with small account balances—workers with balances of $100,000 or less—the stakes
are far greater. Although, retirement savings may be larger in the future as more
workers have opportunities to save over longer periods through strategies such as
automatic enrollment, many will likely continue to face little margin for error. Poor or
imprudent investment decisions may mean the difference between a secure
retirement and poverty, which highlights the need for improving financial literacy.
How we address this issue for the already large segment of the population depending
on limited retirement savings to ensure income adequacy throughout retirement
continues to be one of the key policy challenges facing the Congress and the nation.

We provided officials from the Department of the Treasury, IRS, Department of
Labor, and the SEC with a draft of this report. Officials from the Department of Labor
and SEC provided us with informal technical comments that we have incorporated in
the report, where appropriate.

As agreed with your office, unless you publicly announce its contents earlier, we plan
no further distribution until 30 days after the date of this letter. At that time, we will
send copies of this report to the Secretary of the Treasury, Commissioner of Internal
Revenue, Secretary of Labor, Chairman of the SEC, and other interested parties. In
addition, this report will be available at no charge on GAO’s Web site at
http://www.gao.gov.

If you or your staff have any questions concerning this report, please contact me at
(202) 512-7215 or jeszeckc@gao.gov. Contact points for our offices of Congressional
Relations and Public Affairs may be found on the last page of this report. GAO staff
who made key contributions to this report were Michael J. Collins, Assistant Director;
Benjamin P. Pfeiffer; Bryan G. Rogowski; Patrick S. Dynes; Joseph A. Applebaum,
Susan C. Bernstein; and Roger J. Thomas.

Sincerely yours,

Charles Jeszeck
Acting Director, Education, Workforce, and
Income Security Issues

(131002)

Page 18 GAO-10-632R Retirement Income


accounts, such as an IRA, 18 percent took an annuity, and just 6 percent took
installments.” According to the survey, among IRA holders, 37 percent indicated they
were not at all likely to make a withdrawal until age 70 4%, while another 27 percent
indicated they were not very likely to make such a withdrawal.” Among those
withdrawing IRA funds, 64 percent took an amount based on the IRS annual required
minimum distribution. Furthermore, an estimated 44 percent withdrew funds for
living expenses, 19 percent for health care expenses, and 15 percent for home
expenses. Households with younger workers generally have lower balances in DC
plans and IRAs, but they also have the opportunity to begin tax-qualified savings from
an earlier age, have more years to save, and have more years to receive a return on
their investments.

Other investments—bank account balances, stocks, bonds, and mutual funds held
outside of retirement plans—are important sources of income for some retirees. An
estimated 21 percent of households headed by someone aged 55 to 64 held stocks
directly, with a median value of $24,000, while 14 percent held pooled investment
funds, such as mutual funds, with a median value of $112,000. Only 2 percent held
bonds directly, which had a median value of $91,000. About 21 percent of these
households had one or more certificates of deposit, with a median total value of
$23,000. Other assets include life insurance and savings bonds. An estimated 35
percent of these households had cash value life insurance, with a median value of
$10,000.

Retirees typically invest in a mix of equities or funds invested in equities and other
assets, such as bonds, in order to provide investment income and appreciation to
fund retirement over a long period. Studies of market rates of return indicate that an
investor could withdraw 4 percent of the amount of a well-managed diversified
portfolio, adjusting the initial withdrawal amount for inflation. For example, one such
study found that an investor would have an 11 percent chance of running out of
money at some point over 30 years.” However, the chances of running out of money
are higher if the investor incurs substantial investment losses early in retirement.

“Investment Company Institute, Defined Contribution Plan Distribution Choices at Retirement: A
Survey of Employees Retiring Between 2002 and 2007, Investment Company Institute Research
Series (Washington, D.C., Fall 2008). Nine percent of respondents indicated they had multiple
dispositions which may have included some of the other categories but were not included in the totals
reported.

“This excludes households that had withdrawn funds in tax year 2008. The IRS generally requires
account holders to begin taking minimum withdrawals from IRAs and qualified DC plans beginning in
the year they reach age 70 4%. The Worker, Retiree, and Employer Recovery Act of 2008 waived this
requirement for 2009.

“This analysis by T. Rowe Price assumes inflation will be 3 percent each year and that the retiree
maintains 40 percent of the portfolio in stocks and 60 percent in bonds throughout retirement. The
estimated chance of running out of money over 35 years is 23 percent.

Page 12 GAO-10-632R Retirement Income


12
13
14
15
16
17
18
19
20
21
22
23
24
25

2

(2) in clause (ii), by striking “diversification.”

and inserting “diversification, and”; and

(3) by inserting at the end the following:

“(ii) the lifetime income disclosure

described in subparagraph (D)(i).

In the case of pension benefit statements de-

seribed in clause (i) of paragraph (1)(A), a life-

time income disclosure under clause (iii) of this

subparagraph shall only be required to be in-

eluded in one pension benefit statement in each

calendar year.”.

(b) LIFETIME INCOME.—Paragraph (2) of section

105(a) of such Act (29 U.S.C. 1025(a)) is amended by

adding at the end the following new subparagraph:

°S 2832 IS

“(D) LIFETIME INCOME DISCLOSURE.—

“) IN GENERAL.—

“(I) DiscLOSURE.—A lifetime in-
come disclosure shall set forth the an-
nuity equivalent of the total benefits
accrued with respect to the partici-
pant or beneficiary.

“(II) ANNUITY EQUIVALENT OF
THE TOTAL BENEFITS ACCRUED.—
For purposes of this subparagraph,

the ‘annuity equivalent of the total


retirement age. For those at the highest level of earnings covered by Social Security
($106,800 in 2010), Social Security replaces about 26 percent.’ At the median income
level, Social Security replaces an estimated 47 percent of average annual indexed
lifetime earnings."

The age for receiving normal or “full” Social Security retired worker benefits had
been age 65. However, under current law, the full retirement age is gradually
increasing, beginning with retirees born in 1938, and will reach age 67 for those born
in 1960 or later.* People may still choose to retire at the early eligibility age of 62 and
receive reduced benefits. The reduction for early retirement takes into account the
longer period of time over which benefits are paid. Similarly, those who retire later
receive a commensurate increase in benefits, which takes into account the shorter
period of time over which benefits are paid. On balance, the differences in age at
which benefits are taken leave the trust fund in approximately the same financial
position.

For the first time since 1983, the Social Security trust funds are currently paying out
more in benefits than they are receiving through payroll tax revenue, but trust fund
interest income more than covers the difference, according to the Social Security
Administration.’ Additionally, the Social Security trust funds will be able to pay all
promised benefits for about another 27 years, according to the 2009 report of the

Social Security trust fund’s Board of Trustees. At that time, the Social Security trust
funds are forecasted to be able to pay only 76 percent of scheduled benefits.”
However, Social Security reforms could eliminate or reduce the size of this reduction
in scheduled benefits through measures to increase expected revenue or decrease the
expected growth of benefits.

