DCIIA Lifetime Income 

RFI Comment Letter 

 

May 3, 2010 

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

Room N-5665 

U.S. Department of Labor 

200 Constitution Avenue, NW. 

Washington, DC 20210 

Attention: Lifetime Income RFI 

RE: Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in 

Retirement Plans 

The Defined Contribution Institutional Investment Association (DCIIA) appreciates the opportunity to respond to the Request 

for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans (the "Lifetime 

Income RFI") of the Employee Benefits Security Administration's ("EBSA"), Department of Labor, and the Internal Revenue 

Service, Department of Treasury, published on February 2, 2010. 

Who We Are: The Defined Contribution Institutional Investment Association (DCIIA) is a recently formed non-profit trade 

association dedicated to enhancing the retirement security of American workers. DCIIA members include investment 

managers, consultants, record keepers, insurance companies, plan sponsors and others committed to improving retirement 

outcomes for American workers by advocating for better defined contribution plan design and institutional investment 

management approaches. 

DCIIA's Retirement Income Committee: This response to the Lifetime Income RFI has been prepared by DCIIA's 

Retirement Income Committee, which was formed to foster and promote research, education, and best practices related to 

institutional retirement income issues and improving outcomes for plan participants through the application of sound retirement

income policies and solutions. The Committee was established in accordance with DCIIA’s founding charter and core beliefs. 

A copy of the Retirement Income Committee's Charter is included with this submission. 

DCIIA Supports a Full Lifetime Approach to Retirement Income Adequacy: DCIIA commends the Department of Labor 

and the Department of Treasury for reviewing the rules under the Employee Retirement Income Security Act of 1974, as 

amended ("ERISA") and the Internal Revenue Code of 1986, as amended (the "Code") to determine whether, and, if so, how 

both agencies could or should enhance, including by regulations or otherwise, the retirement security of participants by 

facilitating access to, and use of, lifetime income or other arrangements designed to provide a lifetime stream of income after

retirement. DCIIA urges both agencies to take prompt action to enhance and support the ability of retirement plans and their 

plan sponsors to offer lifetime income solutions to working Americans. 

DCIIA strongly believes that the likelihood of a successful retirement income outcome is improved by careful attention to both 

the working (accumulation) and retirement (distribution) phases, and, importantly, by enabling a combination of employersponsored and individual retirement account solutions to initially grow and ultimately preserve retirement savings to meet 

spending needs over an individual’s total life expectancy. 

An important first step is for the entire retirement industry to begin to communicate accumulated retirement values in 

retirement income terms, e.g., how much lifetime income will a given level of savings produce?. The agencies, along with the 

whole retirement industry – providers and plan sponsors alike -- must work together to support efforts to create retirement 

income solutions which are professionally overseen, simply-designed and well-communicated and which facilitate plan 
May 3, 2010 

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Defined Contribution Institutional Investment Association (DCIIA) 

sponsors taking the next steps to adopt retirement income solutions to promote a successful retirement outcome for all 

participants. 

DCIIA respectfully requests that the agencies seek to promote acceptance of retirement income strategies, including by 

adopting fiduciary safe harbors for retirement income solutions, such as by clarifying how retirement income products can 

serve as a QDIA (qualified default investment alternative) and encouraging adoption of auto-enrollment into retirement income 

strategies. The agencies should also promote portability of retirement income products and support both guaranteed and nonguaranteed income solutions. Plan sponsors should also be provided support, through regulations, model communications or 

otherwise, to create participant communications reflecting a lifetime income stream, in addition to account balances. 

In addition to our enclosed response, we are also enclosing the core beliefs of our association (see below) and the Charter of 

our Retirement Income Committee. Both of these helped guide our responses to specific question in the RFI. As an 

Association representing a wide array of investment managers, recordkeepers, investment consultants and other vendors to 

the defined contribution industry, we are not advocationg for any particular product design – we believe that the marketplace 

and plan sponsors will provide innovation and solutions which are relevant and applicable to a particular plan’s demographics, 

needs and other related benefit offerings. We are united, however, in our view that improving the retirement security of 

retirement plan participants is a critically important goal, and that the agencies can help to promote this goal by making it 

simpler and more straightforward for plan sponsors to incorporate lifetime income solutions in their plans. 

DCIIA's Core Beliefs: DCIIA members believe the current defined contribution retirement system, with the adoption of 

institutional design approaches available today, can and will provide for the retirement security of working Americans. The 

important advances contained in the Pension Protection Act, particularly the safe harbor protections for plan automation 

features and appropriate default investment selection, provide plans with important guidance and fiduciary safe guards which 

can result in higher participation and savings rates, more appropriate investment allocations and improved long-term 

investment performance. 

By incorporating techniques of professional pension management found in traditional defined benefit pension plans, defined 

contribution sponsors can improve retirement savings outcomes, affording their employees a better quality of life in retirement

while managing their own fiduciary liabilities in plan governance. Some of the most prominent best practices include: 

1. Open Architecture in Assembling Best-in-Class Plan Design 

Open architecture provides plan sponsors and their consultants with the ability to select the best combination of partners 

to meet plan needs, including investment manager, record keeper, custodian, managed account, advice and other 

service providers. 

2. Full Support for All Investment Vehicles and Product Solution Formats 

The continued development of standard industry trading systems and information sharing protocols provides plan 

sponsors with a very wide range of DC-appropriate investment and pricing options which, depending on plan 

preferences, may be best delivered through mutual fund, insurance contract, collective trust or individual and institutional 

separate account formats. 

3. Improved Default Programs as Most Effective Path to Realizing Successful Outcomes 

Auto-enrollment and sufficient auto-escalation of contribution rates – coupled with a well-constructed qualified default 

investment and an effective employee communications and education program – can generate sufficient balances for 

workers to fund an adequate income replacement rate at retirement. Spending needs and longevity risk can be 

addressed by existing as well as new post-retirement investment and income management solutions being introduced to 

the market. 
May 3, 2010 

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Defined Contribution Institutional Investment Association (DCIIA) 

4. Full Lifetime Approach to Providing Retirement Income Adequacy 

The likelihood of a successful retirement income outcome may be improved by careful attention during both the working 

(accumulation) and retirement (distribution) phases, and by including a combination of employer-sponsored and 

individual retirement accounts, to initially grow and ultimately preserve savings necessary to meet spending needs over 

an individual’s total life expectancy. 

5. Full Expense Transparency from All Service Providers 

Plan participants benefit from plan sponsors providing fiduciary oversight of plan economics, and being knowledgeable 

about the breakdown of all plan costs and sources of revenue, including but not limited to investment management, 

record keeping and other administrative expenses. 

Thank you again for the opportunity to provide our views on lifetime income solutions and to respond to the questions you 

have posed. We look forward to continuing to work with you to better the retirement security of American workers. 

Sincerely, 

Lew Minsky 

Executive Director 

Defined Contribution Institutional Investment Association 

Enclosures: DCIIA Retirement Income Committee Charter 

 DCIIA Response to DoL RFI 

cc: DCIIA Retirement Income Committee. 
 DCIIA Retirement Income 

Charter 

May 3, 2010 

DCIIA Retirement Income Committee 

The DCIIA Retirement Income Committee provides a forum to foster and promote research, education, and the 

promulgation of sound fiduciary practices related to institutional retirement income issues. The Committee was 

established in accordance with DCIIA’s founding charter and core beliefs. It brings together investment managers, 

insurance companies, consultants, record keeping and trust companies, plan sponsors, law firms, academia and others 

focused on improving outcomes for institutional plan participants through the application of sound retirement income 

policies and solutions. 

