Steps and policies that could encourage more people to choose an annuity include:

° There needs to be better education about finances, retirement planning, and life
expectancy. The DoL should review what materials terminating and retiring
employees are currently getting and determine if more oversight, regulations,
standards, and/or model language is needed.

° Plan participants should be able to designate non-spouse beneficiaries when
there is no spouse or the spouse has given written permission.

. DoL should explore the possibility of giving people who start collecting an
annuity a second change to take the lump-sum. If feasible, this would take the
pressure of making an irrevocable choice. In addition, once people get used to
getting the monthly pension check they might be less likely to choose the
lump-sum.

° Ways to expand what the PBGC guarantees needs to be considered. Retirees
in plans that the PBGC takes over are being punished with cuts in vested
benefits and other restrictions that make no sense to the average person.

“3. What types of lifetime income are currently available to participants directly from plans ...?”

Our DB plans offer a wide range of options. Typically these include choices (or
combinations of choices) such as reduced early retirement; unreduced early retirement based on
age and service thresholds; normal retirement; late retirement; single-life annuity; joint &
survivor annuity with 50%, 66 2/3%, 75% and 100%; minimum 5, 10 and/or 15-year certain with
lifetime payments; and income leveling (larger payouts before Social Security starts). Plans

offer partial lump-sums when employees contribute to the DB plan. A majority of our DB plans
also provide disability pensions.

We are not aware of any DC plans offering lifetime benefits.
“4. To what extent are the lifetime income options ... provided at retirement or other termination
of employment as opposed to being offered incrementally during the accumulation phase ...?”
We are not aware of any DB or DC plans with phased-retirements that allow participants
to start collecting “incrementally during the accumulation phase.” The only exceptions are those

situations where the law requires the DB or DC plan to start making distributions to older
employees who have continued working well beyond typical retirement ages.

“5. To what extent are 401(k) and other defined contribution plan sponsors using employer
..contributions to fund lifetime income ...?”

We are not aware of any DC plans that offer lifetime income options.


“24. Should an individual benefit statement include an income replacement ratio ...?
Given the complex issues related to the calculation of the projected replacement ratio and

the disagreements over what is an appropriate replacement ratio, we would want to see more on
this proposal before we could determine if this should be on the benefit statement.

Thank you again for the opportunity to share our views. Please let us know if you have
additional questions.

Sincerely,

l
R. Thomas Buffenbarger
INTERNATIONAL PRESIDENT

RTB/mb


“2. Currently the vast majority of individuals who have the option of receiving a lump sum

distribution

choose to do so ..... What explains the low usage rate of lifetime income

arrangements?... 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?”

Only a few of our DB plans had a lump-sum option. We do not collect data on whether
or not the thousands of defined contribution (DC) plans our members participate in offer lifetime
income options, but we are not aware of any that have this option.

Our impression is that where DB plans have lump-sum options, factors that lead a large
percentage of the terminating and retiring employees to select the lump-sum include:

The present value of an annuity is a larger amount of money than most people
have ever been offered in their lives. It is worth significantly more than any
other assets most people have other than possibly their homes. There is a huge
temptation to take the money.

There is a lack of understanding of retirement finances in the U.S. Very few
people understand the present value of a monthly annuity or what the life
expectancy is for retirees and their spouses.

Many people have pressing financial needs so using part or all of the lump-
sum immediately overwhelms concerns about the future. This is especially
true where people have large medical bills and/or had their standards of living
reduced due to wage and benefit concessions or job losses. The middle class
has been squeezed by a generation of bad policies and corporate greed. We

need to avoid “blaming the victim” when people take the lump-sum just to
survive.

Some people do not trust their employers to properly manage the pension
funds and/or think that they can management the money better themselves.

Some participants are worried that if the PBGC takes over the plan in a
distressed termination that they will lose a large portion of their pension
benefits.

When there is no option to designate a non-spouse surviving beneficiary,
choosing the lump-sum is often the logical financial decision, especially for
people who expect to die soon after retiring.

For many retirees, taking the lump-sum allows them to either avoid making a
complicated decision or making an irrevocable decision to take an annuity.
The need to choose can be intimidating and confusing. Taking the lump-sum
can really be a passive “non-decision.”


“6, What types of lifetime income or other arrangements ... to provide a stream of income ...are
available to individuals who have already received distributions from their plans (out-of-plan
options) ...?”

We are not aware of any plans where individuals retain annuity purchase rights once they
receive a distribution other than certain limited situations where a former employee is rehired
after they had received an automatic minimum lump-sum distribution from a DB plan.

“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., afier a distribution
or rollover)?