"Social Security benefits for retired workers at full retirement age (age 66) in 2010 provide 90 percent
of the first $761 of average monthly indexed earnings, 32 percent of additional earnings up to $4,586,
and 15 percent of earnings above $4,586, up to the limit on the annual base of covered earnings each
year or $106,800 per year ($8,900 per month) in 2010. See Social Security Administration, Your
Retirement Benefit: How It is Figured, (Washington, D.C., January 2010).

"The median estimate was for 2005. See Andrew G. Biggs and Glenn R. Springstead, “Alternate
Measures of Replacement Rates for Social Security Benefits and Retirement Income,” Social Security
Bulletin (68:2) 2008.

‘Those born in 1938 were the first to be affected when they turned 62 in 2000 and faced a greater
reduction for retiring at that age.

"The Social Security Administration estimates that over the next several years, trust fund income,
excluding trust fund interest, will fluctuate above or below trust fund expenses and beginning in 2016,
expenses will exceed income.

“The Board of Trustees, Federal Old-Age and Survivors Insurance and Federal Disability Insurance
Trust Funds, The 2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors
Insurance and Federal Disability Insurance Trust Funds, House Document 111-41, (Washington,
D.C., May 12, 2009), 2, 9.

Page 3 GAO-10-632R Retirement Income


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oO WN DUH FF YW NY

+S 2832 IS

5

enactment of the Lifetime Income Disclo-
sure Act, the Secretary shall—
“(I) prescribe assumptions that
administrators of individual account
plans may use in converting total ac-
erued benefits into annuity equiva-
lents for purposes of this subpara-
graph; and
“(I]) issue interim final rules
under clause (i).
In prescribing assumptions under sub-
clause (I), the Secretary may prescribe a
single set of specific assumptions (in which
ease the Secretary may issue tables or fac-
tors that facilitate such conversions), or
ranges of permissible assumptions. To the
extent that an accrued benefit is or may be
invested in an annuity contract, the as-
sumptions prescribed under subclause (I)
shall, to the extent appropriate, permit ad-
ministrators of individual account plans to
use the amounts payable under such con-
tract as an annuity equivalent.

“(iv) LIMITATION ON LIABILITY.—No

plan fiduciary, plan sponsor, or other per-


Us. Government
INFORMATION.
GPO,

111TH CONGRESS
1st SESSION S. 2832

To amend the Employee Retirement Income Security Act of 1974 to require
a lifetime income disclosure.

IN THE SENATE OF THE UNITED STATES

DECEMBER 3, 2009
Mr. BINGAMAN (for himself, Mr. Isat , and Mr. Kon.) introduced the fol-
lowing bill; which was read twice and referred to the Committee on
Health, Education, Labor, and Pensions

Zz

A BILL

To amend the Employee Retirement Income Security Act

of 1974 to require a lifetime income disclosure.

Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.

This Act may be cited as the “Lifetime Income Dis-
closure Act”’.

SEC. 2. DISCLOSURE REGARDING LIFETIME INCOME.

(a) IN GBNERAL.—Subparagraph (B) of section
105(a)(2) of the Employee Retirement Income Security

Act of 1974 (29 U.S.C. 1025(a)(2)) is amended—

‘

oO WN DUN FW DY

(1) in clause (i), by striking “and” at the end;


insurer is assuming the investment risk vis-a-vis the purchaser and the manner in
which the annuity is marketed.” Annuities are generally supervised by state
insurance departments, which regulate sales and marketing practices and policy
terms and conditions to ensure that consumers are treated fairly when they
purchase insurance products and file claims in addition to reserve requirements of
the insurance companies offering annuities. Because variable annuities are
subject to federal securities laws, they are regulated by the SEC including
regulation of disclosure and sales practices, while the insurance aspects of the
product are regulated by the applicable state agency. Indexed annuities are also
regulated by the SEC, in addition to states. To help guide states in their oversight,
the National Association of Insurance Commissioners (NAIC) has proposed
language for “model laws and regulations” for legislators to consider or modify for
their respective states. Finally, the states, through state guarantee associations,
have a role in protecting annuity owners against insurer insolvency. However,
coverage for annuities varies from state to state and is not available for variable
annuities.

a
Table 1: Regulators that Oversee Annuities

Types of Annuities

Indexed
Regulators Fixed annuities annuities Variable annuities
State insurance departments Yes Yes Yes
SEC No Maybe Yes
State guarantee associations Yes Yes No

Source: GAO analysis of federal and state laws.

Beyond Employer-Sponsored Plans, Regulation of Investment Advice Is Two-
Tiered

While plan sponsors and pension plan trustees of employer-sponsored retirement
plans are held to a federal standard of care with respect to investment advice, so too
are investment advisers and brokers who offer investment advice outside of such

“In January 2009, the SEC issued new rule 151A, which is intended to clarify the status under the
federal securities laws of indexed annuities and to provide the protections of the federal securities
laws to investors in indexed annuities that impose significant investment risks. Following adoption of
rule 151A, petitions were filed in the U.S. Court of Appeals for the District of Columbia Circuit for
review of the rule. On July 21, 2009, the Court held that the Commission's interpretation of “annuity
contract” was reasonable and denied the petitions with respect to that issue. However, the Court
granted the petitions with respect to the petitioners’ alternate ground that the Commission failed to
properly consider the effect of the rule on efficiency, competition, and capital formation and
accordingly remanded the rule for reconsideration. The remedy remains under consideration by the
Court.

Page 16 GAO-10-632R Retirement Income


income was $19,500 in 2007. Some of these plans, together with Social Security
benefits, can provide substantial income. However, although private sector DB plans
are required by law to offer a benefit in the form of an annuity, a growing number of
these plans are also offering lump sum options at retirement.” According to
investment company officials we spoke with, many workers retiring with a DB plan
choose a lump sum over an annuity. However, nearly one-third of participants in
single-employer DB plans are enrolled in hybrid plans, such as cash balance plans.
Cash balance plans often express benefits as account balances rather than monthly
annuity benefits, and offer lump sum payouts as well as annuity payments.

Annuities. Few households—about 6 percent—owned individual annuities in 2007."
However, only 3 percent ($8 billion) of the total amount of annuities sold in 2008
were fixed immediate annuities, designed solely to provide lifetime income.”
According to the Insured Retirement Institute, the majority of annuities sold are
deferred annuities, which are rarely converted to lifetime income.” In 2008, less than
1 percent of deferred annuities sold were converted to lifetime income.