Mission 

The DCIIA Retirement Income Committee’s mission is to promote the delivery of lifetime income solutions to a broad 

segment of US workers via the following initiatives: 

 Frame the industry and public retirement dialogue in 

outcome-based terms. 

 Support efforts advocating that 401(k) statements 

reflect a lifetime income stream, in addition to account 

balance. 

 Become a clearinghouse for education/communication 

on the full range of retirement income solutions, 

tailored to the needs of multiple audiences: plan 

sponsor, participant, consultant, and regulator. 

 Encourage industry standardization and operational 

protocols for supporting institutional retirement and 

lifetime income solutions. 

 Promote portability/transferability of income between 

record keeping platforms. 

 Promote acceptance of retirement income strategies 

as a QDIA; encourage consideration of autoenrollment into retirement income strategies. 

 Support both guaranteed and non-guaranteed 

institutional lifetime income solutions. 

 Clarify impact of required minimum distributions 

(RMD’s) on ability to offer different types of income 

solutions, and promote equal and relevant treatment of 

various income solutions under the RMD rules. 

 Encourage regulatory principles for retirement income 

options that are equivalent to other 401(k) options. 

 Assist plan sponsors who choose to offer an 

institutional retirement income solution, either in their 

plan or outside of the plan, in discharging their 

fiduciary responsibility to periodically review their 

offering to ensure that it is appropriate for participants 

and meets the then current investment and fiduciary 

standards for performance and risk. 

 Assist plan sponsors and their advisors in developing 

and agreeing to broad standards for comparing various 

income-related solutions. 

 Foster partnerships and/or alliances with organizations 

and individuals who share our goals in order to 

leverage knowledge/resources. 

 Engage in primary and secondary research activities 

that will broaden awareness and understanding of 

institutional lifetime and retirement income. 

Structure 

The DCIIA Board of Directors establishes all Committees. The Retirement Income Committee is comprised of DCIIA 

Directors or representatives of DCIIA Members, or both. The Board of Directors appoints the Chair and Vice Chair of the 

Retirement Income Committee, and establishes procedures to govern Committee activities. Participation in the 

Retirement Income Committee is voluntary and open to representatives of all DCIIA member firms. The DCIIA Retirement 

Income Committee shall coordinate efforts with other DCIIA Committees on relevant initiatives. The Retirement Income 

Committee has a Chair and a Vice-Chair, who shall come from different membership categories (or constituencies within 

membership categories) whenever possible. The Chair and Vice-Chair of the Retirement Income Committee are subject 

to ratification by a majority of Committee members, and shall serve two year terms. The Chair of the Retirement Income 

Committee concurrently serves a two year term on the Executive Committee of the DCIIA Board of Directors. 
 DCIIA RFI 

Response 

May 3, 2010 

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? 

The primary advantage to receiving some or all benefits in the form of lifetime payments is to create a floor amount of 

income for life. Social security and pension income (if applicable) may not be sufficient to cover the basic income 

needs of many retirees. Annuitizing accumulated retirement balances can also mitigate many retirement risks and 

protect the participant from the consequences of poor financial judgment. Additional advantages include: 

A. Reduce exposure to outliving one’s income: Many retirees rely on Social Security and pensions to cover basic 

living expenses. However, these income sources may be less reliable, or less prevalent, in the case of defined 

benefit pensions, for future retirees who will increasingly need to rely on personal savings to fund retirement 

spending. 

Another complexity is that Americans are living longer. As a result, many financial professionals suggest that 

pre-retirees and new retirees consider a retirement planning horizon of 20 to 30 years. 

The end result is that many workers risk outliving their income. 

B. Reduce market risk: Severe capital market fluctuations, like those experienced in 2008 and 2009, can quickly 

erode individual’s retirement savings. This, in turn, significantly decreases the amount of retirement income 

participants are able to generate, especially if withdrawals are made during market downturns. 

Products that offer lifetime payment options often mitigate this risk by offering a fixed rate of return (fixed 

annuities) or by “locking in” investment gains. The addition of lifetime payout options, regardless of the specific 

form of the product, reduces market exposure and helps insulate the income of participants from market volatility. 

C. Reduce the risk of ineffective financial management: Not all plan participants have the ability or discipline to 

effectively manage a retirement income distribution strategy. Research shows that most pre-retirees over 

estimate the amount they can draw down from their retirement savings and under estimate the length of their 

planning horizon. Further, many participants, especially less affluent participants, do not have access to 

competent financial advice to help them with this process. 

In addition to suggesting annuitization of benefits via immediate income annuities, different financial product 

alternatives should be considered. For example, some investment firms have introduced income replacement 

funds and managed payout funds that generate regular, but non-guaranteed cash flow for the participant. 

Further, systematic withdrawal programs can also be established to generate non-guaranteed retirement income. 

These products may become popular because they offer the participant flexibility and control. 

Disadvantages of participants receiving some or all of their benefits in the form of lifetime payments include: 

A. Reduced flexibility and control of assets: Income annuities that offer guarantees are often irrevocable and the 

participant may not be able to withdraw assets above their scheduled payments without significant penalties. If 

the annuity is irrevocable, the participant’s estate could be reduced if the participant dies prematurely. 

B. If the timing of the annuity election is not flexible, the participant may find that the annuity is not appropriate from 

tax and planning perspectives. For example, if a participant plans to work in retirement the annuity may prove to 
Defined Contribution Institutional Investment Association (DCIIA) 

RFI Response 

May 3, 2010 2 

generate additional and unwanted taxable income. Further, the participant may want to defer annuitization to 

increase his/her payout (much like deferring receipt of social security benefits). 

C. Reduced opportunity for capital appreciation in a rising market: Because fixed annuities transfer asset risk to the 

annuity provider, in a market environment where asset prices are generally rising, the participant would give up 

potential for increased asset prices and income. 

D. In the event of impaired health status later in life, participant may be unable to access assets needed to address 

healthcare costs. Also, for individuals with impaired mortality, an annuity with a payment stream not tailored to 

the participant’s health status may result in reduced distributions than would otherwise be the case. 

E. Behavioral challenge of helping participants understand the trade-off between a sizeable accumulated balance 

and what appear to be relatively modest lifetime monthly payments. 

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? 

DC plan participants often decline to utilize lifetime income arrangements for a combination of the reasons mentioned 

in this question. However, it should be noted that many participants will roll balances out of the plan and into an IRA 

and seek to generate retirement income outside of the plan structure. 

With respect to DC plan participants foregoing lifetime income options, reasons include: 

A. Retain flexibility and control. Participants may be unwilling to make an irrevocable decision with their retirement 

savings, even if it offers the best expected return. 

B. Product complexity. Many participants likely do not appreciate the complexity and risks associated with 

generating retirement income from their savings. A wide variety of retirement income product features, coupled 

with inconsistent naming conventions and descriptions of these features deter participants from understanding 

retirement income options. The lack of cost transparency further adds to the confusion. 

C. Costs. The costs of lifetime income distribution options are often significantly higher or perceived to be higher 

than non-guaranteed options. 

D. Lack of confidence in the solvency of the lifetime income provider (most typically an insurer). Participants are 

uncertain about trusting a single financial institution to guarantee their income, and are generally unaware of 

what would happen to their assets and guarantees if the guarantee provider were to become insolvent. 

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? 

