Morgan Lewis

COUNSELORS AT LAW

Office of Regulation and Interpretations
May 3, 2010
Page 14

As discussed above, the amount of a payment will depend on, among other
factors, the age of the annuitant when payments begin, gender, the type of annuity selected i.e.,
life annuity, joint and survivor annuity, the number of payments guaranteed and the frequency of
annuity payments. Theoretically, the statement could provide numbers based on a representative
retiree, for example, a 65 year old female requesting monthly payments for the remainder of her
life, with at least ten years of payments guaranteed. The statement would then, however,
probably contain disclosures which say, in effect, that the number is only an example and that a
particular annuitant’s number will vary from the depicted number to a greater or lesser extent,
depending on how similar the annuitant’s demographic information and annuity choice is to that
of the representative annuitant depicted. We believe a better approach would be to provide on
the benefit statement a website address where the participant will be able to enter her personal
demographic information, proposed annuity commencement date and amount used to purchase
the annuity and then choose among the available annuity options and payment frequencies and
see what the annuity payment would be. This type of tool would allow a participant to see the
impact of taking an annuity option with a larger or small number of guaranteed payments and/or

accelerating or postponing the commencement of annuity payments.

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COUNSELORS AT LAW

Office of Regulation and Interpretations
May 3, 2010
Page 5

a participant could choose to receive a portion of her benefits in lifetime payments and then, due
to unforeseeable financial circumstances, regret that she no longer had access to the amount
which had been used to purchase the lifetime stream of payments. Similarly, a decision to select
lifetime payments in the form of fixed annuity payments might be disadvantageous if variable
annuity payments would have been larger. Conversely, if all the variable annuity options
selected perform worse than fixed annuity payments, the result would be less than optimal.
However, the fact that a reasonable choice may not, in the end, achieve the best possible result in
no way detracts from the value to the participant of having had the option to receive lifetime
payments. In any case, to ensure that participants make reasonable decisions, it is essential that
participants have access to written and on-line educational materials, retirement planning
seminars and other learning tools so that they are in a position to make a well-reasoned decision

whether to receive their benefits as lifetime payments and what portion to receive in this manner.

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?

It is very difficult to identify with certainty which of many reasons is paramount
in an individual’s decision not to take a particular step. We believe that a combination of inertia
and a reluctance to act proactively results in individuals taking lump sum distributions or ad hoc
payments as opposed to selecting a lifetime income option. Taking a lump sum or taking
payments as needed are comparatively easy decisions. They do not require an individual to

prepare a personal balance sheet, showing current and future assets and liabilities, as well as a

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Morgan Lewis

Office of Regulation and Interpretations
May 3, 2010
Page 10

each separately. For example, a purchaser who was secking to avoid leaving dependents without
adequate assets in the event of death at a young age and at the same time seeking to reduce the
tisk that an extended life would deplete the assets available to support the purchaser in retirement
might purchase a combination of a life insurance policy with a life annuity. An insurance
company could provide this combination product on a more attractive economic basis. The
insurance company would not have to price separately for the mortality risk associated with the
life insurance and the longevity risk associated with the annuity because the two risks would

offset each other.

Similar cost savings or reduced distribution costs might be available if annuities
were combined with other products. The decision to use either element of a combination product
is a very complicated one which must be based on a complete understanding of the participant’s
needs as well as features of the two products. Given the complexity of that decisionmaking
process along with the limited number of combination products available in the marketplace, we

believe that it is premature to expect that combination products will be used with any frequency.

Participant Education

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?

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Morgan Lewis

COUNSELORS AT LAW

Office of Regulation and Interpretations
May 3, 2010
Page 7

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?

It is axiomatic that any entity offering a retirement income stream and which is
concerned about its own long-term solvency will adjust its charges and/or the amount of the
benefit provided to reflect the extent of the guarantees the entity provides the recipient and the
benefit’s features which may, in effect, give the recipient the option to modify the arrangement at
a time of the recipient’s choosing. For example, an individual who selects a life annuity with
guaranteed payments for 10 years will receive a higher monthly payment than if (s)he had
selected a life annuity with guaranteed payments for 20 years, for the simple reason that the
entity providing the benefit knows that, in a large group of recipients, some of them will die
between 10 and 20 years after payments commence. The death will allow the entity to stop
making payments which would have continued if the recipient had selected the 20 year
guarantee. Similarly, there will be a cost associated with any feature which allows the recipient,
at the recipient’s discretion, to either take payments more quickly or convert what was scheduled
to be a series of periodic payments into a lump sum payment. There are two fundamental
concepts involved. One is the present value of money concept. A recipient who is entitled to
payments of $1,000 per month for the next 12 months will not receive $12,000 if (s)he asks for a
lump sum payment at the beginning of the period. In setting the payment level at $1,000 per
month, the providing entity anticipated earning interest on the money the recipient paid for the

annuity or gaining some other benefit from making the payments over an extended period.

