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Comment to: Request for Information Regarding Lifetime Income Options for Participants 

and Beneficiaries in Retirement Plans 

U.S. Department of Labor, Employee Benefits Security Administration, 

RIN 1210–AB33 

U.S. Department of the Treasury, Internal Revenue Service, 

REG–148681–09 

February 9, 2010 

 As a young American just beginning to enter the workforce, I am deeply concerned about 

the state of retirement plans, particularly the demise of defined benefit plans and the loss of 

security that comes from having lifelong annuity payments. Even for the well-educated and 

financially savvy, the time wasted in coordination and planning and the burden of the risk that 

one will outlive retirement savings are enormous costs placed on all Americans, pre- and postretirement. I therefore strongly support retirement rules that require annuity-based payments as 

the default on all retirement plans, regardless of type. In support of the agencies’ Request for 

Information, I outline some relevant analogies and research in response to Question 2. 

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 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? 

 While all of the listed concerns likely contribute to the choice of lump sum distributions, 

modern research on decision-making emphasizes the systematic cognitive biases that lead to 

such choices. As a student of law and behavioral decision-making, in response to this Request 

for Information, I outline below two areas of research that I urge the agencies to examine while 

crafting default rules to promote lifetime income options in retirement plans. Specifically, there 

are strong analogies to be found in research regarding: 

(1) the deleterious effects of lump-sum settlements versus structured annuity-like settlements 

in tort law; and, 

(2) the choice of lump-sum lottery payments in lieu of annuities. 

The Problem of Lump-Sum Settlements/Judgments in Tort Law

 Tort law settlement structures present similar problems to the lump-sum versus annuity 

distribution choice for retirement income. Especially when tort settlements or damages awards 

are made to compensate a victim for ongoing medical expenses or lifetime lost earnings, the 

typical lump-sum damages award can be problematic for the same reasons that lump-sum 

retirement payments are troubling: the recipient bears the burden and risk to invest, manage, and 
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slowly draw down the award to ensure sufficient annual income to meet the ongoing medical or 

living expenses that the award was designed to fund. 

 Because of these difficulties, structured settlements in the form of annuities have gained 

widespread support, including through default rules in many state statutes. See Ellen S. Pryor, 

After the Judgment, 88 VA. L. REV. 1757, 1759 (2002) (noting the enormous change in 

settlements away from lump-sum payments). Leaving aside potential tax advantages and possible 

preferences of defendants, the annuity form of settlement ensures that the tort victim will receive 

needed income to meet ongoing medical expenses or to replace annual lost earnings, as 

appropriate. Indeed, the importance of such mechanisms is reflected in the specific amendment 

of the Internal Revenue Code to reflect these options. See 26 U.S.C. § 5891. Studies have shown 

that lump-sum payments are often rapidly dissipated. See Pryor, supra, at 1779 n.67; Marcus L. 

Plant, Periodic Payment of Damages for Personal Injury, 44 LA. L. REV. 1327, 1332 (1984) 

(discussing relevant studies). And so analogy to lump-sum settlements and award judgments in 

tort law would help with understanding the similar problem in the retirement context. 

The Choice of Lump-Sum Lottery Payments

 Most lotteries offer winners two payment options: a lump-sum payment or a fixed 

annuity paid out over a specified number of years. Lottery winners who choose lump-sum 

payments are in some ways analogous to those who choose lump-sum payments upon retirement: 

they face the same challenges of investment, planning, and income-smoothing. Yet studies have 

shown the same problems as in the case of lump-sum tort settlements. For example, a recent 

study shows that lump-sum lottery winnings have little effect on bankruptcy filings because of 

the squandered wealth. Scott Hankins et al., The Ticket to Easy Street? The Financial 

Consequences of Winning the Lottery 2-3 (Vanderbilt U. Law Sch., Law & Econ., Working 

Paper No. 09-01, 2009), available at http://ssrn.com/abstract=1324845. 

 By looking to analogous situations, the agencies can build on existing research to support 

the implementation of strong default rules that encourage lifetime income options rather than 

lump-sum payments upon retirement. 

Respectfully submitted, 

James R. Williams 

Stanford Law School ‘10 

james.williams@stanford.edu