Those individuals fortunate enough to participate in defined benefit plans can expect to receive lifetime income from 

the plan in retirement (assuming they elect to receive their benefit in annuity form). The form and consistency of 

payout resembles that of Social Security payments. Defined benefit plans also offer different annuity payment 
Defined Contribution Institutional Investment Association (DCIIA) 

RFI Response 

May 3, 2010 3 

options to the participant. Specifically, single and joint life annuities are offered. Joint life annuities may come with 

different levels of survivorship benefits for a surviving spouse (e.g., 50%, 75% or 100%). 

Most defined contribution plans do not offer lifetime income annuities, although participants taking Required Minimum 

distributions or systematic withdrawals may view that as a repetitive income source. Defined contribution plans also 

offer lump sum distribution options which are frequently rolled into IRAs. ) 

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? 

Providing future guaranteed income through an in-plan investment option is a good alternative to annuitization at the 

retirement date, assuming that the disadvantages noted above can be addressed. There are several in-plan product 

designs which are currently available to plan sponsors .These include guaranteed Living Benefit (GLB) riders 

attached to group variable annuities and fixed Deferred Income Annuities (DIA), which can be immediate annuities 

that begin payouts at retirement, or “longevity annuities” which delay payments until later in life (to protect narrowly 

against the “tail risk” of outliving one’s assets).. 

Deferred Income Annuities allow a participant to purchase a future income guarantee while saving in the DC plan. 

Each contribution purchases a future income guarantee payable at retirement or at a specific age. Essentially, the 

future income guarantee purchased is based on the age at contribution and projected retirement age or advanced 

age (in the case of longevity annuities), which determines the deferral period, annuity pricing considerations (e.g., 

interest rates at the time of contribution, mortality and expenses), and the anticipated annuity option at retirement or 

later. 

Guaranteed Living Benefit riders offer an income guarantee via either a Guaranteed Minimum Income Benefit (GMIB) 

or Guaranteed Lifetime Withdrawal Benefit (GLWB) rider. With GMIBs, participants are able to invest in approved 

subaccounts and guarantee a future income benefit based on a separate “stepped up” value. Participants can 

access the stepped up value only by initiating the withdrawal or income benefit. It cannot be accessed for the single 

sum cash value. With GLWBs, participants’ assets that are invested in a fund move into the guaranteed fund 

component at a specified age (e.g., age 50). The market value of the account balance is used to establish the 

benefit base, which is then “wrapped” with a guaranteed percentage withdrawal amount, for example 4% or 5%, 

which is then the amount that is paid out annually. The participant retains total control over the assets and may 

choose to liquidate at any point in time as long as there is a market value. If the assets fall to zero, the insurance 

company steps in and continues to pay the guaranteed withdrawal amount; this payment comes from the insurance 

company’s General Account 

We believe that a wide variety of options may be viable for most participants for the following reasons: 

 Investing in guaranteed income incrementally while saving for retirement can create a dollar-cost-averaging 

benefit that cannot be achieved via a single point in time purchase. This is especially valid when utilizing DIA 

products. 

 In-plan investments in guarantees, if provided as a QDIA, will create an income floor for participants that can 

replicate the benefit of a traditional defined benefit plan. 

 In-plan investing will reduce the “sticker shock” that many retirees sense when comparing the monthly income 

benefit provided by a SPIA (single premium immediate annuity) to the cash outlay. 

 GLB riders provide a form of portfolio insurance that reduces the impact of large investment losses immediately 

prior to retirement. 

 Finally, investing in income guarantees over time will remind participants that their DC asset accumulations need 

to be used efficiently to generate income for a long time horizon. Anecdotally, there are many stories of 
Defined Contribution Institutional Investment Association (DCIIA) 

RFI Response 

May 3, 2010 4 

participants electing a lump sum distribution from their DC plan and splurging on a purchase (industry 

convention holds that this purchase is often a boat), without a full appreciation for the length of the horizon that 

the assets need to last. 

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

employer non-elective contributions to fund lifetime income? To what extent are participants offered a choice 

regarding such use of employer contributions, including by default or otherwise? 

There are products in the marketplace which propose such a design, but it is not clear that sponsors have utilized 

them to date (survey data indicates that substantially less than 10% of plans utilize any type of in-plan annuity today). 

The designs appear to allow participants full discretionary control over these assets, as with any default structure. 

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? 

In reviewing the question, DCIIA respectfully declines to comment on those arrangements that are designed for retail 

delivery to individuals who no longer have any affiliation with their employer sponsored retirement plan. 

Our Association is focused on lifetime income programs that are provided to plan participants still affiliated with their 

employer sponsored retirement plan. We believe that both in-plan and voluntary distribution arrangements facilitated 

through IRA rollovers should be designed as qualified institutional offerings. These arrangements should be 

structured to take advantage of the institutional framework of professional oversight, scale pricing, transparency, and 

unbiased participant education. Institutional arrangements provided to plan participants both during the accumulation 

and distribution phases will produce far better outcomes than what is available to participants on a retail basis. 

Today there are examples of lifetime income arrangements available to plan sponsors on both an in-plan and IRA 

rollover basis. There has been significant product development to date and the DCIIA supports continued broad 

based product development within the institutional framework for both in-plan and qualified IRA rollover distributions. 

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? 

Fundamentally, lifetime income options, particularly in the guaranteed space, provide a combination of features – 

investment components that allow participants some sort of market exposure (to varying degrees, including no 

market exposure, in the case of an immediate annuity), and insurance, specifically, insurance against outliving one’s 

assets. Products that carry a promise to make payments to a participant for their entire life, regardless of market 

performance, interest rate changes or the life span of that individual mean that the provider of that guarantee is 

bearing additional risks, and there are costs associated with that guarantee. In some cases, these costs are explicit, 

and various regulators may require them to be disclosed, and hedged. In other cases, the costs are there, but are 

carried as long term guarantees, and do not have to be explicitly accounted for or hedged. In either case, the 

guarantor (an insurance company), is bearing a complex set of risks associated with that promise to pay. If, for 

example, regulatory or capital constraints require that certain market risks be hedged, then short-term changes in 

market volatility can increase the cost of offering a specific guarantee. The insurance company may elect to bear 

those increased costs or pass them along to current or future participants. 
Defined Contribution Institutional Investment Association (DCIIA) 

RFI Response 

May 3, 2010 5 

Critically, these costs differ fundamentally from the costs associated with providing an investment product appropriate 

for the accumulation phase of a participant’s savings horizon. The provision of a guarantee, where certain risks are 

transferred from the individual to an insurance company, naturally incur costs over and above those created by 

providing participants with market exposure. 

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)? 

Pros of In-Plan 

 Track Retirement Income – An in-plan option allows the participation to track the amount of accumulated income 

leading up to the retirement. 

 Dollar Cost Averaging – An in-plan option may allow for dollar cost averaging by purchasing lifetime income 

payments across an extended period leading up to retirement, reducing vulnerability to the interest rate 

environment at the time of retirement. 

 Institutional Pricing – Participants may gain access to significantly lower fees than the retail market by being 

lumped into a large asset base (i.e. plan level assets). 

 Increased Fee Transparency – Fee disclosure requirements may lead to clearer, more transparent disclosure for 

in-plan participants. Plan sponsors (and their advisors) can individually and collectively improve the 

transparency and comparability of a wide array of lifetime income product solutions. 

 Spur Participation – A participant will be more likely to take action within a plan’s parameters versus soliciting 

annuity options on his/her own behalf. 

 Endorsement – Participants may take comfort in knowing that the in-plan option was pre-screened by the plan 

sponsor acting as fiduciary, which will also continue to monitor the in-plan option. 