Annuities offering lifetime income generally provide retirees more income than they
would receive from conservative investments, such as bonds. For example, in April
2010, according to an annuity market quote website, a $100,000 annuity purchase
would provide $6,480 per year as long as the purchaser or their spouse is alive.” This
annual amount is 25 percent greater than the $5,200 of income that would be
available from a highly rated $100,000 30-year corporate bond.” However, the

“This trend has likely been assisted by the growing popularity of cash balance pension plans, which
are DB plans that express their benefit as an account balance. Although cash balance plans are
required to offer an annuity, most cash balance plans also offer a lump-sum benefit. See GAO, Private
Pensions, Information on Cash Balance Pension Plans, GAO-06-42 (Washington, D.C.: Nov. 3, 2005).

“This estimate, from the Survey of Consumer Finances, is only for annuities which had investments in
stocks. According to the Survey of Consumer Finances, for households with someone aged 55 to 64 in
2007, the median estimated value of annuities and other managed assets, such as trusts and hedge
funds, that included investments in stocks was $59,000. An estimated 4.5 percent of all households had
such annuities and 1.7 percent had other managed assets.

“Single premium immediate annuities are usually purchased with a lump sum and payments begin
immediately or within one year of the purchase date. Sales of single premium immediate annuities
totaled $264 billion in 2008, according to data from Morningstar, Inc. and LIMRA, compiled by the
Insured Retirement Institute.

“Deferred annuities are retirement savings vehicles that allow purchasers to save money for
retirement, defer taxes on investment income, and have an option to start receiving lifetime income at.
a future date.

“'These amounts assume that both husband and wife are age 66 and they select an option providing a
continuation of payments until both die without any term certain or death benefit options.

“Based on statistics provided by the Federal Reserve in “Selected Interest Rates” on April 22, 2010, the

bond would provide $5,200 annually. This is for a $100,000, 30-year noncallable “AAA” rated corporate
bond.

Page 8 GAO-10-632R Retirement Income


Figure 1: Sources of Income for Households with Someone Aged 65 and Older, 2008
Social Security

1%

Cash public assistance
2%

Other

Income from assets

Pension income

Employment earnings
Source: U.S. Social Security Administration, Office of Retirement and Disabiliy Policy, Income of the Population 55 or Otder, 2008.

Notes: Data reported by the Social Security Administration for pension income includes regular payments from
IRA, Keogh, or 401(k) plans. Nonregular (nonannuitized or lump sum) withdrawals from IRA, Keogh, and 401(k)
plans are not included. Data reported for income from assets includes interest income, income from dividends,
rents or royalties, and estates or trusts.

DB plans, DC plans, and IRAs are subject to various provisions of ERISA, and the
Internal Revenue Code of 1986 (the Code). ERISA was enacted to protect the
interests of employee benefit plan participants and their beneficiaries. ERISA sets
certain minimum standards for pension plan participants and their beneficiaries. For
example, Title I of ERISA requires sponsors to disclose to participants certain plan
information, such as the summary plan description, which describes the rights and
obligations of participants and beneficiaries under the plan. Title I also establishes
standards for plan fiduciaries, individuals who generally exercise discretion or
control over the management of the plan or the disposition of plan assets. Title I of
ERISA is enforced by the Department of Labor’s Employee Benefits Security
Administration (EBSA).

The Internal Revenue Service (IRS), under Title II of ERISA and the Code, generally
ensures that plans meet certain requirements for tax qualification which enable these
plans to make tax deductible contributions and earn interest on a tax exempt basis.
These features encourage employers to establish and maintain pension plans for their
employees.

Page 5 GAO-10-632R Retirement Income


While Social Security is the largest source of retirement income for households with
someone aged 65 or older, other financial assets such as pension income from
defined benefit (DB) and defined contribution (DC) plans and private savings (bank
account balances and individual retirement account (IRA) funds)" and nonfinancial
assets such as home equity are important sources of retirement income.” See fig. 1
for additional information. However, these sources are not large compared with
income from work. In 2007, before the recent recession, half of the households with
someone aged 55 to 64 had financial assets of $72,400 or less, not much more than the
median working income of $54,600 in the same year.”

"TRAs are retirement savings arrangements which allow workers to make tax-deductible and
nondeductible contributions to an individual account. For workers who meet certain conditions
regarding their income or who are not otherwise eligible to participate in their employer's pension.
plan, contributions to a regular (traditional) IRA receive favorable tax treatment; workers may be
eligible to take an income tax deduction on some or all of the contributions they make to their IRA.
Amounts withdrawn from the IRA are fully or partially taxable in the year withdrawals are made. If
the taxpayer made only deductible contributions, withdrawals are fully taxable. Investment income on
funds in the account is tax deferred until funds are withdrawn. Workers below certain income limits
may also contribute to Roth IRAs, which do not provide an income tax deduction on contributions, but
permit tax free withdrawals. Individuals may also transfer funds to a Roth IRA, but must pay taxes on
the amounts transferred.

"A DB plan promises to provide a benefit that is generally based on an employee's salary and years of
service. Typically, DB annuity payments are received on a monthly basis by the retired participant and
continue as long as the recipient lives. DC plan benefits, primarily those from 401(k) plans, are based
on the contributions and investment returns in individual accounts. For each participant, typically the
plan sponsor may periodically contribute a specific dollar amount or percentage of pay into each
participant’s account.

“Brian K. Bucks, et al., “Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey
of Consumer Finances,” Federal Reserve Bulletin, 95, February 2009, A19, A5.

Page 4 GAO-10-632R Retirement Income


plans and directly to retirees.” While investment advisers are subject to a federal
fiduciary duty, brokers are subject to a “suitability” standard, which is generally
considered to be a lower standard of responsibility than the fiduciary standard.
Investment advisers are required to manage their client’s portfolio such that
investments are not just suitable, but are in the best interest of the client.” Any
broker” who provides investment advice solely incidental to his or her services as a
broker-dealer and does not receive any special compensation for such advisory
service is excluded from the definition of “investment adviser” under the Investment
Advisers Act of 1940, and hence, not subject to the attendant federal fiduciary duty.”
Nevertheless, when making investment recommendations to clients, such brokers are
required to (1) have a reasonable basis for their recommendations and (2) make only
recommendations that are suitable for the client’s specific investment objectives,
financial situation, and needs.” Broadly stated, the suitability doctrine refers to the
obligation to recommend to a client only those specific investments that are suitable
to the investment objectives and peculiar needs of that particular client.

