Milliman Transcript of Testimony re DOL RIN 1210–AB33 

10000 N. Central Expressway, Suite 1500 

Dallas, TX 75231 USA 

Tel +1 214 863 5500 Fax +1 214 863 5110 

milliman.com

Transcript of Testimony as Presented at 

Public Hearing Regarding Lifetime Income 

Options for Participants and Beneficiaries in 

Retirement Plans 

September 15, 2010 
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our FRM practice is responsible for the risk management of US$500 billion of guaranteed 

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Milliman Transcript of Testimony regarding DOL RIN 1210–AB33

Transcript of Testimony Presented at Public Hearing on Lifetime 

Income Options for Participants and Beneficiaries in Retirement Plans

RIN 1210–AB33 

September 15, 2010 

3

September 15, 2010 

FILED ELECTRONICALLY

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

Room N-5655 

U.S. Department of Labor 

200 Constitution Avenue, NW. 

Washington, DC 20210 

Attention: Lifetime Income Public Hearing 

Re: RIN 1210–AB33: Transcript of Testimony presented at Public Hearing on Lifetime 

Income Options for Participants and Beneficiaries in Retirement Plans 

<Tamara Burden> Good Afternoon. I’m Tamara Burden and I’m a Principal and Consulting 

Actuary with Milliman. Milliman is a leading actuarial and consulting firm and we do a lot of work 

with insurance companies and plan sponsors on retirement savings products. I’m also the 

Managing Director of the Retirement Guarantee Network which is devoted to bringing guaranteed 

lifetime income to defined contribution plans. I really appreciate this opportunity to speak with 

you today. 

The DoL is at a key juncture. You are looking now at ways to provide American workers access 

to and encouragement to buy cost-effective lifetime retirement income. You are aware that many 

of us here today believe that a key reason current products aren’t being widely adopted inside of 

employer-sponsored plans is because of uncertainty involving the fiduciary safe harbor for 

retirement income products. A number of speakers have discussed this issue in detail and asked 

the Department of Labor to consider modifying or extending that safe harbor. Today I would like 

to talk about extending that safe harbor to stand-alone living benefit products (which are also 

known as guaranteed lifetime withdrawal benefits in the variable annuity space). I have three 

points to make: 

• These products are good for American workers 

• These products require insurance companies to manage risk prudently 

• In order to protect the interests of plan sponsors and the American worker, the safe 

harbor should only be extended in the presence of certain safeguards 

The beneficiaries of sound public policy in this instance are Americans who are either saving for 

retirement or planning their transition from their working to their retirement years. With the 

welfare of those beneficiaries firmly in your minds, I ask you to carefully consider my remarks 

today. 

So what makes stand-alone living benefits good products? In today’s world, Americans are 

facing retirement with too little savings, with recent large losses in retirement accounts, and with 

interest rates at record lows. We don’t have the luxury of conservative investment portfolios 

focused on protecting principal. For many, the best hope they have for a secure retirement is to 

tap into the upside potential of equity investments. But on the other hand, we can’t withstand 

another collapse of the global financial system that wipes out a big chunk of our retirement 

savings. Americans need investment strategies and products that allow them to prudently invest 

in equities while, at a reasonable cost, protecting their retirement income against market declines. 

When people don’t have a lot saved for retirement, it becomes difficult to partition assets into a 

recurring income stream to pay regular bills and expenses, and money for unexpected events 
Milliman Transcript of Testimony regarding DOL RIN 1210–AB33

4

Transcript of Testimony Presented at Public Hearing on Lifetime 

Income Options for Participants and Beneficiaries in Retirement Plans

RIN 1210–AB33 

September 15, 2010 

(say, a sudden medical emergency). So even while people are trying to maximize their income 

stream they need to maintain control of and access to the underlying assets. 

Americans also need longevity protection. They need to be able to draw retirement income 

without having to worry about what might happen if they live longer-than-average life spans. 

Products that offer all of these benefits in one package exist in the marketplace today. These are 

“stand alone living benefits”. These products enable participants to take advantage of a 

guaranteed lifetime retirement income, with equity participation before and throughout retirement, 

while maintaining full control of and access to their underlying assets. 