 Unbiased Decision Support – Plan sponsors have no financial incentive to drive participant behavior into specific 

options, and thus would typically offer decision support and guidance that has no inherent bias. In the individual 

retail market, commissions and other revenue incentives can create biased guidance and aggressive marketing 

tactics. 

Cons of In-Plan 

 Flexibility – A participant may seek a variety of annuity providers or features in the retail market, but most likely 

only a single in-plan option would be offered to participants. 

 Portability – The issue of a participant being able to take lifetime income payments from one employer to another 

becomes relevant when offered as an in-plan option. 

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? 

Pros of In-Plan 

 Beneficial for Participants – The addition of an in-plan option exhibits a conscious decision by the plan sponsor 

to help its participants prepare for retirement, promoting employee engagement and productivity. Providing an 

option that aids in the awareness of accumulated retirement income, protects against the early depletion of 

assets, and access to institutional fees is a benefit to participants and should thus also benefit the plan sponsor 

through employee appreciation. 
Defined Contribution Institutional Investment Association (DCIIA) 

RFI Response 

May 3, 2010 6 

 “DB-Like” Structure – An in-plan option allows a participant to transform defined contribution assets into a 

guaranteed income stream similar to once prevalent defined benefit plans. Plan sponsors who have moved away 

from a DB structure may appreciate the security offered to employees through an in-plan option. 

 No Added Costs – The addition of an in-plan option should not result in additional fees for the plan sponsor. 

 Asset Retention – In-plan options often preserve assets within the plan after retirement, maintaining asset levels 

over time and retaining the institutional purchasing power within the plan. 

 Employee retention. Like defined benefit plans, carefully designed DC plans that have a guaranty income option 

may help in the retention of skilled employees 

Cons of In-Plan 

 Limited Number of Options – At this time, there is a limited number of in-plan options available to plan sponsors 

to choose from. 

 Fiduciary Responsibility – Plan sponsor protection in offering an in-plan option is undefined currently. 

 Ongoing Monitoring – The evaluation of the universe of annuity/guaranteed income options is unprecedented in 

a defined contribution setting, creating concerns in ability to effectively monitor or replace an option if necessary. 

Options offered outside the plan generate significantly less work and risk for the plan sponsor. 

 Employer/Plan-level Portability – If a plan sponsor wishes to switch providers, either the plan recordkeeper or the 

lifetime income provider, there are currently no standards for transferring accumulated income balances, and not 

all recordkeepers will support all products or solutions. This can leave plan sponsors with a difficult choice 

regarding solutions which are no longer appropriate for the sponsor or their participants. 

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? 

Without commenting on the current state of the market with respect to sponsors offering partial annuitization options, 

there can be little doubt that the literature regarding choice architecture is compelling on this point. Simple “framing” 

choices with respect to how lifetime/retirement income choices are presented to participants can make enormous 

differences in the take-up rates of such products. More research is called for on this topic, but initial work done by 

academics such as Jeffrey Brown, Moshe Milevsky, David Laibson, Brigitte Madrian, not to mention the seminal work 

done by Cass Sunstein and Richard Thaler in this field suggests that simple changes in how lifetime income options 

are presented (or delivered, in the case of a default approach) can lead to much-improved metrics with respect to 

retirement security. 

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? 
Defined Contribution Institutional Investment Association (DCIIA) 

RFI Response 

May 3, 2010 7 

DCIIA believes that use of defaults in connection with lifetime income products is critical, if not essential, to creating 

retirement income adequacy in the United States, again, with the caveat that the issues noted elsewhere in this 

response are addressed. The decline in the use of defined benefit plans combined with the unsure footing of Social 

Security and the volatility inherent in traditional defined contribution plan investments make it essential that we create 

an additional source of guaranteed lifetime income. 

We know from research on behavioral science applied in the context of retirement plan investing that a significant 

percentage of participants will never take the time to educate themselves about lifetime income products or, if they do, 

will never act on the education they receive. We also know that the majority of participants age 55-59 are interested 

in guaranteed income or paycheck products. Many experts who have studied the problem of retirement income 

adequacy have recommended that some or all of participants’ accounts in defined contribution plans be defaulted to 

a distribution option that provides guaranteed lifetime income payments. This research supports the view that if we 

take a “wait and see” approach to see if encouraging voluntary action will be enough to close the income gap, we are 

unlikely to be satisfied with the result and will have lost valuable time needed to close the retirement income 

adequacy gap. 

While we support the use of defaults in connection with lifetime income options, we also believe it’s critical that 

defaulted participants have the opportunity to opt out of the default without penalty, both before the default action 

occurs as well as for some administratively reasonable period of time after it occurs. There will always be a segment 

of participants who want to actively manage their account during retirement or who have other reasons why a lifetime 

income solution is not the right solution for them and we believe it is critical to support this category of participants, as 

well as those who are less active investors. 

One of the key barriers in using defaults to cause participants to invest in lifetime income products and or to take 

distribution in the form of lifetime income vehicles has been the irrevocability (perceived or otherwise) of the 

investment decision. Lack of control over account balances and the “all or nothing” choice implied in many annuity 

products are among the core reasons why plans don’t offer in-plan lifetime income products and, more specifically, 

why participants don’t select them when taking a distribution from the plan. More recent products help address this 

problem by allowing participants control over how much of their account to invest in a lifetime income option, allowing 

them to invest gradually over time and make changes to their investment elections, and allowing access to and 

control over some or all of their account in the lifetime income investment during both the accumulation and 

withdrawal phases. 

Creating a regulatory structure that would allow plans to default participants in to lifetime income investments and 

distribution options is essential for addressing the risk that participants will outlive their retirement savings. However, 

participants must have sufficient flexibility after the default has occurred to align the retirement income investment 

with their individual retirement income needs. Please see our response to Q 13 for more detail on this topic. 

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? 

If, and what amount to annuitize is a very individual decision based on the participant’s own facts and circumstances. 

We recommend that the DOL encourage plan participants to create or estimate a retirement budget taking into 

account items such as: 

 Sources of fixed income, such as Social Security or pension income, 

 Savings and assets available to generate supplemental income (via investment earnings and/or liquidated 

capital), 

 Income earned from part-time or temporary work in retirement, 
Defined Contribution Institutional Investment Association (DCIIA) 

RFI Response 

May 3, 2010 8 

 Anticipated expenses in retirement split between “basic income needs” and “lifestyle income needs”, and 

 Legacy and estate goals. 

Inflation also needs to be addressed. While some income annuities or annuity options offer COLA features to keep 

pace with inflation, most do not. Income needs should be reviewed periodically in retirement and additional 

guaranteed income amounts may need to be secured 

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? 

DCIIA as an organization supports lifetime income options in 401(k) plans, and supports the inclusion of those 

features in default options utilized for plan participants. DCIIA further believes that it should be simpler, easier, and 

less risky from a fiduciary perspective for plan sponsors to include these features. We believe that if the Agencies 

encouraged plan sponsors to incorporate lifetime income features in their plans that would be useful. We do not, 

however, believe that these features should be required, especially in the absence of clarity regarding any risks that 

sponsors may be taking be including these features in their plans. Further, such features are not always equally 

valuable for every plan sponsor – there may be specific workforce demographic or other benefit features (such as an 

open defined benefit plan) that would make the required inclusion of a lifetime income feature less appropriate. 

DCIIA strongly supports the basic tenets of “choice architecture,” and the concepts popularized in the book “Nudge,” 

by Sunstein and Thaler. More specifically, DCIIA supports designing defaults that lead to successful outcomes, but 

leaving choice, in this case, to both sponsors and participants. 