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COUNSELORS AT LAW

Office of Regulation and Interpretations
May 3, 2010
Page 6

personal income cash flow statement. Having this and/or similar information would be essential
in deciding whether and how much to allocate to a lifetime income option. Moreover, as
discussed above, even after an individual has decided to allocate some or all of their benefits to
an income option, selecting an income option requires further decisions to be made, e.g.,
payments for life or life with a guaranteed number of payments, fixed annuity or variable annity
payments, etc. There will always be a number of competing considerations to weigh. Finally, to
some extent, this analysis will always involve considering how long the individual will live and
what their medical, housing and other costs will be for the remainder of their lives. Of course, as
a matter of human nature, these are issues most individuals prefer not to think about. The
number and complexity of these subsequent decisions is undoubtedly a reason participants make
the less complicated decision of a lump sum or ad hoc payments even if that decision may not be

the one best tailored to their individual circumstances.

It would be very helpful if the Agencies could facilitate employers and others providing
additional information about the available distribution options and the analytical framework
necessary to select an appropriate one for an individual's particular circumstances. Any
educational materials should also explain why making the much easier choice to take a lump sum
distribution or ad hoc payments from a retirement plan or IRA is itself a decision and one not

without its own set of consequences.

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Morgan Lewis

COUNSELORS AT LAW

Office of Regulation and Interpretations
May 3, 2010
Page 9

any, does the value of the residence exceed any mortgage debt. The amount and liquidity of the
participant’s other assets and other income sources are also key factors. A participant’s risk
tolerances would also be relevant. In summary, the annuitization decision involves many
considerations, many objective, but also some subjective. The number of human and internet
sources of guidance on this subject, including detailed worksheets, will only expand as the
“baby-boom” generation begins to face this decision as they contemplate impending retirement.
We believe that it is very important that the Agencies take steps to facilitate plan sponsors
providing their participants access to individuals and internet resources to help participants make

the decision whether and, if so, how much of their benefit, to annuitize.

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, . . .?

Because many participants will find a lifetime income distribution option a useful
component of their retirement financing plan, we believe all defined contribution plans should be
required to offer one. We do not believe, however, that it should be the default option. There
are simply too many factors which go into making the basic decision, i.e., whether one should

annuitize a retirement benefit, for a lifetime income option to be the default distribution option.

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?

There are undoubtedly circumstances in which combination products can allow

the purchaser to buy two products together less expensively than if the purchaser had purchased

DB1/64630915.2


Morgan, Lewis & Bockius LLP .
1111 Pennsylvania Avenue, NW Morgan Lewis
Washington, DC 20004
Tel: 202.739.3000
Fax: 202.739.3001
www.morganlewis.com

COUNSELORS AT LAW

May 3, 2010

Office of Regulation and Interpretations
Employee Benefits Security Administration
Room -- 5655

U.S. Department of Labor

200 Constitution Avenue, NW
Washington, DC 20210

Re: — RIN 1210-AB33
29 CFR Parts 2509, 2520 and 2550

Request for Information Regarding Lifetime Income Options for Participants and
Beneficiaries in Retirement Plans

Ladies and Gentlemen:

American Equity Investment Life Insurance Company (“American Equity”) commends
the Department of Labor and the Department of the Treasury (the “Agencies”) for their decision
to publish a Request for Information Regarding Lifetime Income Options for Participants and
Beneficiaries in Retirement Plans.' The Request solicits comments on whether, and if so how,
the Agencies could or should enhance, by regulation or otherwise, the retirement security of
participants in employer-sponsored retirement plans and in individual retirement arrangements
(IRAs) by facilitating access to, and use of, lifetime income or other arrangements designed to

provide a lifetime stream of income after retirement.

' 75 Fed. Reg. 5253 (Feb. 2, 2010) (the “Request”).

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Morgan Lewis

Office of Regulation and Interpretations
May 3, 2010
Page 12

time, in addition to information about the provider’s financial condition, they should also receive
information about the nature of any protection they have if the provider encounters financial
difficulties and is no longer able to make the anticipated payments. For example, there are state
guaranty funds which, subject to various conditions and limits, provide benefits to customers of

financially-troubled insurance companies.

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?