We view the “outside plan” as a disadvantage since individuals do not get the benefit of
lower fees through a group purchase and they are making financial decisions that they may not
well prepared for.

The only disadvantages to “in-plan option” from a participant perspective would be if the
plan administrator failed to properly pick the annuity provider or did not provide annuity options
that meet participant needs.

“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
itas a lump sum distribution ...? ... Would ...such partial annuity options ...be desirable and
would this likely make a difference...?”

The only situations where DB plans allow a partial payout is when the employees are
contributing and can take their account balances as a lump-sum, but the employer provided
portion of the DB benefit is an annuity. We are not aware of any DC plans that have partial
annuity options.

Expanding lump-sum options for DB plans is not something the DoL needs to be
spending time on. If DC plans were going to offer annuity options, then having the ability to use

only part of the account balance to buy an annuity at a group rate would probably increase the
election of the annuity option.


9000 Machinists Place

International Upper Marlboro, MD 20772-2687

Association of
Machinists and
Aerospace Workers

301/967-4500

OFFICE OF INTERNATIONAL PRESIDENT

April 19, 2010

Subj: Lifetime Income RFI
RIN 1210-AB33

Office of Regulations & Interpretations
Employee Benefits Security Administration
Room N-5655

U.S. Department of Labor

200 Constitution Ave, N.W.

Washington, D.C. 20210

Attention: Lifetime Income RFI

Dear EBSA:

The International Association of Machinists and Aerospace Workers (IAM) appreciates
the opportunity to submit these comments pursuant to the notice in the Federal Register for the
“Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries
in Retirement Plans” (Vol. 75, No. 21, February 2, 2010, pages 5253 to 5258).

The IAM represents over 700,000 active and retired members who work in a variety of
industries including manufacturing, defense, aerospace, transportation, shipbuilding, repair
services, and government. The IAM has negotiated some of the strongest retirement plans in
North America and takes great pride in its multi-employer pensions. Nearly all of our members
are participants in defined benefit (DB) plans. Over two-thirds of our members are participants
in a DB plan and also have a defined contribution (DC) plan as supplement to save for
retirement. Given our decades of experience in these programs and success in helping our
members and their spouses have secure retirements, we offer a unique insight into the questions
posed by the Department of Labor in its request for information (RFI).

Before we address the RFI questions, there are four issues that we want to raise that are
relevant to this discussion about retirement security and employee benefit plans.

First, any policy and legislative changes that attempt to address the retirement crisis in
the U.S. should do no harm to existing single and multi-employer DB pension plans. Given the
success DB plans have had in creating secure retirements for millions of working people, the
government should be looking for ways to strengthen DB plans and expand DB plan coverage to


“11. Various ‘behavioral’ strategies for encouraging greater use of lifetime income have been
implemented or suggested ..... Would expanded offering of such partial annuity options ...be

desirable ...

We think giving people in DC plans partial, gradual or trial basis annuity options would
be useful.

If the annuity is the default option this would probably increase the number of people
taking the annuity since many terminating and retiring employees are overwhelmed by all the
decisions that they need to make so they take the lump-sum by default. However, if the annuity
is the default option, participants will need the opportunity within a reasonable period of time to
get out of the default option if they change, or finally make up, their mind.

“21. Should an individual benefit statement present the participant's accrued benefits as a
lifetime income stream of payments in addition to presenting the ...account balance?”

Although we think it would be useful for DC plans benefit statements to also show the
annuity value of the account balance, this could create a lot of confusion if not clearly explained.
For example, since interest rates impact annuity values, the changes in annuity values from one
benefit statement to the next may show different trends than the participants account balance.

We also would need to know how complicated and expensive this would be for plans to
include on benefit statements before we could give a “yes” or “no” answer to this question. The
complexity and expense would also impact how often it would be appropriate if required.

“22. ...how should a lifetime stream of income...be expressed on the benefit statement ...?”"

We think a single life monthly annuity showing what a person will potentially get at age
65 based on the account balance at the time of the statement would be the clearest explanation.
We think this should also be shown as an amount per year of service. For example, “If you were
age 65 as of {date of account balance}, your current account balance could buy you a monthly
annuity of $X which is equal to $Y per month per year of service.” We find with our members
in DB plans understand and like to describe their benefit as an amount per month per year of
service.

Showing multiple ages and options would make things too complex. We do not think
there should be projections about earnings and/or contributions.

“23. ... what actuarial or other assumptions ...would be needed..

