The Profit Sharing and 401(k) Advocate • Sharing the Commitment since 1947 

20 N. Wacker Drive, Suite 3700 • Chicago, IL 60606 • 312.419.1863 • Fax: 312.419.1864 • www.psca.org 

TESTIMONY OF DAVID L. WRAY, 

PRESIDENT, PROFIT SHARING/401k COUNCIL OF AMERICA, 

BEFORE THE DEPARTMENTS OF LABOR AND THE TREASURY JOINT HEARING ON 

LIFETIME INCOME PRODUCTS 

SEPTEMBER 14, 2010 

Overview 

The looming retirement of the baby boom generation has resulted in an increased focus on the 401(k) 

“retirement distribution phase” by those in the employer-provided retirement plan community. At the 

same time, retirement plan participants continue to take their retirement distributions in lump sum form. 

Less than 1 percent of defined contribution plan participants select an annuity distribution option when 

one is offered. Defined benefit pension plans are experiencing a similar lack of participant interest. For 

the one-half of defined benefit plans that offer a lump sum payment, more than 90 percent of participants 

endure the cumbersome spousal waiver procedures to avoid the otherwise required annuity distribution. 

A major factor in the limited usage of annuities in retirement plans is that average wage workers already 

are provided with a substantial annuity when they retire. According to the 2010 Social Security Trustees 

Report, the average 65 year old retiring in 2010 will receive an inflation indexed Social Security benefit 

that replaces 40.8 percent of pre-retirement income. Married couples can each elect to receive their own 

benefit or 150 percent of one spouse’s benefit. Social Security provides a 100 percent survivor’s benefit. 

In two-earner families, the surviving spouse can switch from their own benefit to the spousal benefit if it 

is higher. If an average retiree seeks to replace 80 percent of their working income in retirement, Social 

Security will provide half that amount, indexed for inflation. 

 

In general, because participant interest is so low, defined contribution plan sponsors increasingly see no 

reason to accept the additional fiduciary exposure that comes with an in-plan annuity option. As a result, 

the availability of annuity options in employer sponsored defined contribution plans has been declining. 

In the Profit Sharing/401k Council of America’s survey of 2009 plan year experience, 19 percent of plans 

offered an annuity distribution option. This is down from 23 percent in 2005 and 34 percent in 2000. 

Notwithstanding the above, plan sponsors are becoming more interested is assisting their participants with 

the transition from accumulation to retirement. PSCA recently surveyed its plan sponsor members and 

found that 91 percent of respondents are aware of retirement income products and only 17 percent felt the 

employer had no role in assisting their participants with the retirement transition. 
You have asked about participant concerns affecting the choice of lifetime income relative to other 

options. 

I would summarize those concerns into three general areas: fees, flexibility, and confidence. PSCA 

believes that the market should be permitted to address fees and flexibility. The government has an 

important role in restoring and maintaining confidence in the financial services that support the annuity 

process. 

Historically, fees embedded in annuity products, especially retail annuity products, have been sufficiently 

high enough to offset an annuity’s benefit of long term security. Further, annuity solutions have been 

designed and marketed in a way that makes an apples-to-apples comparison difficult. Participants need 

access to institutionally/group priced options presented in a way that permits them to maximize their 

purchasing power. 

Individual retirement situations vary widely and participants need the flexibility to tailor solutions to fit 

their individual needs. They need: 

• Access to a broad range of annuitization options. 

• The ability to annuitize only a portion of their retirement assets. 

• Access to multiple providers so they can diversify their investment risk. 

• The ability to make multiple annuity purchases over time. 

• Access to annuities with inflation protection. 

The provider community is well aware of the situation and has responded by developing and marketing 

many new lifetime income products. Some are “in-plan” products that permit investment during the 

accumulation phase. Others are distribution-stage products with much more flexibility than the traditional 

products. A significant portion of the industry is marketing their annuities on an IRA platform like that 

provided by the Hueler Companies Income Solutions® platform rather than as a direct plan distribution 

option. The market is delivering solutions to the concerns about fees and flexibility. 

At the same time, confidence in our financial institutions has recently been dealt a significant blow. 

Annuities by their nature depend upon the ability of institutions to exchange dollars today for payments 

over decades. Unless plan sponsors and participants are confident that those selling an annuity today will 

be able to deliver the promised benefits tomorrow, they will be reluctant to annuitize plan assets. It is 

critical that the government continue to take whatever steps are necessary to rebuild and then maintain the 

confidence of working Americans in our financial institutions. 