Responding to this question and a related question in item 17, we believe plans
should be strongly encouraged to provide or promote general retirement planning education.
Given the enormous opportunity to accumulate a large retirement account available to defined
contribution plan participants who enroll in their plans as soon as possible and contribute as
much as permitted, we believe education about the benefits of participating should be given the
same emphasis, at the same time, as a new employee receives information about the employer’s
health insurance options. Updated information about the retirement plan should also be provided
regularly. In addition, we believe that further education should be made available as participants
are closer to anticipated retirement dates. Given the number of means of taking plan
distributions, we believe this education process should begin no later than ten years before a
participant’s target retirement date. Approximately five years before retirement, more detailed
information should be presented focusing on the available distribution options including lifetime

annuities and other lifetime income products. In this phase, participants would receive more

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Morgan Lewis

Office of Regulation and Interpretations
May 3, 2010
Page 11

As noted above, there are a number of factors to be considered in determining
whether and what portion of a participant’s benefit should be taken as a stream of income.
Assuming a decision has been made to annuitize, other information is necessary to implement
that decision. It is essential that a participant have a complete understanding of how the product
operates. A participant will need to know how frequently and in what amounts payments would
be made; will payments be a fixed amount or can they vary; what, if any, liquidity and/or
provision for payments to beneficiaries does the arrangement provide. As a general matter,
income options do not have explicit fees. Rather, those fees are incorporated into the
annuitization tables, i.e., the tables which state how much of a monthly payment a person of a
particular age and sex would receive in return for the lump sum provided for a particular annuity

option.? Of course, any explicit charges should be disclosed.

A participant should also have access to information about the entity providing
the stream of income. With respect to an insurance company, a participant should have access
to financial information, rating agency reports and publicly available information from state
insurance regulatory agencies. Given the almost universal access to the internet, we believe that
access to this information should only be required to be provided on an on-line basis. On-line
access would allow a participant to review the specific information (s)he thought relevant and
avoid the cost of printing and distributing materials which, in many cases, would immediately be

discarded. Because participants will be relying on receiving payments for extended periods of

These are typically presented as an amount per month for each $1,000 provided at the beginning of the income
period.

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Morgan Lewis

COUNSELORS AT LAW

Office of Regulation and Interpretations
May 3, 2010
Page 8

Allowing the recipient to change the chosen payment period from five years to two years also
disrupts the provider investment program. The provider may have purchased a five year debt
instrument to support the five year payment obligation, but may be forced to liquidate that
instrument if the recipient is allowed, and chooses, to reduce the payment period to two years. If
interest rates have risen during the period, the value of the debt instrument will generally be less
than the provider would have anticipated and the provider will have a cost as a result of the
recipient’s decision to reduce the payment period. To summarize, there will be a cost
associated with any feature which allows the recipient to alter what could be called the basic
agreement with the provider. The cost will be reflected either through an explicit charge or a
lower benefit level than if the feature were not included. The amount of the cost will vary based

on how much the feature allows the recipient to deviate from the basic agreement.

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?

Education and/or educational tools are the keys to participants determining what
portion, if any, of their account balances to annuitize. Certainly, basic retirement expenses are a
factor, but there are many additional factors which must be considered, many of which have sub-
factors. Looking at one expense everyone has in retirement, living arrangements, shows the
complexity of the annuitization decision. A participant would have to consider their current and
future housing plans. House, apartment and retirement residence are some of the options. Is the

residence owned or rented and will that continue. If the residence is owned, to what extent, if

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COUNSELORS AT LAW

Office of Regulation and Interpretations
May 3, 2010
Page 4

In addition to expressing our strong support for action by the Agencies to increase access
to annuity arrangements by plan participants, we have the following comments on some of the

specific questions the Request raises.”

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?

Annuities provide a wide variety of payout options which allow a participant to
select an annuity option which best matches her or his individual circumstances. For example, a
participant who had no need to guarantee any amounts would be available as part of an estate
might find attractive a life annuity only. On the other hand, if the participant had beneficiaries to
be provided for, a life annuity with a minimum number of payments guaranteed or a life annuity
with payments guaranteed to continue for the life of the participant and a named beneficiary

might be appropriate.

As to the disadvantages of receiving benefits in the form of lifetime payments, assuming
the participant makes an informed, thoughtful election to receive lifetime payments, we are not
aware of any disadvantages of having the option to make, and making, that decision. We are not
saying that, with the benefit of hindsight, there could not be circumstances in which selecting

lifetime payments does not produce the most advantageous result for a participant. For example,

We have numbered our responses to correspond to the numbering of the questions in the Request and have
summarized each question before our response.