If the DC plan had an annuity option, then the value would be based on what annuity
could be purchased at the time of the statement if the person was age 65. If the DC plan does not
have an annuity option, then a model used by a commercial annuity provider selected based on
proper standards would be used. The source of the annuity value estimation would be disclosed
on the benefit statement.


more people. Although DC plans are useful supplements.to DB plans, we feel that the Federal
Government’s efforts have been overly focused on promoting 401(k) plans, including increasing
tax subsidies. This focus on 401(k) plans has contributed to the steep decline in the percentage
of the workforce participating in DB plans and done little to expand pension coverage to those
that have no plan at all. This shift from DB plans to 401(k) plans has also transferred investment
and other risks from sponsoring employers and the plans onto participants who in almost all
cases do not have the financial cushion to handle these risks.

Second, any policy and legislation to expand retirement protection should learn from the
strengths and weaknesses in the current DB system. For example, we are frequently asked by
our members why there is no fund similar to a multi-employer DB plan that they can make
individual contributions to on a weekly basis to build towards their own guaranteed retirement
annuity. These members understand that there are many problems with buying individual
annuities, including being at the mercy of for profit firms that are more concerned with charging
high fees than in providing a secure retirement. There needs to be a way to pool individuals
together so that they can take advantage of the economy of scale that a large fund has in
managing assets, such as reducing fees, having more diversity in investments, and planning for
the long-term. The IAM also thinks that the Department of Labor (DoL) should seriously
consider the Retirement USA’s “Principles for a New Retirement System” as factors to consider
when exploring new ways to give people access to a more secure retirement
(http://www.retirement-usa.org).

Third, the Pension Protection Act of 2006 (PPA) is seriously flawed and needs long-term
fixes. The fact that Congress is constantly being asked to address the unnecessary volatility and
other problems PPA created shows that we are not the only ones who see this legislation as
harming DB plans. This letter is not the place for a detailed discussion of the problems with the
PPA, but its flaws include the multi-employer funding zone calculations and remedies, the use of
bankruptcy filing dates for non-forfeitable benefits, and that the Annual Funding Notices create
unnecessary panic over the health of pension plans.

Fourth, we feel that retirement plan participants and sponsors are bearing an unfair
burden from the financial collapse that was not their fault. The financial giants that created the
worst economic crisis since the Great Depression received huge government bailouts. The
Troubled Asset Relief Program (TARP) needs to use some of its resources to help pension plans
and the Pension Benefit Guarantee Corporation (PBGC) deal with the losses they suffered due to
the “toxic assets” and other problems that these financial institutions created.

In our response below we use the numbers from the RFI. Since we will not be

responding to every question, such as those for plan sponsors, there are numbers that are skipped.
We will use the term “annuity” to refer to annuities and other forms of lifetime payments.

“1. From the standpoint of plan participants, what are the advantages and disadvantages ... of
receiving some or all of their benefits in the form of lifetime payments?”

There are many advantages to annuity payments. These include:

. The stability of a payment for as long as the retiree lives.


° Under our DB plans, this lifetime payment also provides protection for a
surviving spouse, or in many cases, another designated beneficiary.

° The basic benefits under our private sector DB plans are guaranteed by the
PBGC, and our government sector DB plans have the backing of the federal,
state or local governments that offer the plans.

. The extremely important fact that the plan and the plan sponsor have the
investment risk; not the plan participant.

° The plan, which uses investment professionals, is responsible for managing the
assets; not the plan participants.

° During their working careers, our members under DB plans know that year-
after-year they are building up towards a more secure retirement.

Although there are disadvantages, in most cases these are greatly outweighed by the
advantages. Disadvantages include:

° Only a handful of our DB plans include any automatic protections against
inflation, such as adjustments linked to the change in the Consumer Price
Index (CPI).

° For those that die before retiring or soon after retiring and do not have a

surviving spouse or the ability to designate a non-spouse beneficiary, the
participants’ estates get no value for the accrued benefits.

° Just because someone has a lifetime of payments, it does not automatically
mean that the amount of the payments is adequate to maintain a decent
standard of living.

° For DB plans that the PBGC takes over in distressed terminations, our
members do not always get the full benefits that they were expecting. Key
features that participants view as important parts of the DB pan are excluded
from the guaranteed benefit. People are especially outraged that age and
service are frozen at the time of plan termination so they may be denied
benefits that they were only a few months short of qualifying for.

° Retirees sometimes have trouble locating their single-employer DB plans when
they are ready to start collecting the benefits that they earned years ago. This
is especially a problem when an employer no longer exists or has gone through
multiple changes in ownership.

. Since DB plans typically have 5-year vesting, this means mobile workers and
those with low seniority do not get any benefit from participating in a DB plan.