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One Stamford Plaza 

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towerswatson.com 

Towers Watson Pennsylvania Inc., a Towers Watson company 

April 28, 2010 

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

Room N-5655 

U.S. Department of Labor 

200 Constitution Avenue, NW 

Washington, DC 20210 

Attention: Lifetime Income RFI 

Re: RIN 1210-AB33 Request for Information Regarding Lifetime Income Options for Participants and 

Beneficiaries in Retirement Plans 

Dear Sir/Madam: 

This letter is the response of Towers Watson to the request by the Department of Labor (DOL) and the 

Department of Treasury (Treasury) for information regarding lifetime income options for participants and 

beneficiaries in retirement plans. 

 

Towers Watson is a global human capital and financial management consulting firm established on 

January 1, 2010 as a combination of the former Watson Wyatt and Towers Perrin. With 14,000 

associates around the world, we offer solutions in the areas of employee benefit plans, talent 

management, rewards, and risk and capital management. 

In the retirement plan area, whether a client maintains a defined benefit (DB) plan, a defined contribution 

(DC) plan, or both, Towers Watson works with each client to determine the right approach to design, 

funding, investing, governance and employee engagement. We take into account the nature of each 

client's business, the composition of its workforce and its goals for benefit adequacy, competitiveness and 

cost management. 

Towers Watson appreciates the opportunity to provide our views and information on this important topic 

of lifetime income options for participants and beneficiaries in retirement plans. In analyzing the issues 

raised in your request for information (RFI), we found it helpful to think about your questions in seven 

broad areas. We have organized our response accordingly and hope that you find it helpful. 

I. What is our view about retirement plan participants getting their benefits as lifetime payments? [RFI 

questions 1, 12] 

With declining mortality rates, the fall-off in traditional defined benefit plan coverage, and the potential for 

reduced benefits from Social Security, the exposure of retirees to longevity risk – or the risk of outliving 

one’s savings – is significant and increasing in importance. Moreover, with the fall-off in employerprovided retiree health insurance and rising health and long-term care costs, the exposure of retirees to 

costly morbidity and disability risks is also growing. As a result, a sound and efficient asset distribution 

strategy is needed for retirees to: a) maintain a reliable stream of income, b) preserve wealth for a variety 

of liquidity needs (family emergency, sudden expensive home repairs, disabled children, etc.), and c) 

insure against, or dedicate resources to, the possibly high costs of morbidity and disability. 
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Each retiree should ensure that the guaranteed lifetime payments available from any employment during 

retirement, DB plan distributions, Social Security, and insurance products will be sufficient to support 

basic consumption needs in retirement. Further, in assessing these lifetime payments, retirees should 

consider the impact of uncertain inflation. Discretionary spending is highest early in retirement, while 

expected spending on health care and long-term care needs increases as retirees age. The different 

natures of these types of spending, as well as whether insurance coverage is available should be 

factored into the financial strategies of the retired household. Also, due recognition should be given to the 

cognitive challenges that retirees often face in managing their investments and distributions as they age. 

In the pure form instrument of an immediate straight life annuity, the policyholder pays a lump sum 

premium to an insurer in exchange for the promise that the insurer will pay a series of periodic payments 

for the lifetime of the insured (or the joint lifetimes of the insureds), regardless of the longevity outcomes 

of the individuals insured. Such an annuity transfers the uncertainty of the individual's or couple’s lifespan 

with respect to consuming out of this lump-sum to the insurer, which reduces its own uncertainty, in turn, 

by pooling the lump-sums of many annuitant policyholders with similar longevity expectations (always, by 

age, where allowed by law, by gender, and, rarely, by health) together. Indeed, abstracting from any 

unique issuer costs of the life annuity, the return (ROI), contingent on survival, to an annuity should be 

higher than a bond portfolio of similar risk as of the insurer issuing the annuity. As the issuance age 

increases, the return, again contingent on survival, from the life annuity also increases, because the 

investments of the larger number of dying policyholders (because expected mortality increases with age) 

are, in essence, redistributed to those who remain alive. Owing to its nature, however, when a straight life 

annuity is used, the ability to bequeath assets is eliminated and advance access to future payments is not 

available or is strictly limited. Stated more bluntly, the return to an annuity at the death of the insured(s) is 

-100%. 

A number of further trade-offs exist in practice, between maintaining an account balance versus receiving 

a series of guaranteed lifetime payments, that make this decision complex and unique to each individual. 