Concluding Observations

Given the long-term trends of rising life expectancy and the shift from DB to DC
plans, aging workers must increasingly focus not just on accumulating assets to
ensure an adequate retirement income at the point of retirement but also on how to
manage those assets to have an adequate income throughout their retirement.
Workers are increasingly finding themselves depending on retirement savings
vehicles that they must self-manage, where they not only must save consistently and
invest prudently over their working years, but must now continue to make
comparable decisions throughout their retirement years. These decisions may prove
difficult for many, as workers are faced with a large variety of available investment
options, governed by a multiplicity of laws, regulations, and agencies. These
decisions may prove challenging even for the minority of workers with significant
retirement savings. However, for the majority of workers who approach retirement

“Pension plan consultants who do not exercise discretion or control over pension plan assets and who
are registered investment advisers are subject to the fiduciary duty imposed under the Investment
Advisers Act of 1940.

“The anti-fraud provision of the Investment Advisers Act of 1940 has been construed by the U.S.
Supreme Court as imposing on investment advisers a fiduciary obligation to act in the best interests of
their clients. See SEC v. Capital Gains Bureau, 375 U.S. 180 (1963). A number of obligations flow from
this fiduciary duty, including the duty to fully disclose any conflicts the adviser has with his clients.

“The term “broker” or “stockbroker,” as defined by the Securities Exchange Act of 1934 refers to “any
person engaged in the business of effecting transactions in securities for the account of others, but
does not include a bank.”

“A broker who is not subject to the Advisers Act may nonetheless be subject to a fiduciary duty under
state law.

"'The suitability standard is based on the principle that a broker who makes a recommendation is

viewed as making an implied representation that he or she has adequate information on the security in
question for forming the basis of his opinion.

Page 17 GAO-10-632R Retirement Income


At retirement, DC participants’ face a number of choices regarding their account
balances, such as leaving money in the plan, purchasing some form of an annuity,” or
transferring or rolling over their balance into an IRA. Employers who sponsor
qualified plans and enable departing participants to receive lump sum distributions
must give participants the option to have these amounts directly transferred into an
IRA or another employer’s tax-qualified plan (if that plan accepts rollovers).

Several Lifetime Income Options Are Available for Retirees with Retirement
Savings, but Most Opt to Invest Savings

With the long-term shift toward self-directed 401(k) type plans, an increasing number
of retirees face decisions about how to allocate their balances at retirement and have
many options. One key decision for many retirees is to choose between continuing to
manage self-directed investment balances and using all or a part of the balance to
purchase an annuity that would provide income for the remainder of their lives.”

Options for Lifetime Retirement Income Streams

Retirees have three primary options to generate a lifetime income stream. First,
participants in DB plans can receive their benefits as a lifetime annuity.” Second,
retirees with DC plan assets can purchase individual life annuities provided by
insurance companies that offer retirement income on a lifetime basis. A third option,
which would enhance the Social Security lifetime income stream, is to defer
retirement under Social Security by a few years (up to age 70) in order to receive
higher monthly benefits.

DB Plans. According to the Survey of Consumer Finances, about 32 percent of
households in 2007 had a traditional DB plan promising a specific level of income
during retirement.” According to the IRS, the average taxable pension and annuity

“An annuity is an insurance agreement or contract that comes in a number of different forms and can
(1) help individuals accumulate money for retirement through tax-deferred savings, (2) provide them
with monthly income that can be guaranteed to last for as long as they live, or (3) do both.

“Financial literacy is important for making informed decisions about these options. For a discussion of
efforts to improve financial literacy, see GAO, Financial Literacy and Education Commission:
Progress Made in Fostering Partnerships, but National Strategy Remains Largely Descriptive
Rather Than Strategic, GAO-09-638T (Washington, D.C.: Apr. 29, 2009); GAO, Financial Literacy and
Education Commission: Further Progress Needed to Ensure an Effective National Strategy, GAO-07-
100 (Washington, D.C.: Dec. 4, 2006); GAO, Increasing Financial Literacy in America, GAO-07-284CG
(Washington, D.C.: Dec. 11, 2006); and GAO, Comptroller General’s Forum: Highlights of a GAO
Forum: The Federal Government’s Role in Improving Financial Literacy, GAO-05-93SP (Washington,
D.C.: Nov. 15, 2004).

“Such annuities provide lifetime benefits calculated based on years of service and average annual
earnings over a specified number of years, typically at the end of a retiree’s career.

“In this context, the survey includes a DB plan with a portable cash option, which would allow the
worker to receive a lump sum in lieu of regular payments during retirement.

Page 7 GAO-10-632R Retirement Income


coo wm ND NH FF WY NY

*S 2832 IS

3

benefits accrued’ means the amount of
monthly payments the participant or
beneficiary would receive at the plan’s
normal retirement age if the total ac-
crued benefits of such participant or
beneficiary were used on the date of
the lifetime income disclosure to pur-
chase the life annuities described in
subclause (III), with payments under
such annuities commencing at the
plan’s normal retirement age.

“(11) LIFE ANNUITIES.—The
life annuities described in this sub-
clause are a qualified joint and sur-
vivor annuity (as defined in section
205(d)), based on assumptions speci-
fied in rules prescribed by the Sec-
retary, including the assumption that
the participant or beneficiary has a
spouse of equal age, and a single life
annuity. Such annuities may have a
term certain or other features to the
extent permitted under rules _ pre-

scribed by the Secretary.


HERB KOHL, WISCONSIN, CHAIRMAN

Wnited States Senate

SPECIAL COMMITTEE ON AGING
WASHINGTON, DC 20510-6400
202) 224-5364

May 3, 2010

Phyllis C. Borzi

Assistant Secretary

Employee Benefits Security Administration
Department of Labor

Nancy J. Marks

Division Counsel/Associate Chief Counsel
Tax Exempt and Government Entities
Internal Revenue Service

Department of the Treasury

J. Mark Iwry

Senior Advisor to the Secretary

Deputy Assistant Secretary for Retirement and Health Benefits
Department of the Treasury

Dear Assistant Secretary Borzi, Ms. Marks, and Mr. Iwry:

BOB CORKER, TENNESSEE, RANKING MEMBER

As Chairman of the Senate Committee on Aging, I take my responsibility to ensure Americans’
retirement security very seriously, and applaud you for issuing a Request for Information (RFI)
on the important topic of promoting retirement security for American workers. Increasing access
to financial options which provide income throughout retirement can be of tremendous value for
many Americans. | plan to hold a Committee hearing on this subject on June 16, and look
forward to inviting a representative of your agencies to discuss the RFI and the ideas that have
been generated to strengthen our retirement system.

Given the RFI’s focus on lifetime income options for retirement plans, I would like to provide
you with two comments for the official record.

First, | would like to submit a Government Accountability Office (GAO) report entitled
“Retirement Income: Challenges for Ensuring Income throughout Retirement.” Last year I
requested the GAO examine the financial options retirees have and ultimately choose for turning
financial assets into consistent income. The report also examines how pensions, annuities and
other retirement savings vehicles are regulated. I believe their research provides valuable
insights and will be useful to this RFI.