Participants could be given access to low-cost, institutionally priced lifetime income options selected in accordance 

with fiduciary due diligence requirements. There is significant product innovation currently occurring with respect to 

lifetime income products and the Agencies should fashion rules that encourage future development by defining 

“lifetime income distribution option” in broad terms. 

According the 2009 Hewitt study, “Trends and Experiences in 401(k) Plans”, 84% of 401(k) plan participants take 

distribution in the form of a lump sum payment and only 1% elect to take an annuity. With this wide gap, relying on 

voluntary choices by plan sponsors and plan participants will not be sufficiently effective in promoting retirement 

income adequacy and using a lifetime income option as the default distribution option is necessary to address the 

risk that a substantial number of participants will outlive their retirement income. Protections similar to those offered 

in the context of automatic enrollment, such as notice requirements and the opportunity to opt out without penalty are 

essential for the effective use of a default strategy. The products used as a default must be flexible enough to 

accommodate the necessary flexibility and must be attractive enough to defined contribution plan participants to 

promote a high “stick rate” similar to what we’ve experienced using automatic enrollment. 

From a behavioral finance perspective, a mandated inclusion of a lifetime income feature that applied to 100% of the 

account balance as the default option would likely be viewed extremely negatively by both sponsors and participants. 

Alternatively, clear guidance that the selection and inclusion of lifetime income features is not only acceptable, but 

encouraged, with appropriate opt-out features, would allow plan sponsors to design default structures appropriate for 

their workforce and benefit plans, would harness the power of inertia, and would still give participants control over 

their account balances if they proactively chose not to utilize the lifetime income feature. 

We believe that if lifetime income options are encouraged as the default distribution option with appropriate 

protections for plan sponsors (including protections similar to those offered under the QDIA rules), it will encourage 

plan sponsorship because it will make the plan more valuable to employees and will reduce the risk of claims brought 

by participants based on insufficient retirement income. 
Defined Contribution Institutional Investment Association (DCIIA) 

RFI Response 

May 3, 2010 9 

As is mentioned in Q26, the regulatory hurdles that plan sponsors currently face with items such as the qualified joint 

and survivor annuity rules become a hindrance to adding retirement income products to a plan, particularly as a 

default option. 

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? 

There have been a variety of barriers or impediments that have limited the widespread adoption of lifetime income 

solutions within qualified plans. The discussion below is by no means comprehensive, but addresses some of the 

reasons behind sponsor reluctance to offer these solutions to their participants. 

Annuities are complex financial products. Historically, plan sponsors and their advisors have used metrics such as 

an investment’s expense ratio as a key metric when comparing various investment options. Lifetime income features 

introduce new requirements for comparing options, including, but not liimited to, the cost of the underlying investment 

content, and the amount of future income purchased today at some price. The lack of comparability across different 

types of products, as well as the difficulty of comparing accumulation products (such as mutual funds) with 

distribution options (such as annuities) has clearly been a key inhibiting factor in sponsor adoption to date. 

It is not practical or realistic to expect plan sponsors to bear the risk associated with understanding annuity pricing 

nuances – let alone determine if the annuity benefits provide value to plan participants – without some form of 

fiduciary relief or specific guidelines to help plan sponsors endorse the products. The industry is working to improve 

the transparency of these products and the cross-comparability, but this issue remains contentious. 

Counterparty risk is also a concern. Selecting an insurer (in the case of a lifetime guaranteed product design) could 

be done by relying on a company’s current financial and claims-paying ratings from a 3rd party ratings agency (e.g., 

Moody’s, S&P, Fitch, A.M. Best, etc.). While a company’s financial and claims-paying ratings can be interpreted as 

a good indication of a company’s stability, it cannot predict its long term viability. This is especially relevant given the 

long-term nature of immediate annuity guarantees. However, rating agencies have also come under fire for failing to 

predict and quantify the risk exposure that many firms had to annuity living benefits in 2008 and 2009. 

The DOL would clearly need to offer additional safe harbor guidelines to relieve sponsors of fiduciary responsibility in 

both cases. 

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? 

As noted in Q. 6, DCIIA’s mission is focused on solutions which are offered to participants still affiliated with qualified 

workplace retirement plans. While we are aware that there is some product innovation with respect to the designs 

alluded to above in the “pure” retail space, we are not aware of those designs being offered in the qualified, 

employer-sponsor arena. 

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? 

DCIIA has elected not to comment on this question. 

As an association, we support the efforts of plan sponsors to improve the retirement outcomes of all of their 

participants. 
Defined Contribution Institutional Investment Association (DCIIA) 

RFI Response 

May 3, 2010 10 

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? 

The following should be included in the information provided to participants: 

 Fees – the expenses of the product 

 Penalties – if there are penalties for non-scheduled withdrawals from the product. 

 Amount of income for the participant – the annual income the participant will receive which may be dependent on 

when they begin the distributions. 

 Underlying investments of the product – is it in the general account of the provider or are their underlying 

investments the participant can select? 

 Features of the product – are there guaranteed amounts? Is it adjusted for inflation? Is there a spousal benefit 

and if so in what amount? 

The plan sponsor would provide the information to the participant based on facts and features they receive from the 

product provider. The information should be available to the participant in paper and electronic format before they 

purchase the lifetime income solution. 

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. DCIIA believes that there the need to educate plan participants about lifetime income is a public policy and 

moral imperative. However, legal and regulatory concerns seem to be getting in the way of advancements in this 

area. As a general matter, the consideration of whether an expense for education is in fact an eligible plan expense 

(and, therefore, able to be paid for from plan assets) involves a review of the duties of loyalty and prudence under 

ERISA. Specifically, Section 401(c)(1) provides that the assets of a plan shall be held for the exclusive purposes of 

providing benefits to participants in the plan and their beneficiaries, and defraying reasonable expenses of 

administering the plan and ERISA Section 404(a)(1)(A) provides that a fiduciary shall discharge his duties with 

respect to the plan solely in the interest of the participants and beneficiaries for the exclusive purpose of providing 

benefits to participants and their beneficiaries, and defraying reasonable expenses of administering the plan. 

Moreover, a plan fiduciary must establish and follow a prudent process to evaluate whether an expense meets these 

standards. 

It seems clear that providing plan participants with the education and tools that they need to appreciate, measure and 

fully consider their individual retirement income needs falls squarely within the dictates of ERISA. That said, the 

ultimate determination of whether expenses are reasonable and necessary must be made by the plan fiduciaries 

pursuant to their fiduciary duties under ERISA to act prudently and for the exclusive purpose of providing benefits to 

the participants and their beneficiaries and defraying reasonable administrative expenses. While this standard may 
Defined Contribution Institutional Investment Association (DCIIA) 

RFI Response 

May 3, 2010 11 

seem relatively straight forward to apply in the lifetime income context, it can be very difficult for a plan 

sponsor/fiduciary to act without guidance from the DOL. Thus, the DOL can help promote the adoption of education 

programs in this area by providing plan fiduciaries with published rules or regulations regarding the standards that it 

will use in reviewing the use of plan assets to pay for retirement income educational efforts implemented using plan 

assets. 

19. What specific legal concerns do plan sponsors have about educating participants as to the advantages and 

disadvantages of lifetime income or other arrangements designed to provide a stream of income after retirement? 

