plans, particularly those funded using group variable annuity contracts, already 

have (or could have) the ability to offer more traditional lifetime income products once a 

participant is eligible for a distribution. The contracts may stipulate the rate tables, 

expenses, etc., that apply if the participant selects the option. 

These annuity options are typically set up as distribution alternatives to lump-sum and 

installment payments. Therefore, the participant does not need to elect the option until 

termination, retirement, or other distributable event (and is not charged a fee until he 

makes that election). 

The information provided to participants may include information that explains the 

benefits of annuities, along with fees/expenses and the calculation of the benefit. 

However, that information might not be provided until the participant requests it (For 

example: A retiring participant may be provided with distribution election forms and only 

after the participant requests information specific to the annuity option is more detailed 

information provided.) 

ERISA 404(c) could be amended to encourage use of these products as follows: 

• Provide additional limited protection if the employer meets the annuity safe 

harbor under 29 CFR 2550.404a-4 (for selecting an annuity provider) and the 

plan allows in-service withdrawals at Age 59-1/2 so that participants may elect a 

distribution or conversion to an annuity product. 

Qualified Default Investment Alternatives 

ERISA section 404(c)(5) provides that, for purposes of ERISA section 404(c)(1), a participant in 

a defined contribution plan will be treated as exercising control over the assets in his or her 

account with respect to the amount of contributions and earnings if, in the absence of an 

investment election by the participant, such assets are invested by the plan in accordance with 

regulations of the Department of Labor. The Department of Labor’s regulation 29 CFR 

2550.404c-5 describes the types of investment products that are qualified default investment 

alternatives under ERISA section 404(c)(5). 

35. To what extent are plans using default investment alternatives that include 

guarantees or similar lifetime income features ancillary to the investment fund, 

product or model portfolio, such as a target maturity fund product that contains a 

guarantee of minimum lifetime income? What are the most common features 

currently in use? Are there actions, regulatory or otherwise, the Agencies could or 
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should take to encourage use of these lifetime income features in connection with 

qualified default investment alternatives? 

Few plans are currently using QDIA’s that include lifetime income guarantees. 

In-plan Lifetime income features were relatively rare in DC plans due to lack of 

availability from product vendors, but many national vendors have rolled out such 

products or are developing new products. This is particularly true of insurance 

companies which offer DC variable annuity products. The industry buzz is high, and I 

would expect a large segment of DC sponsors to evaluate these products in the near 

future. 

Many DC plans use asset-allocation or target date funds as their default investment 

alternative, particularly to take advantage of the additional fiduciary protection afforded 

those defaults if they are deemed as Qualified Default Investment Alternatives. These 

plans may offer lifetime guaranteed income coverage as an optional “wrap-around” 

benefit to these investment alternatives. Investors selecting the asset-allocation or 

target date investment alternatives are not generally required to choose the lifetime 

income coverage. However, if they do select coverage, they can only get coverage for 

those savings which are retained in the covered alternatives (i.e. the asset-allocation or 

target-date funds). Savings transferred out or withdrawn generally will lose the 

insurance coverage. Coverage is provided for an additional fee, generally tacked onto 

the assets in the covered funds only (therefore, the investment experience for covered 

savings will be lower than those who are invested in the same investment alternatives 

but who do not elect coverage. 

For example, assume the SmallCo 401(k) offers four investment alternatives: Money 

Market (Fund A), Balanced (Fund B), Bond (Fund C), Equity (Fund D). Of those funds, 

Fund B is designated as the plan’s default investment alternative. The SmallCo 401(k) 

plan also offers optional lifetime guaranteed income coverage, with the following 

features/requirements: 

• Only savings invested Fund B may be covered by the lifetime income guarantee 

• To be covered, the savings must have been in Fund B for a minimum of five (5) 

years 

• Participants may elect out of the coverage at any time 

• Savings removed from Fund B (through withdrawals, loans, transfers to noncovered investment alternatives, or transfers to other plans) lose the insurance 

coverage 

• At separation of employment, the participant may retain the coverage by keeping 

the covered savings in the designated investments (Fund B) or by rolling over 

into a designated product of the vendor. 
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• Participants take installments payments from Fund B that may not exceed a 

specified amount (5% of the adjusted value at in the covered accounts at 

distribution). 

• If the covered assets in the Fund B are depleted below the amount needed to 

fund the specified distribution, then the insurer will make the benefit payments 

for the remainder of the participant’s life (or specified period). 

• If the SmallCo 401(k) plan is transferred to another vendor by the Fiduciaries, 

only Fund B savings that are retained (with the vendor providing the insurance) 

will be continue to receive coverage. 

Note that some plans may elect to integrate lifetime income coverage into their 

default investment alternative. This could have a significant affect on the number of 

participants enrolled in such features, particularly for plans that also utilize autoenrollment or easy-enrollments. 

Regulation specific to default investment alternatives (with regards to lifetime 

income alternatives) should be focused on protecting participants, not specifically 

encouraging the use of lifetime income products as default investment alternatives. 

One important modification to regulation should be to bar the automatic use of 

lifetime income solutions as a default option in DC plans, except in cases where the 

funds involved are only attributable to Employer contributions, because: 

• A very large percentage of participants – particularly younger participants – 

may be uninvolved. These types of participants often are auto-enrolled in DC 

plans, or allow their affirmative savings election to be auto-invested in 

“default” options. 

• Participants who are auto-enrolled or auto-invested may not be aware that 

their current investment returns are being reduced to purchase the lifetime 

income coverage. Over time, reductions in account balances could be 

significant – a 0.90% annual fee could reduce account balances by 9% in 

just 10 years. 

• Participants who are auto-enrolled or auto-invested may roll over amounts (in 

some cases, significant amounts) into the plan which will be automatically 

directed to the covered default options. 

• Participants who are auto-enrolled or auto-invested may eventually transfer 

out of the default investments (to other plan alternatives) and not realize 

they paid for a benefit that will never be exercised. 

• Many American workers, particularly younger workers, change jobs 

frequently due to layoffs and career changes. Participants who are autoenrolled or auto-invested may cash out early to meet immediate needs 

between jobs and will lose the insurance benefit they paid for. 
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Where the funds are strictly attributable to Employer contributions, and the 

default investment otherwise would qualify as a Qualified Default Investment 

Alternative, regulation should permit (and provide additional protection to plans) 

that use lifetime income products as the default. This would presume that the 

fiduciary has also met the safe harbor requirements of 29 CFR 2550.404a-4.