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Morgan Lewis
Office of Regulation and Interpretations COUNSELORS AT Law
May 3, 2010
Page 15

Summary and Conclusion

American Equity applauds the willingness of the Agencies to consider the difficult issues
involved in facilitating the use of lifetime income options to promote the retirement security of

American workers and appreciate the opportunity to comment on these issues.
If you would like to discuss any of our comments, please call me at (202) 739-5450.

Sincerely,

Michael Berenson

cc: Marla Lacey, Esq.

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Morgan Lewis

COUNSELORS AT LaW

Office of Regulation and Interpretations
May 3, 2010
Page 3

benefits and should be available to all retirement plan participants as a distribution option. In
addition, because annuities provide a unique set of benefits, which may not be well understood,
we believe it is essential that a well-designed participant education program be in place so that
participants can make a thoughtful decision whether they should take any of their plan
distribution in the form of an annuity and, if an annuity is appropriate, what portion of their

distribution should be taken in that form.

Even before the stock market decline which began in late 2007, it was widely recognized
that the American public was not well-positioned to maintain their then-current standard of
living in retirement. As a result of various factors, including advances in medical care,
Americans can expect more retirement years. However, between generally inadequate levels of
savings and a significant shift by employers away from defined benefit plans (which provide a
lifetime income stream to participants), the American public could not realistically expect their
savings, anticipated Social Security benefits and existing retirement programs to support their
then current standard of living. While the stock market as measured by the S&P 500, on April 1,
2010, has increased by 74% since reaching its low for the past five years of 676.53 on March 9,
2009, it would have to increase an additional 33% to get back to its high for the past five years of
1565.15 attained on October 7, 2007. This weak stock market performance, especially when
combined with the sharp decline in the value of personal residences which homeowners may
have been looking to as a means of support during retirement, increases the importance of the

decisions the Agencies will make after they have reviewed the responses to the Request.

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COUNSELORS AT LAW

Office of Regulation and Interpretations
May 3, 2010
Page 2

American Equity is pleased to have the opportunity to submit these comments. American
Equity and its affiliated companies are leaders in the development and sale of fixed indexed
annuities and fixed rate annuities. As of December 31, 2009, American Equity had
approximately 300,000 policyholders and $20.2 billion in policy benefit reserves. During the
year ended December 31, 2009, American Equity and its affiliates received approximately $3.7
billion in new annuity premium, ranked 3rd in the sales of fixed index annuities in the United

States, 11th in sales of all fixed annuities and 19th in sales of fixed and variable annuities.

American Equity’s target market is individuals ages 45-75 who are seeking to accumulate
savings for retirement and other purposes. As a result, American Equity has developed a special
understanding of the individuals in its target market, including the investment and other goals
they are seeking to achieve, the questions and concerns they have about annuities and the most

effective ways to address those questions and concerns.

An initial and fundamental question the Agencies raise is whether it would be appropriate
for them to take future steps to facilitate access to, and use of, lifetime income or other
arrangements designed to provide a stream of income after retirement. For myriad reasons, most
of which the Agencies are very familiar with, American Equity unequivocally believes that the
Agencies should take actions to facilitate access to and use of annuities and other products
designed to provide lifetime or other streams of income during retirement. By no means is
American Equity suggesting all plan participants should take all, or even part, of their plan

distribution in the form of an annuity. Rather, we believe that annuities provide a unique set of

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Morgan Lewis

Office of Regulation and Interpretations
May 3, 2010
Page 13

information about how lifetime annuities operate, and how to select the lifetime annuity best
suited for a participant’s retirement needs and goals. Using a multi-step approach would be
designed to save participants from the information overload that might occur if all the relevant
materials were provided close to the time they were making the decision in what form to receive
their retirement benefits. Such information overload increases the likelihood that a participant

will make the easy choice of a lump sum or ad hoc payments, which may not be the best choice.

Disclosing the Income Stream That Can Be Provided From an 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?

In principle, we believe that the more information a participant has, the more
thoughtful the retirement planning process will be and the better the decisions will be, all
ultimately more likely resulting in the retirement security the Agencies and American Equity are
seeking for American workers. As evidenced by the questions in items 22 and 23, we believe
that including on an individual benefit statement one or more numbers reflecting the participants
accrued benefits as a lifetime stream of payments would be so conjectural and would have to
contain so much explanatory information and so many caveats as to be practically worthless. We
do believe, however, that this information could be made available on-line in a user-friendly
manner which could be referenced on individual benefit statements and would not have the

inherent flaws we envision in putting one or more numbers on the benefit statement itself.

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