For example, research suggests that many Americans will not have adequate savings to generate 

sufficient lifetime payments at retirement to cover reasonable living expenses, thus perhaps leading them 

to accept an increased amount of risk in their investment portfolio in retirement to support their income 

needs. Others will have ample and secure income flows in retirement from Social Security and DB plans 

and generous coverage by employer-sponsored retiree health plans. For a significant number of plan 

participants at retirement, current poor health and its attendant costs makes formal annuitization a poor 

choice. More broadly, some products currently available in the marketplace are perceived to be (1) 

expensive (at least in part due to adverse selection of mortality risks, that is, the tendency of people with 

reasonable expectations of early death to avoid the voluntary purchase of life annuities, or because of 

high marketing or other issuer costs), (2) too complex, (3) subject to pricing risk at time of selection 

(owing to changing interest rates) and continuous risk of issuer failure, and (4) have limited flexibility. As 

a result, annuitization of benefits will potentially be perceived as a net loss by many individuals. In 

conclusion, purchases of life annuities should be facilitated, particularly in a “DC-only” retirement plan 

setting, but not required. 

II. What is the reality of the availability and nature of lifetime income options given by DC plan sponsors 

(internal or external to the retirement plan) or accessible in the commercial market for retirement plan 

participants and beneficiaries? [RFI questions 3 - 11, 30, 33, 34 - 37] 

A plethora of insurance products are available in both the institutional and retail markets to provide 

lifetime payments in retirement including fixed immediate annuities, fixed deferred annuities, longevity 

insurance (fixed deferred annuity with income starting at an advanced age, e.g., age 85), inflation-indexed 

annuities, and variable annuities, which may include guaranteed minimum withdrawal benefits or other 

guaranteed benefits. The value proposition, however, is not obvious for the products currently available 

in the institutional marketplace because: 1) products are new and evolving, 2) products are perceived to 

be expensive, 3) flexibility in current solutions is limited, 4) there is a low take-up rate when offered, 5) 
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plan sponsors have expressed limited appetite to adopt these products due to the relatively high fiduciary 

risk to which it exposes them, and 6) minimum required distribution rules may prevent the use of certain 

desirable strategies, such as deferring annuitization to the older age ranges of retirement. 

While the retail market offers the ability to customize solutions to meet the needs of individuals 

overcoming the flexibility issues in the group market, the cost of distribution for these retail products is 

higher, resulting in a reduction in the amount of lifetime payments that can be generated from an account. 

The recent financial and economic environment has further caused producers to increase fees for 

guaranteed minimum withdrawal benefits on variable annuity products, which have become popular in the 

retail market over the past decade. 

Some other out-of-plan rollover options include managed payout funds (which manage the 

distribution/decumulation phase of retirement such that the likelihood of success is enhanced but not 

guaranteed because they are not insured) as well as annuity purchase services where a third-party 

negotiates group purchases with a variety of vendors from which the plan participant can choose. 

III. What is the reality of the demand for lifetime income options by retirement plan participants and what 

are explanations for this level of demand? [RFI questions 2, 16, 17, 29, 38, and 39] 

Towers Watson has a variety of sources of information for both the prevalence of annuity options in DC 

plans and the levels of annuity election in both DB and DC plans when both an annuity and a lump sum 

are available. We will provide detail on the various sources of information but they consistently exhibit a 

low level of election for lifetime options when a single sum option is available. This would seem to 

suggest a lack of demand, although it also could indicate dissatisfaction with the lifetime options offered in 

the particular situations. Alternatively, for DB plans, it could be attributable to a real or perceived 

additional value in the single sum offering. We do not have the data to draw definitively those distinctions 

or comment on why plan sponsors or participants made the choices that they did. We also note that the 

apparent lack of demand may not indicate a lack of need, but rather a lack of education and 

understanding of the attributes of lifetime options. 

Towers Watson maintains a database of plan provisions for over 1,400 large employers which indicates 

that between 20% and 25% of the employers with DC plans offer some sort of lifetime options within 

those plans. Our work with plan sponsors indicates a stronger interest to offer lifetime options. Other 

sections of this response address the concerns and barriers that currently exist which we believe have 

prevented plan sponsors from doing more in this area. 

Turning to participant choices, we have conducted an informal survey of our consultants working with DB 

plans that offer both lump sums and annuities, regarding the choices that participants have made 

historically. We received responses for over 20 plans covering well over 300,000 active participants. The 

responses indicated that, on average, over 80% of participants who terminated or retired elected a lump 

sum rather than an annuity. The lowest reported lump sum election rate of the group was 55%. While this 

was not a rigorous study, the findings are very clear and are consistent with the anecdotal evidence that 

we have observed over the years working with such plans. It is possible that lump sum election rates in 

DB plans will come down somewhat as the statutory interest rate changes, owing to the Pension 

Protection Act of 2006 (PPA), make them less attractive relative to annuity options (with the full impact in 

2012 and beyond), but we have not seen movement in that direction and suspect that any change would 

be modest. 