You have asked about information to help participants make choices regarding management and 

spend down of retirement benefits. 

While virtually all sponsors provide some type of education to plan participants, practices vary widely. In 

PSCA’s 53rd Annual Survey, reflecting 2009 plan year experience, 33 percent of responding sponsors 

provide education specifically relating to retirement distributions. In some cases plan sponsors offer 

extensive pre-retirement education that addresses not only the employer’s plan but Social Security and 

Medicare, and even estate planning. Other sponsors feel that education should be limited to the plan and 

its investment options. 

PSCA believes that current guidance regarding the provision of education or advice about 

distribution-related issues, including the ability to use plan assets to educate participants about 

lifetime income or other arrangements, is sufficient. However, if some need the Department of 

Labor to expand and clarify Interpretive Bulletin 96–1 so they can rely upon the Bulletin in order 
to provide participants with information to help them make better informed retirement

income decisions, then the Department of Labor should do so. 

Also, retirement decisions regarding plan assets are not made in a vacuum. Guidance clarifying 

that it is an appropriate use of plan assets to provide for broad pre-retirement education that goes 

beyond issues related to the plan or investing of plan assets, such as Social Security, Medicare, 

general estate planning, eldercare, long-term care, etc., will encourage more plan sponsors to 

provide this type of education to plan participants. 

 

You have asked about the disclosure of account balances as monthly income streams. 

PSCA does not support a regulatory or Congressional effort to require individual benefit 

statements to present an account balance as a stream of future lifetime income payments. That 

said, some plan sponsors and service providers voluntarily offer this feature today. Once again, 

PSCA believes that plan design decisions such as these are best handled by individual plan 

sponsors. 

Section 105 of ERISA requires that benefit statements provided to participants and beneficiaries 

in self-directed individual account plans include a notice directing the participant or beneficiary 

to an Internet website at the Department of Labor for sources of information on individual 

investing and diversification (http://www.dol.gov/ebsa/investing.html). The website includes a 

rich array of resources for participants. The Department should consider adding an income 

stream calculator to the site that participants could use if they want to make this calculation. If 

the Department agrees to this suggestion, the calculator should accommodate both insured 

products and non-insured structured payment products. S.3760, The Automatic IRA Act of 2010, 

sponsored by Senator Bingaman, includes a provision that closely tracks our recommendation. 

You have asked about a fiduciary safe harbor for selection of a lifetime income issuer or product. 

Fiduciary concerns are a major issue for plan sponsors that are interested in offering a lifetime income 

product. The current safe harbor guidance, while helpful, is not a safe harbor in the conventional sense. 

It merely lays out a subjective process that constitutes a prudent selection process for selecting an annuity 

provider. To effect a behavior change by plan sponsors, the government will have to take responsibility 

for the safe harbor status of certain decisions, particularly the long term viability of the product provider. 

You have asked about alternative designs of in-plan and distribution lifetime income options. 

We are pleased at the evolution in the philosophy regarding annuitization of plan assets. Rather than 

assume that full and immediate annuitization of plan assets at retirement is a best practice, it is now 

recognized that annuitization is a tool participants can use as they develop a custom designed best 

solution. This has opened the door to a wide range of innovative products and approaches. Some products 

have an insured or annuity feature, and others are pure managed payout funds. Longevity insurance that 

begins payments at an advanced age provides an interesting complement to the managed payout funds and 

some other insured products. 

It is currently difficult to include an in-plan lifetime income product with the other investment options in a 

defined contribution plan that allows transfers between investment choices because of surrender charges 

and fees. It is also difficult to help participants understand how accumulation annuities work in relation 

to other investment options and hard to find an advice model that would meet the needs of the general 

population of participants. Compliance with the joint and survivor annuity regime and required minimum 
distribution rules may be difficult with some products. Portability issues arise when a participant severs 

employment. 

These products are in their infancy, and questions about them so far have resulted in very low adoption 

rates by plan sponsors. PSCA believes that the market should be permitted to refine and improve these 

products without government interference that could hamper this important process. When products are 

developed that meet the needs of participants and plan sponsors, they will be included in employer 

provided plans. This “marketplace of ideas,” combined with the flexibility of the defined contribution 

system, has resulted in continually improving retirement plans and we are confident it will soon bring 

attractive lifetime income products to American workers.