Web Site: http://aging.senate.go'


can also increase expenses. For example, one variable annuity prospectus we
reviewed indicated that maximum expenses for a $10,000 investment and a 5 percent
annual rate of return could exceed $7,000 over a 10-year period.”

A retiree’s frame of reference may explain why many retirees do not prefer lifetime
income streams over lump sums.” Analyses of Health and Retirement Study data
suggest that choosing a lifetime income stream is highly associated with having a
traditional DB plan—a pension plan that workers understand is a source of lifetime
income. Other factors, even those that could logically influence the selection of an
annuity, such as perception of one’s health or income and plans to leave a bequest to
heirs, were not statistically associated or were less highly associated with the
selection of annuity income.” One study we reviewed analyzed people’s evaluations
of annuities by asking them hypothetical questions about whether they would
exchange a portion of their Social Security benefit for a lump-sum payment. Asked
about an annuity choice in this context, 41 percent of survey respondents preferred
an annuity over a lump sum if the amount of the lump sum was actuarially equivalent.
About 30 percent of respondents indicated that they would select the annuity even if
the lump sum were increased by 25 percent, raising the value of the lump sum above
the value of the annuity.”

Postponing the Receipt of Social Security Benefits. About half of people begin
drawing Social Security retirement benefits the first year they are eligible (age 62),
but waiting to draw benefits until a later age would increase annual benefits and
increase earnings from work.” Social Security provides an average of about $11,786
annually if begun at age 62, $15,715 if begun at full-retirement age, and $19,487 at age
69.” A big advantage to postponing Social Security benefits is that unlike most

“By comparison, total expenses over 10 years would be about $1,573 for a $10,000 investment in a
mutual fund with expenses of 1.22 percent per year and an annual (pre-expense) return of 5 percent.

“For a discussion of this topic, see Jeffrey R. Brown, et al., Why Don’t the People Insure Late Life
Consumption? A Framing Explanation of the Under-Annuitization Puzzle, American Economic
Review Papers and Proceedings (98:2) 2008.

“See GAO, Private Pensions: Participants Need Information on Risks They Face in Managing
Pension Assets at and During Retirement, GAO-03-810 (Washington, D.C.: July 29, 2003), and Mark M.
Glickman and Gene Kuehneman, Jr., “Retiree Pension Payout Decisions—Evidence from the Health
and Retirement Study, 1992-2002,” presented at the 2006 Annual Meeting of the Allied Social Science
Associations.

“Jeffrey R. Brown, et al., “Who Values the Social Security Annuity? New Evidence on the Annuity
Puzzle”, National Bureau of Economic Research Working Paper, December 2007.

“Under Social Security, retiree benefits are reduced for retirees who start drawing benefits before
their full retirement age and increased for those who delay the start of benefits up to age 70. Another
option for retirees who have assets and have begun receiving Social Security benefits is to repay
benefits received and have Social Security recalculate their benefit as of a later start date.

“These estimates are based on average awards to retired workers age 62 in 2008. For example, a

retiree who lives until nearly age 82 (the average male life expectancy at age 62) would receive
$233,724 if starting benefits at age 62 and $248,772 at age 66. Delaying receipt of Social Security

Page 10 GAO-10-632R Retirement Income


principal amount of the bond would typically be available in 30 years, whether or not
the purchaser or spouse is alive.

Lifetime income annuities have several disadvantages. Many retirees lack sufficient
financial assets to buy an annuity that would replace more than a small fraction of
their preretirement income. According to the Survey of Consumer Finances, about 39
percent of households at or nearing typical retirement ages lacked a retirement
account such as a DC plan or IRA, as of 2007. For those who have such plans, the
median total value was about $98,000. In addition, most life annuities are designed to
provide a constant level of income, but the premium is generally not available to
cover large unplanned expenses. Thus, insurers and financial planners often urge that
retirees only use a portion of their assets to purchase annuities. According to
insurance industry representatives, few annuities provide monthly lifetime income
with payments adjusted for inflation. The effects of inflation can be significant. For
example, over the last 30 years inflation has eroded the value of a dollar by 63
percent.” This is an important consideration, particularly as older retirees may face
increasing challenges re-entering the labor force. Lastly, annuities generally leave
nothing for heirs; payments end at the death of the annuitant (and his or her spouse,
in the case of joint and survivor annuities).

Some disadvantages of annuities can be addressed by options available from insurers,
but monthly income is then often reduced or the total cost to purchasers is increased.
For example, some insurers provide opportunities to cancel an annuity for a limited
period of time in exchange for lower monthly payments. Annuities are available with
limited death benefits, but annuities with this feature also have lower monthly
payments.” To provide some protection against inflation, some insurers provide an
option to automatically increase monthly payments each year at a pre-set rate, such
as 2 or 3 percent. Some insurers provide an option to receive payments indexed for
inflation, but the initial amount of annual income available with these options is
much less than an annuity without inflation adjustments. For example, as of April
2010, an inflation-indexed joint annuity provided by The Vanguard Group with a
$100,000 premium could provide $4,646 of income in the first year—30 percent less
than an annuity without inflation adjustments. However, the annual income from an
inflation-indexed joint annuity is more than twice as much as would be available from
a $100,000 U.S. Treasury Inflation Protected Security (TIPS) (providing about $2,000
per year, in addition to inflation adjustments). Some insurers offer variable annuities
that provide lifetime income based on guaranteed minimum growth in the initial
premium even if the variable annuity balance drops to zero. However, such options

“This reflects the change in the Consumer Price Index for all urban consumers (CPI-U) through March
2010, and is equivalent to a 3.4 percent annual rate of inflation.

“For example, an annuity premium of $100,000 could provide $540 per month as long as an annuitant
(currently aged 66) or spouse (currently aged 66) is living. Selecting an option to provide this monthly
amount to a named beneficiary starting after the annuitant and spouse both die and continuing until 20
years after the annuity payments began would reduce the monthly amount by $15. If either the
annuitant or spouse dies after the 20" year, the beneficiary would not receive any payment.

Page 9 GAO-10-632R Retirement Income


ERISA, under Title IV, also established the Pension Benefit Guaranty Corporation
(PBGC). PBGC provides plan termination insurance for defined benefit plans that
terminate with insufficient funds to pay benefits promised under the plan.
Specifically, participants in such plans, who meet certain requirements, are entitled
to receive payments up to certain prescribed limits to replace benefits lost because of
the plan’s insufficiency at plan termination."

Although total pension participation has remained at about 50 percent of the private
sector workforce, there have been important changes in the types of pension plans
offered by employers. DB plans have become less prevalent in the last three decades.
In 2007, 32 percent of households had a DB plan benefit from current or former
employment and 38 percent had a DC plan benefit.” From 1990 to 2007, the number
of active participants in private sector DB plans fell by 26 percent, even as the
workforce increased by 22 percent. In recent years, a number of employers have
closed their DB plans to new participants or limited or frozen the additional accruals
of benefits to current participants."