How do stand alone living benefits work? Say it’s the beginning of 2008, you’re 65 years old and 

you are planning to retire at the end of the year. You’ve got $400,000 in your retirement account, 

and that will support a pre-tax income of about $2,000 a month. At the end of the year, your 401k 

balance has fallen to $250,000 a year. This will only support an income of $1200. If you had a 

stand-alone living benefit guarantee, you would be able to take the $2,000 a month that you’d 

been counting on, and when you ran out of money, the insurance company would pick up the 

$2,000 a month payments as long as either you or your spouse were still alive. 

That sounds pretty great. You might be wondering – what’s the catch? How does that work? 

Retirement income guarantees are terrific, but every dollar that a participant doesn’t lose has to 

come from somewhere. In practice, these dollars come from the insurance company that 

provides the guarantee, but the insurance companies themselves get the money from the 

marketplace. They do this by using derivatives – not the complex, illiquid kind that helped cause 

the global financial crisis, but rather the simplest, most liquid and transparent hedge assets 

available. I want to stop here for just a moment and emphasize that these are not new risk 

management strategies I’m talking about. I’m describing for you how the insurance companies 

who sell these products today – many of those companies represented at this hearing in fact – 

manage this risk right now. So insurance companies use derivatives, and derivatives have a 

pretty ugly connotation these days. I’m going to take just a minute to address that. Derivatives 

can be used in two ways. One is to leverage risk in the hope of a higher return (that would be 

similar to AIG and their credit default swaps) and the other is to lay off risk that already exists in a 

portfolio, winding up with a smaller net risk position. That’s the use of derivatives that applies 

here. In general, in managing this kind of business life insurers have avoided complex financial 

instruments, and have emphasized transparency and reliability in their operational processes. 

This emphasis on simplicity has helped the life insurance industry to avoid the pitfalls 

encountered by the banking industry. 

In fact, in 2009, Milliman completed a study of insurance companies offering guaranteed 

retirement income products and determined that the hedging programs had been about 94% 

effective in achieving their designed goals during the period from September 2008 through March 

2009i

. Just in September and October of 2008 alone, these hedging programs saved the life 

insurance industry an estimated $40 billionii. Imagine where we’d be today without those hedging 

programs. 

To look at the value of these products in another way, I took half a dozen publicly traded 

insurance companies that sell this business today and looked in their annual filings with the 

Securities and Exchange Commission where they have to report the value of their living benefit 

guarantees. At the beginning of the year, these companies had an average liability of $275 

million. By the end of the year, this number had ballooned to $3 billion! That’s an increase of 

almost 11 times. You can look at this number in two ways – one is to think, “Whoa, these are 

risky products!” and the other is to think, “Wow, look how much money that guarantee saved the 

American worker!” 

So now that you have a better picture of not just how stand alone living benefits work but also 

how insurance companies manage the risk exposure, I want to talk about the concerns of plan 

sponsors. It isn’t that they doubt hedging programs work – they do! they have! – but these 

guarantees are just backed by the general account of the life insurance company. 

Even though the insurance companies have significant regulation governing the reserves and 

capital that must be held to support each of their lines of business, including these products, the 

failure of an insurance company means that in some area of their business, these reserves and 
Milliman Transcript of Testimony regarding DOL RIN 1210–AB33

5

Transcript of Testimony Presented at Public Hearing on Lifetime 

Income Options for Participants and Beneficiaries in Retirement Plans

RIN 1210–AB33 

September 15, 2010 

capital proved to be insufficient. Once an insurance company is in receivership, the participants 

in such a plan just end up in a line of creditors. To make matters worse, the circumstances that 

would lead to a failure of a large, highly-rated insurance company would be just the 

circumstances that create huge guarantee liabilities. And these are the same times when 

participants need most to be able to rely on those guarantees. We saw exactly this perfect storm 

of events in the recent financial crisis. 

