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U.S. Department of Labor .,,. # , * '3,;,.>,%.,:?' ;- ,?+. : : , . . ,:. >& 

200 Constitution Avenue, W 

Re: Request for Information - Lifetime Income (RIN 12 1 0-Al333) 

Comments by the ~edremen t Security Project on Strategies for 

Promoting Lifetime Income in Retirement Savings ~ccount&P~~ a!& .# 

es, an estimated 75 

when they do not know exactly how long they will live. If they live longer than expected, 

they face the dire prospect of running out of funds late in life. Alternatively, and perhaps 

equally unfortunately, they may be too conservative when drawing down their resources 

and may unnecessarily forgo consumption that they could safely have enjoyed earlier in 

their re~rerileht savings for guakanteed p 

running dut bf resources. The aiinuitant tias mitigated the risk of consuming too much too 

soon or consuming too little over time. The annuity provider assumes the risk that the 

annuitant may live longer than expected (which would require longer-than-expected 

payments), but can diversify and, therefore, spread this risk across a large pool of 

,:,., >., ,. ...'A. 8 annuitants with different probable and actual life spans. ... . , , 

These comments to the RFI include two major propsak.*~i&t, we wfiwuss ways to 

%..< ' ! L. 

use behavioral economics to increase the proportion of workers who chd& to take a*--: 

r, r. portion of their retirement savings in the form of kuaranteed lifetime income ~roduct 

Second, we win propose the creation of a federal guarantee on such products so that M& ' 'Ti:?>-, h<$ ' "m worker is protected even 8 the company that sold the income product goes out of business. 4 

The Challenge 

Despite the potential benefi@ fm retirees, purchase lifetime income products through the 

private market.2 Among c&nt retirees, private annuities account for less ihm 2 percent 

.. ,.I 

, . . ., - ..: dFl(k)s.!,., - , , : , , ,., . . - 

% Aarge litirature has developed that seeks to explain this "annuity puzzle." Early seminal work include$ 

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40 1 (k)s allows inertia to work in favor of lifetime income, as it has done in increasing 

40 1 (k) participation rates and contribution levels (Madrian and Shea 2001 ; Thaler and 

Benartzi 2004). Second, the trial income arrangement would give consumers valuable 

information about income solutions, giving them a tool to appropriately evaluate their 

distribution options to ensure a more secure retirement. Third, launching a trial income 

program through 40 1 (k)-type plans, which have millions of participants, has the potential 

to mitigate the adverse selection problem in lifetime income contracts and to reduce 

prices. Fourth, the trial program would leave individuals free to address their individual 

circumstances and preferences: it initially would provide income for a limited time, and 

workers who preferred to direct the investment of their retirement assets or take 

distributions in other forms could opt out either before or after the two-year "test drive". 

Phased or Inc&meatal Acqahltion of Deferred Annuitim 

The second proposal would involve the phased or incremental acquisition of deferred 

annuities during the plan's c'accumulation pW. This strategy would make the 

automatic (default) approach a more powerful tool to promote lifetime income by 

incorporating three simple but important elements: 

Avoid "dl or nothing". First, instead of requiring tRe traditional all-or-nothing 

muitintion choice, frame the annuity offer as one that allows the acCount owner 

to use only a portion of the amount balance to purchase an annuity. For many, it 

might make sense to annuitize only a portion of the account, and that portion 

might vary from one household to the next. 

Avoid "all at opzce "Pmw or never ". Second, allow plan participants to opt for 

incremental annui thtion over time, rather than confronting them with a single 

"moment of truth" at which the decision whether or not to take an annuity is 

thrust upon them. A single point-in-time approach can make the decision proms 

more difficult insofar as it entails both the urgmcy of a deadline and the high 

stakes associated with a decision acting the disposition of what may be their 

entire life savings. An annuitkition decision may "go down easier" if divisible 

not only in mount (through partial annuitization) but in time (through 

incremmtal annuitintion that avoids a "now or never" choice). 

Avoid "never or forever " irreversible decisiom. Third, to the extent possible, 

allow the consumer to reverse all or a portion of the annuity purchase, at least for 

a time. 

These three elements effectively lower the stakes so that one who passively accepts the 

default h almost nothing to lose. 

In the specific context of 401 (k) plans, two particularly promising vehicles couId 

incorporate these three elements and encourage participants to accumulate defend 

lifetime income over their working lives. 
Invest the employer match in deferred annuities. Most 

matching oonkib~iomr A plan sponsor could maLc phad aGuisition of annuity 

income units morr: likely to occur (or could ensure it would occm) by dedicating its 

employer matching contributions to this purpose during the investment or di on 

phase, either mdatorily or as a default h.m which participants oould opt out. Either 

approach would be permissible under current law. This dso wuld have the desirable 

semndary effect of reducing 401 (k) Woipants' overexposure to the stock of their om 

employers by replacing the tsaditiod mandatory or &huh investment of many 

employer matching contributions in employer stock. 

yk&*-%$+ 2 us- fs 

;C&r Ej~h 

E~M mufie in u~~~~w target dsto funds. ~Lw~nd financial providers 

t . . . '; might consider incorporating the phased purchase of &fd annuity units into a . ' , Qualified Default Investment Alternative, or "QD W, specified by the Depadment of 