Meanwhile, since 1990, participation in self-directed DC plans such as 401(k) plans
has grown dramatically in popularity. From 1990 to 2007, the number of active
participants in DC plans increased from about 35 million to 67 million, respectively.”
DC plans, such as 401(k) plans, typically allow participants to decide how much to
contribute, decide how contributions are to be invested, and decide how the balances
will be spent during retirement. Generally, unlike DB plans, investment risk and the
potential for greater returns are directly borne by the participant rather than the plan
sponsor and benefits are not insured by the PBGC. In recent years, some DC
participants have chosen to direct their contributions to so-called target-date funds or
have their assets invested in these funds as a plan-specified qualified default
investment alternative (QDIA).”

“During 2010, for example, the maximum guarantee is $42,660 for a single-employer pension plan life
annuity at age 62 with no survivor benefits, and is lower at younger ages and higher at older ages. The
guarantee is annually adjusted for inflation.

“This includes plans to which the family head or their spouse has rights from current or former
employment. See Federal Reserve Bulletin, February 2009.

"See GAO, Defined Benefit Pensions: Plan Freezes Affect Millions of Participants and May Pose
Retirement Income Challenges, GAQ-08-817 (Washington, D.C.: July 21, 2008). About 3.3 million active
participants in the study population, who represent about 21 percent of all active participants in the
single-employer DB system, were affected by a freeze.

"Department of Labor, EBSA, Private Pension Plan Bulletin Historical Tables and Graphs, 2007 Data
Release Version 1.2, March 2010.

“Target-date funds allocate investments among various asset classes with the goal of reducing
investment risk as the retirement date approaches. These funds differ widely in their allocations
among asset types before and during retirement. See GAO, Retirement Savings: Automatic
Enrollment Shows Promise for Some Workers, but Proposals to Broaden Retirement Savings for
Other Workers Could Face Challenges, GAO-10-31 (Washington, D.C.: Oct. 23, 2009).

Page 6 GAO-10-632R Retirement Income


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son shall have any liability under this title
solely by reason of the provision of annuity
equivalents which are derived in accord-
ance with the assumptions and rules de-
scribed in clause (iii) and which include the
explanations contained in the model life-
time income disclosure described in clause
(ii). This clause shall apply without regard
to whether the provision of such annuity
equivalent is required by subparagraph
(B) (iii).

“(y) EFFECTIVE DATE.—The require-
ment in subparagraph (B)(iii) shall apply
to pension benefit statements furnished
more than 12 months after the latest of
the issuance by the Secretary of—

“(I) interim final rules under

clause (i);

“(II) the model disclosure under
clause (ii); or

“(11) the assumptions under
clause (iii).’’.

1e)


regarding lifetime income options,’ you asked us to examine (1) options retirees have
for drawing on financial assets to replace preretirement income and options retirees
choose, and (2) how pensions, annuities and other retirement savings vehicles are
regulated.

In summary, retirees with savings have several options for lifetime income, but
largely rely on investment income or draw down their assets as needed. However,
many retirees lack substantial retirement savings. The regulation of private pensions
is largely governed by the Employee Retirement Income Security Act of 1974
(ERISA), but a multiplicity of laws and regulations govern the management of other
assets.

To identify options for drawing on financial assets and determine what options
retirees choose from, we reviewed relevant documentation and interviewed officials
from the Departments of Treasury and Labor and the Securities and Exchange
Commission. We also interviewed representatives of trade associations, such as those
for state insurance commissions, and the mutual fund and insurance industries. In
addition, we interviewed representatives of large firms that offer mutual funds and
annuities. To determine how annuities and other retirement savings vehicles are
regulated, we reviewed documentation and interviewed officials from these same
agencies and associations and reviewed applicable laws and regulations.

We conducted this engagement from January 2010 to April 2010 in accordance with
all sections of GAO’s Quality Assurance Framework that are relevant to our
objectives. The framework requires that we plan and perform the engagement to
obtain sufficient and appropriate evidence to meet our stated objectives and to
discuss any limitations in our work. We believe that the information and data
obtained, and the analysis conducted, provide a reasonable basis for our findings and
conclusions.

Background

Social Security benefits are the foundation of retirement income for nearly all
households with someone aged 65 or older—providing annually inflation-adjusted
income for life—and are the source of half or more of total income for about 64
percent of those households.’ For retired Social Security beneficiaries with the
lowest lifetime earnings (up to $9,132 in 2010), Social Security replaces 90 percent of
their average annual indexed lifetime earnings if benefit receipt begins at full

Department of the Treasury and U.S. Department of Labor, Request for Information Regarding
e Income Options for Participants and Beneficiaries in Retirement Plans. 70 Fed. Reg. 5253
(Feb. 2, 2010). The Department of Labor and the Department of the Treasury (the “Agencies”) are
currently reviewing the rules under the Employee Retirement Income Security Act (ERISA) and the
plan qualification rules under the Internal Revenue Code to determine 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 accounts (IRA) by facilitating
access to, and the use of lifetime income or other arrangements designed to provide a lifetime stream
of income after retirement.

“For nearly one-third of such households, Social Security benefits are the source of 90 percent or more
of income. See Social Security Administration, Income of the Aged Chartbook, 2006 (Washington,
D.C., 2006).

Page 2 GAO-10-632R Retirement Income


To help investors manage funds in retirement, financial firms offer retirees a variety
of retirement income funds or target-date funds. The Vanguard Group, for example,
provides pay-out funds targeted to pay 3 percent, 5 percent, or 7 percent of the
market value of investments, depending on whether investors seek to achieve long-
term growth in their portfolios, to maintain the inflation-adjusted value of the original
investment, or to maintain the nominal value of the investment. However, these funds
remain subject to investment risks. These Vanguard Group funds, for example,
reduced monthly payouts by about 16 to 18 percent for 2009 following the decline of
financial markets in 2008.

Some retirees choose to hold bonds to provide income during retirement. Bonds can
provide a steady source of income, but are subject to the risk of default. Also, if a
bond is not held to maturity, the sale price may differ from the purchase amount
depending on market rates of interest at the time of sale. For example, if the market
rate of interest is higher than it was at the time of purchase, the sale price of the bond
will be lower than the purchase amount. The amount of interest income available
from a bond portfolio may decline if newly purchased bonds offer lower rates of
interest than bonds that mature. Highly-rated corporate bonds currently offer yields
that exceed 5 percent, but the payments are not adjusted for inflation and inflation
erodes the value of the principal invested. Inflation-adjusted bonds, such as TIPS
available from the U.S Treasury, offer lower interest rates—currently about 2
percent. To boost the level of distributions, PIMCO offers mutual funds that
distribute interest and principal from investments in TIPS on a schedule over 20 or 30
years. These PIMCO funds provide dependable sources of income with inflation
adjustments, but the balance drops to zero when the bonds mature.