One approach that has been proposed is to extend the existing safe harbor to cover other lifetime 

income products, a recommendation with which Milliman agrees. However, it is important to 

realize that the safe harbor is a protection of last-resort for plan sponsors. Sure, they don’t want 

to be held liable themselves if the insurance company fails to make good on their promises, but 

what plan sponsors really want is assurance that the guarantees will be paid even if the insurance 

company gets into financial trouble. 

So what is the solution? I want to draw your focus to something fundamental about these 

products and their risk management. These liabilities develop and are funded over time as the 

market moves. They are not funded by insurance company capital and surplus – they are funded 

by gains in the assets being held to defease the liabilities. So the solution is straightforward. 

Take the assets backing these guarantees (the hedge instruments and any payoffs they’ve 

generated) and segregate them in a collateral trust account that accrues to the benefit of the plan 

participants in the event of an insurer failure. 

Segregating the assets is no hardship to insurers, who all manage hedging programs to fund their 

guarantee liabilities anyway. Companies are already holding those reserves. They are already 

holding those hedge assets. This simply draws the line in the sand clarifying that these assets 

are specifically earmarked for this guarantee and thereby clarifies the place in the creditor chain 

where the participants sit in the event of a default by the insurance company. Now plan sponsors 

have a viable option for replacing defaulting insurers, or simply continuing to manage the risk on 

their own. Such a collateral account removes the vast majority of the risk associated with the 

potential failure of an insurer and puts the power to secure the guarantee back into the hands of 

the retirees and the plan sponsor. 

In summary, I’ve focused today on stand alone living benefit products because they have some 

fundamental features that are very attractive. They allow Americans, those working and those 

retired, to maintain significant exposure to equity markets while maintaining control of and access 

to underlying assets. They provide downside protection against adverse financial markets and 

protection against outliving assets. These products are immensely valuable for many American 

workers, but the flip side of that is they can create enormous risk exposure for the insurance 

companies who provide them. Although companies can and do manage this risk exposure 

appropriately, the sheer size of the market and the huge value these guarantees can have mean 

the Department of Labor needs to look carefully at how the guarantees are supported. 

Specifically, we encourage the Department of Labor to consider extending the fiduciary safe 

harbor only in the presence of certain safeguards: the presence of a basic, transparent, industrystandard hedge program and the existence of a collateralized separate account that holds the 

hedge assets and cumulative payoffs from those assets. 

Thank you for your time and attention. 

Contact information: 

Milliman 

10000 N. Central Expressway 

Suite 1500 

Dallas, TX 75231 USA 

Tel +1 214 863 5500 

Fax +1 214 863 5110 

milliman.com 
Transcript of Testimony Presented at Public Hearing on Lifetime 

Income Options for Participants and Beneficiaries in Retirement Plans

RIN 1210–AB33 

September 15, 2010 

6

Milliman Response to DOL RIN 1210–AB33

APPENDIX 

For some helpful details on the current state of individual retirement savings accounts, we asked the Employee Benefit 

Research Institute (“EBRI”) for some information. EBRI's robust database includes close to 25 million individual account 

balances and is the largest in the US. In the benefits community, the EBRI database has unchallenged integrity. 

EBRI has prepared an estimate of the average of account balances in 401(k) plans nationwide. As of Sept 1, 2010, the 

value is $78,640. EBRI also estimated September 1, 2010 account balances only for Americans who are in the 55 to 64 

age demographic. It is not unreasonable to assume that this cohort may be those most interested in converting their 

account balances into a stream of lifetime income. The average of these account balances is about $200,000. 

REFERENCES 

 

i Milliman research report: The VA Industry: An Analysis of Recent Activities, by Peter Sun 

http://www.milliman.com/expertise/life-financial/publications/rr/pdfs/va-industry-analysis-recent-rr.pdf

ii Milliman research report: Performance of Insurance Company Hedging Programs During the Recent Capital Market Crisis, 

by Peter Sun, Ken Mungan 

http://www.milliman.com/expertise/life-financial/publications/rr/pdfs/performance-insurance-company-hedging-rr12-01-08.pdf