Principal Life 

Insurance Company 

October 13, 2010 

Submitted electronically at e-ORI@dol.gov

Employee Benefits Security Administration 

U.S. Department of Labor and 

Internal Revenue Service, Department of The Treasury 

200 Constitution Avenue NW 

Washington, DC 20210 

Subject: RE: Follow up to the Hearing on Certain Issues Relating to Lifetime Income Options for 

Participants and Beneficiaries in Retirement Plans 

Dear Sir or Madam: 

Thank you for the opportunity to testify before the Employee Benefits Security Administration, U.S. 

Department of Labor and the Internal Revenue Service, Department of the Treasury last month during the 

“Hearing on Certain Issues Relating to Lifetime Income Options for Participants and Beneficiaries in 

Retirement Plans.” 

As a follow up to my testimony, I’d like speak on behalf of the Principal Financial Group® about the 

challenges of placing a deferred annuity, as an investment option, inside a defined contribution retirement 

plan. Sometimes referred to as “in-plan guarantees”, the product I want to address uses living benefit riders 

attached to variable annuities, which charge fees during accumulation to cover the guaranteed minimum 

withdrawal benefit (GMWB) feature that may or may not be used in retirement. 

At the Principal Financial Group, we believe participants are most prepared to make decisions around 

retirement income as they approach retirement. Rather than paying additional fees for a guarantee they may 

not use, a more beneficial approach is to offer guaranteed lifetime income options to participants at 

retirement as a distribution option. This strategy allows assets to grow without additional fee burden during 

accumulation while maintaining flexibility to customize a retirement income plan when actual needs are 

better understood. 

The Principal® has offered a variable annuity product with a living benefit rider for five years through our 

retail distribution channel. When sold on a retail basis, investors have the benefit of working with a financial 

professional who is able to identify the specific goals and needs of each client to ensure this type of product 

is an appropriate solution and to make sure the client fully understands how it works. Due to the complexity 

of this product, investors need the one-on-one guidance of a financial professional in order to fully 

understand what they are purchasing and to ensure it is the right solution for their situation. 

 

When positioned as a one-size-fits-all solution within a defined contribution retirement plan, participants 

rarely have the benefit of much needed one-on-one guidance to make sure they know what they are getting. 

 

In addition to the educational and suitability challenges, portability remains of significant concern. This 

issue impacts all parties involved, including the participant, plan sponsor, record keeper, and insurer. 

711 High Street, Des Moines, Iowa 50392 (515) 247-5111
 Principal Life 

Insurance Company 

• Participant: If an employee leaves an employer for any reason, there is currently no viable solution that 

allows the employee to continue making contributions, even if they become eligible to contribute to 

another defined contribution retirement plan because the new plan may not offer this kind of option or it 

may be with a different company. This can result in small balances that are insufficient in providing 

lifetime retirement income. Alternatively, the employee may cash out the account. That means the 

employee will have paid fees, potentially for many years, for an income guarantee that will not be used. 

• Record Keeper: A plan sponsor may lose flexibility when changing record keepers once living benefits 

are allowed in the plan. Unlike mutual funds that can transfer data on a common platform, such as the

National Securities Clearing Corporation (NSCC), existing living benefit products vary in design making 

data transmission a challenge and expensive to implement. Recordkeeping these investments can be 

very expensive, and not all recordkeepers are willing to do so. 

• Insurer: The plan sponsor is also restricted to the chosen insurer because there is currently no way to 

transfer the income guarantee to a new insurer. Or the plan sponsor/fiduciary may want to change 

investment options because of underperformance or lower fees, but is restricted from doing so. 

To inform plan advisors about the concerns of using variable annuities as an investment option within a 

defined contribution retirement plan, The Principal offers the attached educational piece. I believe you will 

find this very informative as it contains key findings from trusted industry leaders. 

Your consideration of these concerns is greatly appreciated. 

Greg Burrows 

Senior Vice President 

Principal Financial Group 

Enclosure 

711 High Street, Des Moines, Iowa 50392 (515) 247-5111
Comparing Guaranteed Income Options

Why does the traditional and tested approach win?

