Oral Testimony of

Martin Schmidt

Chairman, Institutional Retirement Income Council

Before the

U.S. Department of Labor

And 

The U.S. Department of the Treasury

For the 

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

Beneficiaries in Retirement Plans

Wednesday, September 15, 2010

U.S. Department of Labor

Washington, DC
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Good afternoon. My name is Martin Schmidt. I am a retirement plan consultant from Chicago 

with over 25 years experience in the institutional retirement space. I am here today in my 

capacity as a member of the Institutional Retirement Income Council (IRIC). IRIC is a nonpartisan, tax-exempt, volunteer organization whose members consist of retirement plan advisers, 

consultants, and attorneys. IRIC’s goal is to facilitate the culture shift of defined contribution 

plans from supplemental savings plans to programs that provide retirement security. I will share 

with you today our experiences in working with plan sponsors who have considered adding 

lifetime income options to their DC plans. 

Over the next few minutes, I will provide the Agencies with some background on the new types of 

lifetime income solutions that are emerging in the market; what is hindering the adoption of 

these solutions; and offer recommendations which the Agencies may wish to consider.

IRIC considers a product “Institutional”, as opposed to “Retail”, if the product is purchased 

through the plan sponsor/participant relationship. When compared to similar retail products, an 

institutionally priced product will likely have lower fees, which will translate into higher 

retirement income and/or larger amounts of lifetime wealth. Institutional lifetime income

products may be offered either “in-plan” through the DC plan or “out-of-plan” as an IRA rollover. 

Lifetime income products may also be offered as an insurance based solution, which provides a 

guarantee of lifetime income, or an investment based solution, which provides retirement income 

but without the lifetime guarantee. Both solutions are becoming more common.

A new type of insured solution in a DC plan is a deferred fixed income annuity. This solution 

allows the participant to invest in guaranteed income over time while the participant is building 

their retirement savings, which we refer to as the accumulation phase. The product can be a 

stand alone investment in a DC plan or an asset class within an investment fund, typically a 

target-date fund. These products are liquid during the accumulation phase and require 

annuitization by the participant to receive guaranteed income payments.

A second type of insured solution is the guaranteed minimum income benefit. Similar to the 

deferred fixed income annuity, the participant purchases guaranteed income over time during the 

accumulation phase. The difference is the guaranteed income component is wrapped around an 

equity investment, typically a Balanced fund. If the equity investment appreciates over time, the 

amount of guaranteed income available to the participant will be higher at retirement. Similar to 

the deferred fixed income annuity, these products are liquid during the accumulation phase and 

require annuitization by the participant to receive guaranteed income payments.

A third type of insured solution is the guaranteed minimum withdrawal benefit. This solution 

allows the participant to purchase an equity investment, typically a target-date or Balanced fund, 

that is wrapped with insurance. The market value is tracked and the high-water mark is used as 

the benefit base. At retirement the participant has a right to a guaranteed withdrawal based on a 

percent of the benefit base, typically 5%. The guaranteed withdrawal is paid for the rest of the

participant’s life even if the market value falls to zero. Unlike the other two solutions, a 

participant does not annuitize their balance, and the amount they can withdraw may vary. 

However, if the participant takes more than the guaranteed withdrawal, their future payments 

will decrease.
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We are also starting to see other retirement income solutions that are not insurance based but 

investment based. For example, there are managed payout funds that are designed to distribute 

balances over a certain time period, such as 20 years after retirement. We also expect to see more 

development of investment based solutions that offer balance protection during the accumulation 

phase and distribute income over time. Development of these solutions includes derivative based 

or other hedging strategies, similar to those found in other insurance products. Some early 

innovations in this area include structured notes offering principal protection as well as 

structured income payments. These notes become debt of the issuer and are subject to the debt 

hierarchy. While we expect to see continued innovation leveraging investment based concepts, at 

this time, none of the available solutions protect a retiree from outliving their assets while 

maintaining a fixed level of income.