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

It is important that the DOL encourage plan sponsors and other plan fiduciaries to help plan participants understand 

and evaluate their retirement income needs. The information that plan participants need to make informed decisions 

about lifetime income arrangements is significantly different than the information that a plan sponsor/fiduciary needs 

to consider in offering such options, and selecting the appropriate provider(s). For example, in selecting annuity 

provider for its plan, DOL guidance instructs a fiduciary to consider: the ability of the annuity provider to administer 

the payments of benefits under the annuity to the participants and beneficiaries and to perform any other services in 

connection with the annuity, the cost of the annuity contract in relation to the benefits and administrative services to 

be provided under such contract, taking into account the amount and nature of any fees and commissions, the 

annuity provider's experience and financial expertise in providing annuities of the type being selected or offered, the 

annuity provider's level of capital, surplus and reserves available to make payments under the annuity contract, the 

annuity provider's ratings by insurance ratings services. Consideration should be given to whether an annuity 

provider's ratings demonstrate or raise questions regarding the provider's ability to make future payments under the 

annuity contract, the structure of the annuity contract and benefit guarantees provided, and the use of separate 

accounts to underwrite the provider's benefit obligations, the availability and extent of additional protection through 

state guaranty associations, and any other information that the fiduciary knows or should know would be relevant to 

evaluating the annuity provider's ability to make all future payments and the relationship between the costs and the 

benefit and administrative services to be provided under the annuity contract. 

As we have identified elsewhere in this RFI, it is critical that the fiduciary selection process be made simpler. This 

would encourage fiduciaries to adopt/establish lifetime income solution(s)while the fiduciary process would continue 

to protect plan participants. Additionally, an education process for plan participants that focuses more narrowly on 

identifying an individual's retirement income needs and identifying the investment products can be used to help meet 

and secure these retirement income needs would also benefit sponsors and participants. Plan fiduciaries must feel 

secure that they will not be exposed to additional risks/liability as a consequence of providing education and/or 

advice to participants on lifetime income consideration and solutions. Plan sponsor would likely take a good deal of 

comfort in the adoption of safe harbors (and/or other guidance) from the DOL that support plan sponsor/fiduciary 

effort in this area. 

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? 

Given that one of the impediments to the use of lifetime income products has been the lack of participant 

understanding, it is important that plans be encouraged to educate participants on the advantages and 

disadvantages of lifetime annuities or other lifetime income products. Guidance may include providing retirement 

income comparisons for various products (both lifetime income and non-lifetime income). 

Plan participants clearly need to be educated on the benefits and drawbacks of lifetime income products. Beyond the 

product features, benefits and costs, participants also need to understand why they have to spend down their 

retirement savings carefully. 
Defined Contribution Institutional Investment Association (DCIIA) 

RFI Response 

May 3, 2010 12 

Participant education is an area where the DOL has an opportunity to demonstrate practical leadership. The DOL 

should consider producing generic educational content and perhaps hosting calculators and planning tools on a 

trusted, impartial website for the public to use when making these decisions. From the plan sponsor perspective, 

encouragement would be preferred to mandates or additional complex notice requirements. 

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. This may be one of the single most important changes to the current 401(k) system that can be made. The 

sooner we begin to shift the mindset of participants away from DC plans as “savings plans,” and toward “retirement 

plans,” the more successful they will be as retirement plans. That means conditioning participants to think about their 

account balance as a stream of future income as early and as often as possible. 

Translating the amount saved into a future income estimate will serve to remind participants that their DC plan 

accumulations are needed to generate income throughout retirement. Additionally, when they see that $100,000 

may only generate $700 of monthly income for life, the participant may be incented to save more aggressively. 

Some providers have already taken steps to make this information available to plan participants. DCIIA encourages 

continued innovation on this topic. It is also critical that the assumptions utilized to create an income example be 

reasonable, and that sponsors do not bear additional liability for providing such estimates. 

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? 

Without limiting the incorporation of either current or future lifetime income product designs, future income benefits 

could be expressed as follows: 

Accumulated account value: 

 Project the account balance to ages 60, 65, and/or 70. 

 Calculate balances based on current contribution rate. Ideally, also show the benefit of increasing contributions 

by 1% or 2% higher than the current rate. This shows the benefit of increased savings. 

 Assume investment returns of 0%, 4% and 8% to the retirement age. 

Annuity benefits: 

 Show the monthly income amount based on the accumulated account values. Most people who budget do so on 

a monthly basis vs. annual basis. 

 Single and Joint Life annuity or withdrawal values should be shown. 

 Also consider showing non-guaranteed income amounts using a 4% or 5% annualized withdrawal rate. 
Defined Contribution Institutional Investment Association (DCIIA) 

RFI Response 

May 3, 2010 13 

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? 

We recommend that the DOL solicit technical illustration guidelines and parameters from impartial regulatory and 

industry associations such as FINRA, the NAIC and/or Society of Actuaries. 

Due to the fluid nature of financial product pricing and market benchmarks, we also recommend that the DOL provide 

general guidance on assumptions (again, with the input from regulatory and industry experts) in the form of safe 

harbors and not dictate by regulation. 

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 preretirement standard of living)? If so, what methodology should be 

used to establish such a ratio, such as preretirement 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? 

Please see also our response to question 21. In particular, we would emphasize the importance of the assumptions 

used in creating lifetime income or replacement ratio examples. 

Income replacement ratios can be misleading and lead to inappropriate planning for those close to retirement. For 

participants within 10 years of retirement, we recommend estimating retirement expenses as described in Question 

12. 

For younger plan participants, income replacement ratios may provide high-level “rule of thumb” guidance. However, 

it is important to disclose that income replacement ratios normally do not take into account “retirement lifestyle” 

expenses and expectations. Other factors like inflation, health care costs, and changing income levels need to be 

factored in to the estimates as well. 

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? 

As noted elsewhere in our response, concerns about the eligibility or appropriateness of lifetime income options in a 

qualified plan context has been an impediment to sponsors adopting them. An important change the agencies could 

make to encourage the use of lifetime income options is the creation of a clear safe harbor, so that plan sponsors are 

aware that they can incorporate these features in their plans, perhaps even as a default, without exposing 

themselves to undue fiduciary risk, or running the risk that the plan will somehow be in violation of the plan 

qualification rules simply by offering a lifetime income option. 
Defined Contribution Institutional Investment Association (DCIIA) 

RFI Response 

May 3, 2010 14 

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? 

The qualified joint and survivor annuity rules present administrative burdens and complexities when applied in the 

context of certain lifetime income products and changes to those rules would encourage the use of lifetime income 

products without compromising spousal protections. 

The vast majority of 401(k) plans today take advantage of the option under IRC § 401(a)(11)(B)(iii) and Treas. Reg. § 

1.401(a)-20, Q&A 3(a) to provide for a 100% spousal death benefit (unless waived) in lieu of offering QJSA or QPSA 

benefits. The reason most 401(k) plans are designed this way is that most participants and beneficiaries waive the 

QJSA and QPSA benefits even when they’re available, and implementing the survivor annuity rules creates 

significant costs and administrative burdens due to the notice, waiver, revocation and spousal consent requirements. 

Under current IRS rules if a participant selects payment in the form of a life annuity the exception to the survivor 

annuity rules is no longer available and plans must comply with the QJSA and QPSA rules. It is not clear under the 

code and regulations, or under recently issued Private Letter ruling 200951039, whether lifetime income products like 

GLWBs that do not involve annuitization of participant accounts trigger application of the survivor annuity rules and 

this confusion is a barrier to adoption of these lifetime income products. 

It is recommended that the Agencies clarify that lifetime income products in which participants maintain and control 

an account balance supporting the lifetime income guarantee and where the participant’s account balance is never 

irrevocably converted to an annuity are not life annuities for purposes of the survivor annuity rules. The result 

should not vary due to the possibility that at some point during the payout phase (after the supporting account 

balance is depleted) the lifetime income payments will be paid by the guarantor. The result should also not vary 

based on the fact that a single election by the participant triggers payment from their account balance until depleted 

and from the insurer after depletion. 