These recent changes in the law with regard to the minimum DB plan lump sum basis and recent volatile 

market conditions could also impact future retiree elections in retirement plans. It is clearly too early to 

know the full impact of these factors on future annuity election rates, but these factors could arguably lead 

to a higher future demand for annuity options. Whether this occurs and, if so, to what degree, remains to 
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be seen. Our experience suggests that the impact will be modest as we have observed high lump sum 

election rates even in situations where annuities were made more financially attractive. 

We have limited current data on DC plan participant elections. We note, however, that in a tabulation we 

did of Health and Retirement Study data from 1992 through 2004 regarding retiring workers’ disposition of 

their DC account balances, about 4% of participants reported that they converted their balances to 

annuities in the two-year periods of each survey wave.1

 As additional evidence, a 2007 Towers Watson 

preference survey of 5,000 employees and retirees finds that about 10% of those covered only by a DC 

plan reported that they expected or actually received some portion of their benefit as an annuity. The 

same survey showed that most participants had a preference for a combination of a lump sum and an 

annuity rather than only an annuity, although there was some sensitivity expressed toward the financial 

terms of that decision. Shorter life expectancies and poorer health moved participants noticeably toward 

the lump sum preference on the spectrum.2

Reasons for the relatively low level of election for annuities among DC plan participants, whether 

available from the plan or purchased from a commercial insurer, could include the lack of understanding / 

lack of effective communication to participants, general mistrust of annuity products, participant desire for 

flexibility, bequest motives, pricing of options (including a long period of low interest rates), availability of 

Social Security or other retirement income, home equity, expectations for higher returns elsewhere, etc. 

In addition, there may be a behavioral bias against annuitization, even with better communications, 

because some plan participants will avoid the reduction in gratification implicit in giving up immediate use 

of the lump-sum plan distribution. 

IV. Are there legal or regulatory impediments to the offering and use of lifetime income options that we 

recommend be fixed or modified? [RFI questions 11, 14, 16, 18 - 20, 25 - 29, 31- 32, 34, and 35] 

Whether or not to offer a lifetime income option in a DC profit sharing or 401(k) plan should be a plan 

sponsor design decision. For plan sponsors who are interested in offering a lifetime income option in 

their DC plans, the biggest perceived legal and regulatory risk is the potential fiduciary liability given the 

cost, complexity, counterparty risk, regulatory considerations and other issues related to these products 

The DOL safe harbor rule for DC plan selection of annuity providers does not go far enough to ease plan 

sponsors' concerns. The DOL should provide specific and definitive ways in which the sponsor can fulfill 

its fiduciary obligations. 

We believe that education is essential in helping participants to make the choice that is right for them 

regarding distribution options. That choice will always be an individual one as many factors – such as 

family status, health status, other sources of income, insurance coverage, pricing, risk profile, ability to 

manage investments, inflation expectations and many others – will influence the decision. Annuities are 

complex financial instruments that have embedded investment, credit and other risks, and participants 

are often not well equipped to understand and evaluate them. As with other investment options, 

participants can easily be overwhelmed if too many annuity options are given to them. 

We believe that both the government and plan sponsors can play a role in the education process. The 

role of the government could be to establish model notices or communications which explain the general 

trade-offs between annuities and lump sums. It could discuss the risk/reward trade-offs on issues such 

as longevity, disability, investment, and inflation in a balanced manner so that participants can make well 

informed choices. The role of the employer would then be to describe the particular options that are 

available under their plans. It is appropriate for plan participants close to retirement or already retired to 

have a range of distribution options and strategies to protect them against longevity, morbidity and 

disability risks. 

 

1

 Towers Watson, “Cashing Out: A Threat to Retirement Security?” Towers Watson Insider (September 2007), 17(9), pp. 35 – 41. 2

 Towers Watson, “Who Prefers Annuities? Observations about Retirement Decisions,” Towers Watson Insider (April 2008), 18(4), 

pp. 12 – 21. 
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As mentioned in other sections of this response relative to offering annuity options, one barrier that 

currently stands in the way of providing education regarding annuities is the liability plan sponsors are 

potentially exposing themselves to when they attempt to communicate on these issues. This is virtually 

identical to the issues surrounding investment education and advice that the government has been 

attempting to address for several years. Plan sponsors are eager to provide information that will help 

their participants make informed choices but will not do so without knowing how this can be done safely. 