For the past several years, there have been various new approaches within the industry to 

include a deferred annuity as an investment option within the accumulation phase of 401(k) 

plans. These newer “one-size-fi ts-all” approaches have received considerable attention and 

have been described by the industry in several ways, but are typically referred to as 

“in-plan guarantees.”

Unfortunately, there is considerable misunderstanding about this untested approach 

to offering participants of 401(k) plans a form of guaranteed income as an investment 

option. As one of the 401(k) retirement plan leaders,* the Principal Financial Group®

continues to stand by the traditional and proven approach of providing a guaranteed 

income solution as a distribution option at the time of retirement, when an individual has 

the most understanding of his or her fi nancial needs and resources.

“Everybody is adopting the in-plan-guarantee approach 

that offers a deferred annuity as an investment option.”

“Despite years of ongoing media and industry coverage ...

Only 4% of employers have an annuity or insurance product 

as an investment option within their plans.” 

Source: Hewitt Associates, “2009 Hot Topics in Retirement.”

FINANCIAL PROFESSIONAL

MYTH

FACT 
Quantifying the difference

Understanding the Impact on

Retirement Savings and Income

To better understand the differences between the two approaches, the illustration below shows the 

impact on a participant having $100,000 in a 401(k) plan who is either 5 or 10 years from retirement. 

The best, average, and worst returns from 1927 to 2008 are considered to validate these results are 

not unique to just one type of market environment. The impact on savings is noted in the orange 

section, and the income that can be guaranteed at retirement is in the blue area. The fi nal section in 

gray considers how much of the traditional account value would be left over if the retiree wanted to 

secure the same amount of income as provided by the in-plan guaranteed minimum withdrawal benefi t 

(GMWB).

Market Performance Impact on Retirement Savings

Type

of Return

Years

to Retirement

Annual

Return Average1

Traditional

60% Stocks

40% Bonds2

In-Plan

Guarantees

GMWB3

Reduction in

Account Value

Due to Fees4

Best

5 20.08% $249,663 $240,446 4%

10 16.50% $460,531 $426,166 7%

Average

5 9.32% $156,134 $149,812 4%

10 9.71% $252,617 $232,642 8%

Worst

5 -4.20% $80,691 $76,972 5%

10 1.68% $118,129 $108,080 9%

Illustration based on a participant having $100,000 in

a 401(k) plan with either 5 or 10 years to retirement

1 The annual returns (1927–2008) of a portfolio containing 60% S&P 500 and 40% Barclay Aggregate Bond Index were used to fi nd the best, worst, and 

average 5 and 10 year holding period returns during this time period. These holding period returns were then converted into a compound annual return for 

use in this analysis.

2 Assuming an investor has $100,000, this column shows the result of applying the compound annual return listed for the applicable holding period (5 or 

10 years). In other words, the $100,000 is put into a mutual fund with 60% stocks and 40% bonds for either 5 or 10 years, and analyzed under various 

market conditions.

3

 In this column the $100,000 is invested in an in-plan GMWB solution. According to the article “Guaranteed Income for Life Solutions in 401(k) Plans: The Next Big 

Thing?” by Callan Associates, in-plan solutions often charge an extra fee of 85–95 bps. For this analysis, an additional 90 bps of fees annually reduces the account 

value within the in-plan solution.
Income Guaranteed Annually Remaining Account Value when Annuitizing 

Just Enough to Equal the GMWB Guarantee

Traditional

Income Annuity5

In-Plan

Guarantees (GMWB)6

Traditional

Account Value

Remaining7

Percent of

Account Value

Remaining7

$17,476 $12,022 $77,917 31%

$32,237 $21,308 $156,129 34%

$10,929 $7,491 $49,126 31%

$17,683 $11,632 $86,444 34%

$5,648 $5,000 $9,263 11%

$8,269 $5,404 $40,929 35%

4

 The 90 bps of extra fees will reduce the growth potential of the account balance in the in-plan solution under all market conditions. This column shows the 

percent impact these fees have on the account balance of the in-plan guarantee versus the 60/40 mutual fund.