Clarifying that certain lifetime income products are not life annuities triggering compliance with the survivor annuity 

rules will not diminish spousal protections enjoyed under the current structure. The vast majority of 401(k) plan 

distributions today are made to participants in the form of a lump sum distribution upon separation from service with 

no spousal protections. Lifetime income and annuity products are almost universally offered in the form of either a 

single or joint and survivor payout structure and, with respect to guaranteed minimum withdrawal type products, any 

account balance remaining at the time of a participant’s death is paid to their beneficiary, which typically is the 

spouse. Therefore, even without the QJSA and QPSA rules applying, spouses are likely to receive a larger portion of 

401(k) plan distribution amounts if a lifetime income product is selected than they do when benefits are paid in the 

form of a lump sum distribution upon separation from service. 

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 in-plan insurance annuities accumulate over time with 

increasing plan contributions and earnings? 

Yes, further guidance on application of the qualified joint and survivor rules to in-plan annuities is necessary. Please 

see our response to Q 26 above for more detail on this issue. 

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? 
Defined Contribution Institutional Investment Association (DCIIA) 

RFI Response 

May 3, 2010 15 

Required minimum distribution (RMD) rules can play a role in discouraging plan sponsors from offering lifetime 

income solutions. Since violation of RMD rules create a significant tax penalty, any potential lifetime income solution 

must carefully consider all situations to ensure violation of RMD rules is avoided. Ultimately, a plan sponsor might 

conclude that any RMD violation that occurred with dollars in their sponsored plan would reflect negatively on the 

sponsor. Such a conclusion discourages plan sponsors from supporting lifetime income solutions. Any guidance 

that alleviates this sponsor concern would help encourage adoption of lifetime income solutions. 

Current RMD rules also discourage usage of certain lifetime income solutions. In particular, longevity insurance is 

significantly impacted by RMD rules. The efficiency of longevity insurance relies on the gap between the purchase 

date of the insurance and the date income begins. By delaying the beginning of the income phase, an individual can 

purchase income at a substantial discount. A typical policy might have a purchase date at age 65 with income 

beginning at age 80. Mortality between 65 and 80 creates a substantial discount on late-life income. However, this 

type of insurance policy is disadvantaged given current RMD rules. If purchased with qualified dollars, the value of 

this policy counts in the RMD calculation, but the policy itself does not generate any income until age 80. What 

happens if there are insufficient funds outside of the insurance policy to pay for the required minimum distribution 

implied by the value of the policy? That concern has kept longevity insurance providers from accepting qualified 

dollars for policies with payouts that begin after age 70. To remedy this situation, we recommend that longevity 

insurance policies be exempted from the RMD calculation. Current RMD rules exempt immediate annuity purchases 

from the RMD calculation. Extending that exemption to cover longevity insurance is justified on the grounds that 

under many circumstances a portfolio combining liquid assets and longevity insurance can create a more desirable 

lifetime income solution (higher income and/or increased flexibility). In fact, given the policy benefits of sharing 

mortality risk, consideration should be given to exempting any insurance contract that focuses solely on lifecontingent payments. Current RMD rules unnecessarily hinder the development of lifetime income solutions based 

on longevity insurance and should be updated accordingly. 

Longevity Insurance Overview 

Longevity insurance (sometimes referred to as a deferred annuity or a longevity annuity) allows an individual to 

purchase life-contingent income that begins at a future date. For example, a longevity insurance policy purchased at 

age 65 may have income payments that do not begin until age 80. The payouts from the policy are inexpensive 

because they are contingent upon living to an advanced age to collect. Recent research has demonstrated that 

longevity insurance arrangements maximize the income benefit per insurance premium dollar spent. For example, 

Scott, 2008 estimates that “for a typical retiree, allocating 10%-15% of wealth to a longevity annuity creates spending 

benefits comparable to an immediate annuity allocation of 60% or more.” Moreover, since insurance costs tend to be 

proportional to the premium payment, longevity insurance can help minimize insurance costs (see, for example, Scott 

et al., 2009). 

Longevity insurance research implies that individuals looking to allocate only a portion of their assets to insurance 

can typically improve their income level by utilizing longevity insurance instead of traditional immediate annuities. 

Since few individuals want to fully annuitize their assets, longevity insurance could play an important role in the 

creation of desirable lifetime income solutions. 

References 

Scott, J.S. 2008. The Longevity Annuity: An Annuity for Everyone? Financial Analysts Journal. 64(1): 40-48. 

Scott, J.S., Watson, J.G. and Hu, Wei-Yin, 2009. What Makes a Better Annuity? Pension Research Council Working 

Paper 2009-03. (forthcoming – Journal of Risk and Investment) 

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 
Defined Contribution Institutional Investment Association (DCIIA) 

RFI Response 

May 3, 2010 16 

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? 

Any clarity the agencies can provide on the ability to view both defined benefit and defined contribution plan benefits 

holistically would enhance the entire retirement benefits offering, for those participants fortunate enough to have 

access to both types of plans. A variety of studies suggest that defined benefit plans can produce low-cost 

retirement income benefits, and if it were possible for DC plan participants to share in those savings, it would improve 

outcomes for those participants. DCIIA would support clarification with respect to the interaction between the two 

types of plans. 

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? 

In our experience 401(k) plans, particularly those in the small to mid market, do not offer traditional annuities as a 

benefit distribution option and therefore do not use the current safe harbor for selecting annuities. The administrative 

costs of complying with the spousal annuity rules and the lack of clarity in the current safe harbor are some of the 

reasons why annuity options are not typically offered. 

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? 

It is not clear whether the current regulatory safe harbor for annuities applies to some of the newer guaranteed 

lifetime income products or, if they do, how it applies in the context of these products. Anecdotally, some plan 

sponsors and their advisors, believe that even if the current safe harbor did apply to these newer in-plan solutions, it 

would not provide sufficient protection for the plan sponsor from a fiduciary perspective. 

It would be helpful to create a new fiduciary safe harbor providing guidance on the selection and monitoring of 

deferred annuities, GMIBs. GLWBs, GMWBs (not an exhaustive list) or other lifetime income solutions and products 

that do not work like traditional single premium immediate annuities. 

Fiduciaries will be most comfortable relying on a safe harbor if it is very clear on the steps they must take and the 

variables they should consider when selecting a lifetime income products. The guidance should be flexible enough to 

accommodate a broad array of lifetime income products/solutions to both facilitate the current product array, and 

encourage product innovation. Following are areas of core concern to fiduciaries that should be addressed by the 

safe harbor. 

 Selecting the Guarantor of Lifetime Income Payments: Plan fiduciaries are very concerned about their potential 

liability in selecting a guarantor and in particular the risk they take if the guarantor is not able to make promised 

payments in the future. The safe harbor should allow plan fiduciaries to rely extensively on protections offered 

by state insurance laws. To the extent an independent review of insurance company solvency is appropriate; 

the safe harbor should identify the specific type of information that should be reviewed when selecting a 

guarantor (ratings information, performance history, etc.). Fiduciaries should be able to rely on publicly available 

information unless they have actual knowledge of non-public information. The safe harbor should clarify that if 
Defined Contribution Institutional Investment Association (DCIIA) 

RFI Response 

May 3, 2010 17 

the decision to select a particular guarantor was prudent at the time made, plan fiduciaries will not be held liable 

if at some point in the future the financial circumstances of the guarantor change. 