The structure set forth above, in which the government is responsible for general education and model 

notices, is one suggestion to address this. If that approach is not taken then a clear set of guidelines 

which distinguish between education and advice, with protection given for education, is needed before 

plan sponsors will move forward in this direction. 

V. What do we think about combined annuity products? [RFI question 15] 

Seminal research has been conducted examining the implications of the positive correlation of mortality 

and disability for the combination of an immediate life annuity with long-term care disability insurance at 

retirement ages.3

 That research finds that combining the two insurance products could reduce the 

combined cost of both types of coverage and make coverage available immediately to more persons, by 

reducing adverse selection in the life annuity and minimizing the need for medical underwriting for 

disability insurance. It is estimated there that minimal underwriting in a combined product, excluding only 

those who would be available for disability benefits at purchase, would increase the potential market to 98 

percent of 65-year-olds, compared to only 77 percent who can pass under current long-term care 

insurance underwriting practice. For the larger pool of potential insureds, simulated premiums for the 

combined product are lower by 3 to 5 percent than total simulated premiums for stand-alone life annuities 

and underwritten long-term care insurance purchased separately. This reduction in cost mainly arises 

from the inclusion of persons with somewhat impaired health and higher mortality probabilities, lowering 

the cost of the life annuity segment, but desiring and needing long-term care insurance coverage. The 

research finds the results are broadly fair to various groups and are robust to various ages and gender 

situations as well as possible errors in the reporting of disability status and moral hazard in making 

claims. 

One impediment to actually offering a combined product, also known as the life care annuity, has been its 

tax treatment. Recent research illustrates, however, that because of provisions in PPA, the life care 

annuity now (beginning in 2010) has an after-tax advantage over separate life annuity and long-term care 

insurance products for many middle- and upper-income retirees.4

 That same research explains that 

offering a life care annuity in a qualified retirement plan would likely be difficult or impossible, owing to the 

operation of minimum distribution rules, possible incidental benefit restrictions, and other considerations. 

Providing an above-the-line deduction to long-term care insurance premiums, as essentially was done in 

PPA for distributions from qualified retirement plans of public safety officers, would result in an even 

larger tax advantage than given to the life care annuity as an after-tax product sold to individuals. 

Today there are only 10 to 15 insurance companies that offer combination deferred annuity/long-term 

care insurance, and to date, sales have been relatively low. With new federal tax advantages beginning 

in 2010 for combined products, however, more insurers are considering entrance into the market. The 

primary product design available today allows the policyholder to withdraw between two and three times 

the current annuity account value to pay for long-term care expenses. As with a typical deferred annuity, 

the premium deposited into the annuity is credited with interest and then charges are deducted for the 

long-term care insurance component. There is often a waiting period to make withdrawals for long-term 

care (typically two or three years) and an elimination period of 90-180 days once a claim is filed. 

 

3

 Christopher M. Murtaugh, Brenda C. Spillman and Mark J. Warshawsky, “In Sickness and In Health: An Annuity Approach to 

Financing Long-Term Care and Retirement Income,” 2001, Journal of Risk and Insurance, 68(2), pp. 225 – 254. 4

 David Brazell, Jason Brown and Mark Warshawsky, “Tax Issues and Life Care Annuities,” Chapter 13 in John Ameriks and Olivia 

Mitchell, editors, Recalibrating Retirement Spending and Saving, 2008, Oxford University Press, pp. 295 – 317. 
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The most significant advantage of these annuity/long-term care products is that because they are offered 

in combination with an annuity plan and owing to the long waiting period for benefits, the long-term care 

insurance underwriting is limited in comparison with a stand-alone long-term care insurance policy. 

Therefore, an individual who does not qualify for coverage under a stand-alone policy may be able to 

obtain at least some coverage through the combination policy. Also the less intrusive underwriting could 

make the product more popular. 

Another advantage to consumers is that they can maintain liquidity of their savings dollars. Unlike a 

stand-alone long-term care insurance policy, if the policyholder should require additional financial 

resources in retirement, he/she still has access to the underlying deferred annuity funds. If the annuity 

funds are withdrawn to cover expenses other than for long-term care, however, the long-term care 

insurance component of the policy is forfeited. 

Stand-alone long-term care insurers generally believe that a disadvantage of these marketed combination 

plans is that the consumer does not get the same level or immediacy of coverage available through a 

long-term care only policy. Combination plan sellers argue, however, that the consumer has at least 

obtained some level of protection. 