~aba9p-cl€hhd tb W g&"ure bf fi&bW!y prb'kdo'ii. Pmbabb thm pwdght for- k~ O~QDIA to date has beenthe target& maturity or life cyc~efmc~. structured as a 

composite "fund of funds", the Wget date or life cyck fund generdly invests in a mix of 

asset classes, consisting largely of diversified equities and kd income investments. A 

new kind of target maturity or life cycle default fund dd hilitate phased purchases of 

annuities: the Wily growing Bed income mmpnent of the life cycle fund might be 

comprised of fixed annuity hame units that accumuiakt over time and that would be 

paid out as an mEaity at hrnont. Thus, fixed defemd annuity units muld 'substitute 

for ~e bnd component of the life cycle fund, either entirely or in part. mle variable 

annuities are invested in equities, hed anadties tend to be Wd up, at least hdhd~, fl5 ~-+-"; by insum= campmy invmtmmts in bonds.) As a dt, the percerntagc of #I@) ,+v ,#<+ 

conhibutiotls used to purchase defmed annuity income units WOW grow as e~~10~~~j& 

approached retirement. * :- 

These new life cycle or target date funds would go beyond the funds currently o 

insofar as they not only would serve as an investment but also would help manage>the 

post-retirement spend-down of 40 1 (k) assets, In addition, this strategy would be 

responsive to many howekolds' anxiety, during the mnt mcession and period of 

extreme market volatility, about the risks of investing in equities and, in some cases, in 

40 1 (k) plans generally. A fixed annuity could protect the annuitant from investment risk, 

Howmr, this may require new amngements t~ assure mmuitsnb ~f the soley of thCrt;,y 

annuity provider or, in any event, the dety of their investment in annuities. In addition, ~3 

while these strategies should drive down annuity costs because of broader use, reduced 

adverse selection, and plan spomr bargaining power, further arrangements will be 

needed to increase tmqmmy of costs and otherwise promote cod duction, 

, - r -.. - & 

Federal Guamtees on Lifetime Income Pavmen L: +. - , x, ;a. 8 .' .:[-. :? : 

A continuing concern or both employers and workers in the wake of the 2008 financial 

crisis is whether the firm that hadun;knuritten annuity-like products will actually still bc 

in business and able to provide those payments several decdes in the future. This 

question arises in vW1y every discussion with employers hut annuity-like products, 

and is o&n raised in discussions with legislators. 
&; .: yp;-. J',, '; 

Under existing law, annuities an, insurance pmduots reguIated for the most p&6Yk&~te%, 

and covd in the event a company fails by state guarantee funds, These hds insure up 

ta the pmt value of an annuity contract up to a set ceiling, usually S 100,000. Most 

state guarantee funds would pay the diaerertce between the assets available frbm the 

failed company for such pmducts and that ceiling 60m assessments on the remai~4 

companies offeri~ atmuity products in that state. ?. 

: 1: :, I, 

However, the ~~ amount of$10O$0Os present value may be sub$tmtislly less 

than the value of a worker's ad and msdt in a sharp cut in his or het rnoz~thly 

income. In such a situation, not only would there be a loss of mnfidencc in the 

remhhg private sector annuity providers, but thm would also be political pmsw on 

: Congress to quickIy establish a fbdd policy. Non-annuity guarantd lifetihe incorne 

products are uninsured since the underlying 

--f*lmsnt savings balmces. - 

Y 

making policy during a crisis, it would be far preferable to establish a 

federally backed and uniform guarantee for annuity-Iike products well in advance of any . -. -: actual need. This additional perceived safety muid encourage workers to purchwe 

annuities and other such pm~ucts at least up to ~lc maximum guarantee mount. 

A number of models could be wed to structure the federal guarantee, including a 

mechanism based on the private sector rehsurance market with an Wrlying federal 

guarantee, and wa FDIC-like bmmce system fbnded by premiums. Iln all cases, such a 

guarantee would dm iaclude a qhent that underlying assets meet certain 

accounting and regdstoty stmbds, and ~~ be segregated in some way in the event 

an issuer becomes insolvent. The guarantee could apply to bath insmw company 

issued annuities ad to other guaranteed lifetime income products offered by other typd 

of companies. 

Concboo 

With inmead reliance on 401 (k) ph in the US. retirement income system, an 

important challenge king the system is to help retiree mamge the risk of outliving their 

assets. Each of the "automatic" or defbult strakgiw outlined here - the incremental 

aqui&ion of Mehe income through employer 40 I&) ~ontributions or by embed 

deferred annuity in a QIIIA, as well 'the Gale-Iwry-John-Walker aotomati~ .trial 

income proposal -- is designed to draw on experience and insights from behavioral 

economics to help replicate, within the 401(k), one of the valued features of the 

traditional DB pension: paranteed lifehe income at group rates (and combined, in 

cases, with professional investment management) 

In addition, mthw need to have the security that their retirement home will not be 

dud or ended if the Mvate ssctor provider of that policy runs into -cia1 difficulty 

or even goes out of business. While existing safe@ mechanisms will certainly duce the 

The -1 amount of monthly incchge gummud under state guarantee hds would vary awrding to the 

age of the mn- owner at the the the company fails. 

. .: -.- 
. -8 

8% . ' 5, 

s 

d&sa&, ftiey to lie&O& by fime i6rm 

lrelrene that both workers and em~loyers can easily understand and rely upon. 

I - 

I i - William G, G& is the Dimtor of The Retirement Security Project and the Arjay and LA Fmces Miller Chair in Fedeml Economic Policy in the Economic Studies Pqogrw the 

David C. John is the Deputy Director Qe Rctinrrmt Security Project and r Senior 

Research Fellow with the Thomas A. Roe Institute for Economic Policy Studies at the -. Heritage Fc 

' 

see Madm a+d Stma Wl), oale trt al. @OW], mti Gale srtd hvry @Ow). 

' A Watd god HlpUW bb to mrage pmlablllty hwgh rolhem. Thb d~ted topic, whlch 4s beyond the 

soope dthb paper, la atklMswd in J. Mark hy and Davld C. John, ' ' [tedbmny befon Senate Aglng Ctee June