 Monitoring the Guarantor of Lifetime Income Payments: Lifetime income products pose a unique challenge to 

fiduciaries in fulfilling their obligation to monitor plan investments and to respond appropriately if an investment is 

found to no longer be suitable for the plan. If a plan decides to eliminate a lifetime income investment altogether, 

participants already invested in the product may pay substantial early withdrawal penalties, or may lose the 

benefit of guarantees they’ve already paid for. The safe harbor likely should presume that the monitoring of 

existing investments would utilize the same types of information utilized in the initial selection of the lifetime 

income feature. Additionally, the safe harbor should clarify that if the selection of the guarantor was prudent at 

the time made, and if upon determining that current investment in the product is no longer prudent the plan 

fiduciary disallows access to new investors, fiduciaries will not be liable for any losses suffered by pre-existing 

investors. 

 Evaluation of Product Features: The safe harbor should identify key product features that plan fiduciaries should 

evaluate when selecting an appropriate product for their plan. The list should be presented as representative 

and not all inclusive in order to take in to account future product development. The representative list should 

include features such as: 

 The level of guaranteed payments offered 

 The degree (if any) to which the payments provide some protection against the erosion of purchasing power 

due to future inflation 

 Any conditions or restrictions on receiving the guaranteed payments 

 The level of access participants have to their account balance during both the accumulation and distribution 

phases 

 The effect, if any, on market experience on the level of guaranteed payments and, if there is such an effect, 

the quality of the underlying investments 

 Product Portability: Many lifetime income products are not readily transferable in the event of a change in 

service providers. Plan sponsors are concerned with balancing their fiduciary role in selecting and monitoring 

service providers with their fiduciary responsibility to plan participants in not causing them to lose benefits or 

incur unreasonable expenses. This problem could be resolved by allowing participants in this situation to roll 

their lifetime income investment in to an IRA, as discussed more fully in the response to Q 14. Absent this 

change to plan distribution rules, plan sponsors should be given guidance on how to evaluate portability. For 

example, they should be protected from liability if there are a reasonable number of other providers who will 

either record keep the guaranteed product, or who will cooperate with the current product provider to maintain 

the product in the plan. Additionally, reasonable recordkeeper reluctance to support multiple product designs in 

the absence of clarity regarding the acceptability of these products limits portability between recordkeeping 

platforms. 

 Fees: Lifetime income products charge fees or incorporate costs in a variety of ways and plan fiduciaries should 

be given guidance about how to compare cost in relation to specific product features, as well as in comparison to 

other similar products. Fee transparency on immediate annuities may never be entirely possible. The level of 

income generated is typically the main basis of comparison among immediate annuities. Also, attempting to 

compare GLWBs, immediate annuities, ALDAs and other designs (e.g., non-guaranteed products) is quite 

complex, and perhaps guidance that encourages a non-biased comparison of the pros/cons of each kind of 

product would be most helpful. 

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? 
Defined Contribution Institutional Investment Association (DCIIA) 

RFI Response 

May 3, 2010 18 

Please see our response to Q 31. 

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? 

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? 

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 should take to encourage use of these lifetime income 

features in connection with qualified default investment alternatives? 

The topic of incorporating lifetime guarantees within a default option is one that is garnering significant interest in the 

plan sponsor and consultant communities, but it appears that few, if any, plan sponsors have been willing to take on 

the perceived risks of incorporating a lifetime income option in their default option. Plan sponsors, consultants and 

recordkeepers remain leery of the lack of clarity surrounding potential fiduciary exposures associated with both the 

products themselves, and more specifically, the potential or perceived increased exposure associated with 

incorporating such a feature in the default option. While the current regulations regarding QDIA’s do not specifically 

exclude annuities or other lifetime income features, other issues noted elsewhere in this response reflect the 

concerns that sponsors and their advisors have regarding the incorporation of lifetime income features as a default 

option. 
Defined Contribution Institutional Investment Association (DCIIA) 

RFI Response 

May 3, 2010 19 

This is unfortunate. As we have discovered as an industry, the power of default structures to create better savings 

outcomes is undisputed – participation rates, deferral rates and diversification metrics are all measurably improved, 

and often the biggest gains occur for the lowest-paid components of the workforce, which has traditionally been 

under-represented in defined contribution plans. If the default option choice architecture has had such a positive 

effect on the accumulation phase for participants, why wouldn’t we want to harness that power to the benefit of 

participants as they enter the distribution phase? Why would we cease offering professional oversight and 

intermediation and scale pricing as participants are faced with the more complex set of choices associated with 

decumulation? There are definitely actions that the Agencies could take which would either alleviate sponsor 

concerns, or, better yet, encourage plan sponsors to incorporate lifetime income features in their default structures. 

Safe harbors regarding feature selection and inclusion, much like the clarity surrounding the selection of QDIA’s 

would be the single most significant action which would remove the hurdles to sponsor action. 

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. 

36. What are the costs and benefits to a plan sponsor of offering lifetime annuities or similar lifetime income products as 

an in-plan option? Please quantify if possible. 

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? 

While most of the issues associated with in-plan lifetime income products are common to plans of all sizes, small 

plans do have additional considerations. Some of the in-plan income products available in the marketplace today are 

available only to plans with significant assets. In addition, there may be developmental costs associated with a 

lifetime income offering that are beyond the budget of a small plan sponsor. Finally, the recordkeeping platforms that 

service smaller plans may not be willing to take on the development associated with a lifetime income offering until 

there is a more compelling level of demand from clients, and a standardized approach to recordkeeping such options 

is in place. 

38. Would making a lifetime annuity or other lifetime income product the default form of benefit payment have an impact 

on employee contribution rates? If so, in which direction and why? 

It is unclear that defaulting participants into a lifetime income products would change their savings rates during the 

accumulation phase. One of the goals of the “automated” 401(k) plan is to move participants to default levels of 

contributions and contribution escalation. Data on defaulted participants in other contexts suggest that few 
Defined Contribution Institutional Investment Association (DCIIA) 

RFI Response 

May 3, 2010 20 

participants make changes to their plan. It is unlikely that the form of the payout benefit at retirement would be 

enough to change their savings rate behavior during their working years. 

It is possible to hypothesize a mandated, 100% immediate annuitization approach that would alienate a certain 

subset of the employee population, and would cause them to decrease their qualified savings (as some of the early 

comments to this RFI have indicated). One of the benefits of the current default architecture is that there are no 

mandates – sponsors can choose to default participants in certain ways, and participants always have the right to 

reverse those default decisions. As long as the lifetime annuity product referenced in the question follows a similar 

default architecture, participants should be open to the inclusion as a default payout structure, and unlikely to alter 

their qualified savings plan behavior during the accumulation phase. 

39. For plans that offer lifetime annuities or similar lifetime income products, what percentage of eligible workers elect to 

annuitize at least some of their retirement assets and what percentage elect to annuitize all of their assets? 

There are a variety of surveys that cover this topic, but the simple conclusion from all of the survey literature is that a 

tiny minority of participants elect to annuitize any of their retirement savings. This is true for qualified plans that offer 

in-plan solutions, but is also true if the aggregate data on qualified assets is broken down by various investments and 

annuities. Using the broadest possible definition of annuities, which would encompass variable products which have 

optional payout features, less than 10% of retirement savings are annuitized. Often, the choice of annuitization is 

“framed” as an all-or-nothing selection, with the default being no annuitization. Not surprisingly, when faced with that 

specific choice architecture, participants opt for lump-sum payouts.