VI. Should some form of lifetime income option be required for DC plans; should it be the default 

distribution? [RFI questions 13 and 38] 

As stated above, whether or not to offer a lifetime income option in a DC profit sharing or 401(k) plan 

should be a plan sponsor design decision as it historically has been, especially given the cost, complexity 

of products, counterparty risk and other issues related to these products. If a plan sponsor decides to 

offer a lifetime income option, there should be no requirement that such option be the default distribution. 

The plan sponsor, however, should be free to make such an option the default distribution. We do 

believe that plan sponsors would be more likely to offer lifetime income options (as suitable) if fiduciary 

concerns were addressed. It is unclear to us what the impact on employee contribution rates or other 

plan dynamics would be if this was the default form of payment. 

VII. Should disclosing the income stream that can be provided from an account balance be mandated, 

and if so, how? [RFI questions 21 - 24] 

We do not believe that disclosing the income stream that can be provided from an account balance 

should be mandated. We support renewing efforts to enhance retirees and pre-retirees’ understanding of 

the annuity option, but do not believe an employer mandate is appropriate, unless it can be shown that 

such disclosures are helpful to employees in making retirement decisions. 

One reason why employees do not utilize annuities is that they do not fully understand the various 

products available. Most employees do not understand the connection between the amount offered as a 

lump sum and the amount of monthly income offered as an annuity and do not have the ready ability to 

assess the adequacy of the total account balance or whether any monthly annuity guarantee represents a 

fair deal. Regularly disclosing the lifetime income stream that might be expected from an account 

balance in the form of an annuity based on various market conditions might help with education. Plan 

participants would be able to evaluate the level of income their accounts may be able to provide, then 

plan and monitor that income level as appropriate in the years leading to retirement. This has the 

potential to serve as a tangible measuring stick for participants to evaluate their retirement preparedness 

and a meaningful incentive for participants who are not as prepared to redouble their efforts. In addition, 

this approach may ultimately increase participant demand for and utilization of the annuitization option. 

There are risks, however, in the details of the calculations and the assumptions, as well as the form in 

which the information would best be presented. Plan sponsors will be reluctant to assume fiduciary risk 

by projecting income streams based on certain assumptions that are then not achieved. 
April 28, 2010 - Office of TOWERS WATSON tA./ Regulations & Interpretations 

Government mandated annuity assumptions may seem desirable at first, but there are many details5 of 

the calculations that would need to be specified in order to ensure uniformity among plan sponsors. And 

if the benefits statement becomes overly cumbersome or confusing, the goal of increasing participants' 

understanding of the annuity may not be achieved anyway. (One recent example of this is the new 

Annual Funding Notice for Defined Benefit Pension Plans, which provides an overwhelming amount of 

information to plan participants. While the goal is to better educate participants on the current funded 

status of the plans in which they participate, the resulting notice is so complex and confusing that we 

question whether it actually ends up achieving its intended goal.) 

Rather than mandating that plan sponsors disclose the income stream that can be provided from an 

account balance, Towers Watson supports testing these disclosures in a proof-of-concept experiment. 

The DOL and Treasury could seek a number of plan sponsors to serve as volunteers. Volunteers would 

test different assumption sets and methods, as well as different forms of presenting the information 

(possibly including replacement ratios and various draw-down solutions in addition to life annuities), and 

would receive protection from liability for their participation. 

The experiment would track participants' attitudes toward the annuity option before, during and after the 

study period, and would specifically monitor whether the enhanced disclosure caused more participants 

to consider an annuity option. By testing a variety of methods and assumption sets, this experiment 

would illustrate which are the most effective in improving plan participants' understanding of the annuity 

option. 

At the conclusion of the experiment, the question of whether or not to recommend this type of disclosure 

and what form it should take should be reevaluated. 

Thank you for the opportunity to share our views and information with you on this important matter. If you 

have any questions about our response, please contact Mark Warshawsky, Director of Retirement 

Research, at 703-258-7636 or Mark.Warshawsky@towerswatson.com. 

Sincerely, 

William B. Gulliver 

Managing Director 

North America Retirement Business 

Towers Watson 

WBG:crb 

5 Should the illustration be based on accrued or projected benefits? How should future contribution rates be determined? How 

should future account growth be determined? What form of annuity should be illustrated? What mortality, mortality improvement 

and interest assumptions should be used? Should the income amounts be adjusted for inflation? Should a single or multiple 

scenarios be provided? 

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