While ERISA Largely Governs the Operation of Pension Plans, a Multiplicity
of Laws and Regulations Govern the Management of Other Assets

ERISA continues to provide the basic framework for the regulation of private
pensions, even as pensions continue to shift from DB to DC plans. ERISA and its
regulations specify, among other requirements, the duties of a plan fiduciary; the type
of plan transactions that are prohibited; and the required disclosure of plan features
to plan participants. However, once an individual withdraws his or her funds from
either a DB or DC plan for retirement, a multiplicity of laws and regulations typically
take precedence, depending on the investment decisions that the individual makes
with those funds.”

“Public plans are generally governed by the applicable state laws or for federal employees by other
federal statutes. State and local employee DB retirement plans are generally protected by state and
local laws and overseen by boards of trustees. Meanwhile, the DB retirement plans for federal
employees are also protected by federal laws and regulations, but administered by the Office of
Personnel Management. U.S.C. § 831 and §§ 841-846. Also see GAO, State and Local Government
Retiree Benefits: Current Status of Benefit Structures, Protections, and Fiscal Outlook for Funding
Future Costs, GAO-07-1156 (Washington, D.C.: Sept. 24, 2007). Nontax-qualified pension plans are
governed by other laws, including the American Jobs Creation Act of 2004.

Page 13 GAO-10-632R Retirement Income


Securities—stocks and bonds. To enable investors to make informed investment
decisions, the Securities and Exchange Commission (SEC) requires firms that sell
securities to the public to disclose detailed information about the securities and
the firm, such as information about the firm’s management, the intended uses for
the funds raised through the sale of the securities, risks to investors, and financial
information about the firm.

Mutual funds. Mutual funds—a form of open-end investment company that raises
and pools capital from shareholders and invests it in a portfolio of securities—are
generally required to register with the SEC. The SEC has promulgated regulations
that aim to protect public investors and prevent fraud. For example, SEC
regulations impose certain disclosure, recordkeeping and governance
requirements on mutual funds, such as requiring funds to inform investors of fees
and the potential risks associated with investing in the fund. Mutual funds are
typically managed by investment advisers, who are also subject to regulation by
the SEC.

Annuities. Annuities are regulated either (1) exclusively under state law or (2)
under both state laws and federal law, depending on the features of the particular
annuity and whether it is marketed as an investment. Section 3(a)(8) of the
Securities Act of 1933 exempts any annuity contract or optional annuity contract
issued by a corporation that is subject to the supervision of the state insurance
commissioner, bank commissioner, or similar state regulatory authority from the
provisions of the Securities Act. The exemption, however, is not available to all
contracts that are considered annuities under state law. For example, while
traditional fixed annuities“ are exempt, variable annuities” are generally not
exempt, as shown in Table 1. Indexed annuities, which offer a return computed by
reference to an outside index such as the S&P-500 Composite Stock Price Index, are
hybrid financial products in which the insurer and the purchaser share the
investment risk to varying degrees. Accordingly, indexed annuities may or may
not qualify under the Section 3(a)(8) exemption and, therefore, may be regulated
by state law and the federal securities laws, depending on the degree to which the

“A traditional fixed annuity is a contract issued by a life insurance company, under which the
purchaser makes a series of premium payments to the insurer in exchange for a series of fixed
periodic payments from the insurer to the purchaser at agreed upon later dates.

“A variable annuity is a financial product under which purchasers pay premiums that are invested in
securities, typically mutual funds and the benefit payments vary with the value of the investments. The
purchaser of this product generally assumes all the investment risk because the insurer's obligation to
the purchaser is only to pay him a proportionate share of the present value of the investment portfolio.
The Supreme Court has held that a variable annuity does not fall within Section 3(a)(8) because it
places all of the investment risks on the purchaser, and none on the company. SEC v. Variable Annuity
Life Ins. Co., 359 U.S. 65 (1959), quoted in, American Equity Investment Life Ins. Co. v. SEC, 572 F.3d
923, 926 (D.C. Cir. 2009).

Page 15 GAO-10-632R Retirement Income


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_azmmemeeeens ACCOUNtADITtY + Integrity ~ Reliability

United States Government Accountability Office
Washington, DC 20548

April 28, 2010

The Honorable Herb Kohl
Chairman

Special Committee on Aging
United States Senate

Subject: Retirement Income: Challenges for Ensuring Income throughout
Retirement

Dear Mr. Chairman:

As the life expectancy of Americans continues to increase, the risk that retirees will
outlive their assets is a growing challenge.’ Today, couples both aged 62 have a 47
percent chance that at least one of them will live to their 90" birthday.” In addition to
the risk of outliving ones’ assets, the sharp declines in financial markets and home
equity during the last few years and the continued increase in health care costs have
intensified workers’ concerns about having enough savings and how to best manage
those savings in retirement.’

Given your interest in options for ensuring income throughout retirement and the
recent request from the Departments of the Treasury and Labor for information

'Since 1970, life expectancies at age 65 have risen by about 2 years for women and nearly 4 years for
men.

“These life expectancies are based on Social Security cohort life tables for people born in 1950. See
Felicitie C. Bell and Michael L. Miller, Life Tables for the United States Social Security Area 1900-
2100, Actuarial Study No. 120, SSA Pub. No. 11-11536 (Washington, D.C., Social Security
Administration, Office of the Chief Actuary, August 2005).

"GAO has addressed such concern in earlier reports. See, for example, GAO, Private Pensions:
Alternative Approaches Could Address Retirement Risks Faced by Workers but Pose Trade-offs,
GAO-09-642 (Washington, D.C.: July 24, 2009); GAO, Private Pensions: Low Defined Contribution
Plan Savings May Pose Challenges to Retirement Security, Especially for Many Low-Income
Workers, GAO-08-8 (Washington, D.C.: Nov. 29, 2007); and GAO, Baby Boom Generation: Retirement
of Baby Boomers is Unlikely to Precipitate Dramatic Decline in Market Returns, but Broader Risks
Threaten Retirement Security, GAO-06-718 (Washington, D.C.: July 28, 2006).

GAO-10-632R Retirement Income


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“Gi) MODEL DISCLOSURE.—Not later
than 1 year after the date of the enact-
ment of the Lifetime Income Disclosure
Act, the Secretary shall issue a model life-
time income disclosure, written in a man-
ner so as to be understood by the average
plan participant, that—

“(I) explains that the annuity
equivalent is only provided as an illus-
tration;

“(I1) explains that the actual an-
nuity payments that may be pur-
chased with the total benefits accrued
will depend on numerous factors and
may vary substantially from the annu-
ity equivalent in the disclosures;

“(1) explains the assumptions
upon which the annuity equivalent
was determined; and

“(IV) provides such other similar
explanations as the Secretary con-
siders appropriate.