These are the newer solutions that have been or will be introduced to the market. I emphasize 

“newer” because the immediate income annuity has been available as a plan distribution option to 

participants for decades. However, very few participants choose this option. Recent surveys by 

Hewitt Associates show when participants are offered annuities as a plan distribution option, the 

percent of participants annuitizing has dropped from 6% in 2005 to 1% in 2009. Because of this 

“Annuity Puzzle”, we have seen the emergence of these newer options which are built to be more 

attractive to participants due to their added flexibility.

While plan sponsors have expressed interest in the newer solutions to help participants with their 

retirement planning, the current regulation and guidance for retirement income and DC plans is 

based on an old, one time annuitization election model. As a result, plan sponsors have been 

slow to embrace these new solutions.

One concern is about increased fiduciary exposure associated with adding a lifetime income

product that requires a relationship between the plan and an insurance company over several 

decades, often referred to as counter-party risk. If a plan sponsor wants to change an investment

option in their DC plan they can easily do so. But the process is much harder with an insured

income solution. Even though some industry experts feel the fiduciary issues have already been 

addressed, the perception among most plan sponsors and their advisors is the counter-party risk

issue still exits. A safe harbor here will help.

Plan sponsors are also confused as to the applicability of the current safe harbor rules when 

selecting an annuity provider for a DC plan since the current safe harbor rules apply to 

distribution annuities. There is a question as to whether these same rules apply for lifetime 

income products which are acquired during the participant’s accumulation phase. We ask that 

the DOL consider providing more direction about the process for selecting an insurer. A step-bystep approach to how an in-plan product should be selected would be very helpful. 

The DOL may also wish to clarify when and how ERISA fiduciary duties apply to participant 

communications for lifetime income products. It is our belief that these products often need to 

be sold to participants and clear education and communication is critical. Interpretive Bulletin 

96-1 could possibly be expanded or separate guidance could be provided. 
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Another way to get participants to invest in lifetime income products is through defaults. The use 

of defaults has worked well to increase plan participation and improve asset allocation. However, 

there is still confusion as to whether lifetime income products can or should be embraced as 

QDIAs, especially since the products have higher fees for income guarantees that may not be 

utilized by the participant. Clarification and guidance in this regard would be helpful. 

There is also a problem with how in-plan lifetime income products are covered by state insurance 

guarantees. Coverage varies by state, but even when coverage exists, insurers are restricted as to 

how much information they can disclose. Unlike bank products, which can be easily liquidated 

and refer to the FDIC protection in their marketing materials, lifetime income products require a 

much longer commitment and the state insurance coverage that will help participants gain peace 

of mind cannot be explained. Some guidance here would be helpful.

Finally, the long-term relationship between the plan and the provider of the lifetime income 

product creates a concern about plan level portability. The industry is in the process of 

developing recordkeeping data standards to help address this issue, but further work is required 

in this area. A common platform, or middleware solution, needs to be developed to make the 

integration with insurers and recordkeepers more seamless. Until this happens few recordkeepers 

will support multiple lifetime income products on their recordkeeping platform. As a result, plan 

sponsors have been reluctant to add a lifetime income product which may limit their ability to 

change recordkeepers. To help address this and other portability issues it would be helpful if the 

Agencies would consider allowing a distributable event to an IRA for the lifetime income products 

prior to participant termination. This would allow participants to maintain the insurance 

guarantees for which they have paid fees.

I have tried to hit the key issues that the Agencies can impact in regards to current plan sponsor 

concerns. There are certainly additional reasons that plan sponsors are not adopting these 

solutions, such as the need for product simplification, better fee transparency, and greater 

demand from participants. However, my limited time today prevents me from going into too 

much detail on these issues but I am free to answer any questions in this regard.

In closing, I would like to say there is growing interest from many plan sponsors in adding 

lifetime income solutions to their DC plans to help mitigate the risk their employees will outlive

their assets. We are not in favor of mandates, but we do think that plan sponsors, especially those 

without defined benefit plans, should be encouraged to consider whether adding a lifetime

income option is in the best interest of their participants. IRIC believes that the Agencies can 

help in this regard by providing clarification, guidance, and safe harbors where possible.

Having better ways for participants to manage the income they receive from their DC plans is 

critical to the future health of our nation’s retirement system and we thank the Agencies for the 

honor of sharing our thoughts today.