5

 At retirement, the investor using the 60/40 mutual fund invests the entire account balance in an institutional income annuity. The annuity rate is based on an 

institutional, unisex rate for an age 65 retiree as of 10/1/2009. An installment refund is included. The income listed in this column is guaranteed for life.

6

 After investing in the in-plan GMWB solution, an investor is guaranteed the higher of either: 1) 5% of their account value or 2) 5% of their original investment 

($100,000). The guarantee that was purchased for the annual fee of 90 bps is only used if the account value actually drops below the original investment of $100,000.

7

 If someone who invested in the 60/40 mutual fund during the accumulation phase wanted to secure the same amount of guaranteed income provided by the in-plan GMWB 

solution, they could easily use an income annuity to do so. The annuity pays an annual amount of approximately 6.99% of the original premium. This column assumes the 

retiree uses some money to guarantee the same income as the in-plan solution, and the leftover account balance displayed can be used for liquidity and growth potential.

3 Key Outcomes

Extra fees for in-plan guarantees (using 90 bps) can reduce account values 

by 7–9% over 10 years and 4–5% over 5 years.

A traditional income annuity typically provides a higher payout rate than the 5% 

guaranteed withdrawal rate of a GMWB. Even when an installment refund is included.

Typically 65–69% of the account value needs to be annuitized to equal the GMWB 

withdrawal amount, leaving the remaining amount to invest in stocks and bonds for 

liquidity or long-term growth potential.

1

2

3
Plan sponsor challenges

What happens to an employer’s fi duciary risk when they want to move their plan in the future? That’s a 

good question that raises concern over plan portability and increased fi duciary risk. But there are other 

challenges facing plan sponsors as highlighted in a recent LIMRA study that identifi es the following:

Participant considerations 

In addition to the above challenges for plan sponsors as identifi ed by LIMRA, the below factors 

can be considered on behalf of plan participants when comparing the options.

Principal Life Insurance Company, Des Moines, Iowa 50392-0002, principal.com

Insurance products and plan administrative services are provided by Principal Life Insurance Company,

a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.

Guarantees provided are backed by the claims paying ability of the insurance company providing the option.

* The Principal ranks No.1 in total plans for all asset sizes among fully bundled 401(k) providers, 2008 Spectrem Group

analysis of fully-bundled 401(k) providers (companies that provide both administrative and investment services).

WE’LL GIVE YOU AN EDGE®

The Principal® is here to help!

If you have additional questions about The Principal approach of offering guaranteed income as a 

better solution to in-plan guarantees or need other tools and resources available to you through 

the Principal Retirement Income EdgeSM program, call your representative of The Principal.

Challenges with In-Plan Guarantees

5 Plan Sponsor Challenges 

Identifi ed by LIMRA

Source: LIMRA, 2009 Retirement Research on Guaranteeing 

Lifetime Income in Defi ned Contribution Plans

1. Increased fiduciary risk 

2. Communication challenges

3. Portability

4. Complexity

5. Product justification

Key Factors In-Plan Guarantees

(as an investment option)

Traditional Approach

(as a distribution option)

Timing Decision is required when future needs and 

circumstances are unknown.

The purchase decision is made when participant 

is at retirement and is most informed.

Control At retirement, retiree is locked into product 

structure provided through the plan.

At retirement, retiree has no limits and can 

“shop” the available income options. 

Portability Portability may be an issue if employer 

moves plan to another provider.

Portability of account value is not an issue 

during the accumulation phase.

Fees

Additional fees are applied during 

the accumulation phase to cover 

guarantees.

No additional fees are required on investment 

options that don’t provide withdrawal 

guarantees. 

Understanding

Complex and diffi cult to understand the 

investment option and eventual payout.

The income annuity is an easier way to 

guarantee lifetime income with a portion of a 

retiree’s account value.

PQ10089-02 l 12/2009 l #8573112011 

© 2009 Principal Financial Services, Inc.