“(ii) ASSUMPTIONS AND RULES.—

Not later than 1 year after the date of the


Second, Senators Bingaman, Isakson, and I have introduced the bipartisan Lifetime Income
Disclosure Act (S. 2832)to provide 401(k) participants with better information that will help
them make important decisions about how much to save and how to make their savings last
through retirement. I would also like to submit the legislative language for consideration as one
way to provide plan participants with additional information about their retirement assets.

Thank you for all you are doing to help assure that all Americans can have a dignified and secure
retirement after a lifetime of hard work. I look forward to continuing to work with you on these
important issues.

/ Sincerely,
| f

Herb Kohl

Chairman


annuities provided by insurers, Social Security benefits are annually adjusted for
inflation. To delay receipt of benefits, retirees can either continue to work after age
62 or draw on their own financial assets to replace the income Social Security would
have provided. The cost of buying an equivalent inflation-adjusted annuity from an
insurer would be about 68 percent more than the total amount of the benefits
foregone from age 62 until age 66. Nonetheless, among workers born in 1940, for
example, an estimated 42 percent started drawing Social Security retired worker
benefits within 2 months of reaching age 62.

Delaying Social Security benefits is not an option for many who cannot work and lack
sufficient assets to live in retirement without the benefits. Workers who have shorter
life expectancies, such as some minorities and less educated workers, are less likely
to be better off by delaying the start of benefits, as they may not live long enough for
the total amount of the higher delayed benefits to exceed the total amount of the
lower benefits they would receive if benefits begin at age 62. The decision of when to
begin receiving Social Security benefits is further complicated for married couples.
When the first spouse dies, the remaining spouse who is at full retirement age or
older receives a benefit which is the greater of the remaining spouse’s earned benefit
or a survivor benefit based on the deceased spouse’s record. If the higher earning
spouse begins receiving Social Security benefits early, the surviving spouse may
receive a lower survivor benefit.

Many Retirees Largely Rely on Investments

Retirees largely rely on investment income or draw down their assets as needed,
rather than supplement their Social Security or DB income with another form of
lifetime income. Although this typically involves more risk, it allows retirees to retain
access to their savings and the opportunity to realize additional increases in wealth.”
Others have ample assets and are able to draw exclusively from investment income to
cover retirement expenses.

According to the Survey of Consumer Finances, in 2007 most households (59 percent)
with a head of household aged 55 to 64 held at least one retirement account, such as
an IRA or DC plan, from a current or former employer of either the worker or spouse.
For households with such accounts, the median combined value was $98,000. A
survey by the Investment Company Institute indicates that upon retirement, 45
percent took a lump sum and transferred some or all of their DC funds to other

benefits as a strategy to increase monthly benefit amounts may not be advisable if the retiree does not
expect to live long or if he or she will not need the higher benefits and their risk-adjusted rate of return
is high enough to warrant early receipt of reduced benefits. In some cases, higher Social Security
benefits may cause retirees to have higher effective income tax rates.

“For these reasons, some insurance providers and financial advisors recommend that retirees use a
portion, not all, of their savings to purchase lifetime income. Insurers now offer variable annuity
purchasers the option to invest their savings with death benefits, or a guaranteed minimum level of
lifetime income or withdrawals.

Page 11 GAO-10-632R Retirement Income


ERISA Largel: verns the Operation of Pension Plans

Under ERISA there is a comprehensive regulatory scheme which provides certain
protections for privately sponsored employee pension benefit plans and their
participants and beneficiaries. Several federal agencies are charged with enforcing
these protections. EBSA, within the Department of Labor, enforces ERISA Title I
requirements, which include minimum plan standards for participation; vesting and
accrual of benefits; and fiduciary responsibility requirements respecting the exercise
of any discretion, control, or management of the plan or its assets. Under Title II of
ERISA, which addresses the tax qualified status of pension plans, the IRS ensures
that these plans maintain their qualified status under the Code. The PBGC, under
Title IV of ERISA, provides plan termination insurance for defined benefit pension
plans which terminate with insufficient assets to pay promised benefits under the
plan.

Individuals who have left the regulated environment of ERISA-covered plans and now
seek to secure their retirement savings in the commercial and retail market face a
myriad of decisions and investment or insurance products in which to invest their
retirement savings. While ERISA regulations address the potential for conflicted
advice, the environment in the retail market is quite different.”

Once an individual withdraws his or her funds from either a DB or DC plan, a
multiplicity of laws and regulations typically takes precedence, depending on the
investment decisions that the individual makes with those funds. In this instance, the
individual is no longer a plan participant governed by ERISA, but is now essentially a
retail investor governed by the laws and regulations that are pertinent to the
particular product or asset in which they choose to invest whether or not the funds
are in an IRA.“ The different laws, regulations, and agencies that may come into play
vary depending on the type of assets held.

“On March 2, 2010, the Department of Labor proposed a new rule relating to the provision of
investment advice to participants and beneficiaries in individual account plans. The new rule would
implement provisions of a statutory-prohibited transaction exemption, and would replace guidance
contained in a final rule, published in the Federal Register on January 21, 2009, that was withdrawn by
the Department by a Notice published in the Federal Register on November 20, 2009. See “Investment
Advice Participants and Beneficiaries,” Proposed Rule 75 Fed. Reg. 9360 (2010). Prohibited transaction
rules for investment advice apply to both employer plans and IRAs. However, ERISA fiduciary
standards do not apply to IRAs.

“Some IRAs, including those in Savings Incentive Match Plan for Employees of Small Employers
(SIMPLE), are DC plans subject to various ERISA rules for plan sponsors. IRS and Labor share
oversight responsibilities for all types of IRAs, but gaps exist within Labor's area of responsibility. IRS
has responsibility for tax rules governing how to establish and maintain IRAs, while Labor has sole
responsibility for oversight of fiduciary standards for employer-sponsored IRAs, and has issued
guidance to employers related to payroll-deduction IRAs regarding when such an arrangement would
be a pension plan subject to Labor's jurisdiction. 29 C.F.R. § 2510.3-2(d) and 29 C.F.R. § 2509.99-1.
Labor does not have jurisdiction to oversee payroll-deduction IRA programs that are operated within
the conditions of their guidance. See GAO, Individual Retirement Accounts: Government Actions
Could Encourage More Employers to Offer IRAs to Employees, GAO-08-590 (Washington, D.C.: June 4,
2008).

Page 14 GAO-10-632R Retirement Income