REVISED 9.15.2010 

Testimony Of 

Allison R. Klausner 

On Behalf Of The ERISA Industry Committee 

Before The Employee Benefits Security Administration, 

U.S. Department Of Labor 

And 

The Internal Revenue Service, U.S. Department Of The Treasury 

At The Joint Hearing On Issues 

Regarding 

Lifetime Income Options 

For Participants And Beneficiaries In Retirement Plans 

On 

September 14, 2010 

Good morning. My name is Allison Klausner, and I am pleased to appear before you 

today on behalf of The ERISA Industry Committee, generally known as ERIC. 

ERIC is a nonprofit association committed to advancing the employee retirement, health, 

incentive, and welfare benefit plans of America’s largest employers who directly sponsor 

comprehensive retirement and health benefits to tens of millions of employees and their families. 

I am honored to serve as the chair of ERIC’s Task Force on Lifetime Income. Over the 

past decade, there has been a significant movement among employers away from defined benefit 

arrangements to defined contribution plans. As a result, employees have greater responsibility for, 

and control over, their retirement planning decisions. The Task Force is charged with providing 

guidance and support to the Agencies as they develop regulations designed to secure during 

retirement the savings of tens of millions of workers, 

I have served as an Assistant General Counsel, Benefits for Honeywell International Inc. 

for the past seven years. I provide counsel on retirement issues, including the distribution of 

retirement plan assets. 

At Honeywell, I partner with our employee benefits administration and operations teams, 

as well as those in human resources. It is these people who are in the trenches every day with 

workers and their families while they face difficult choices in a complicated world with regard to 

their employer sponsored retirement plans. 

While working with Honeywell’s employee benefits and human resources teams, I hear 

our employees’ concerns about whether they are saving enough, diversifying adequately, and 

selecting a retirement distribution option that is appropriate for them. In conjunction with various 

written plan materials and communications, Honeywell strives to provide our employees and 

retirees with the information and education needed to understand and comply with the increasingly 

complex and changing rules, in general, and to navigate the plan asset distribution process, 

specifically. 

In recent years, a tremendous focus has been on the accumulation of retirement plan assets 

and the need to ensure that the accumulation is not eroded or adversely impacted by loans, 
The ERISA Industry Committee September 14, 2010 

Testimony of Allison Klausner Page 2 of 4 

in-service withdrawals or excessive fees. Although this focus remains, the employee benefits 

community has shifted some of its energy to review and consider the regulatory framework relating 

to the distribution of retirement income. I am pleased to speak to you today about how that regulatory 

framework should be designed so that the assets employees accumulate in these plans can be secure 

and enjoyed during retirement. 

Let me commend the Agencies for addressing issues associated with the distribution of 

defined contribution plan assets. ERIC and its members are pleased that the Agencies recognize the 

importance of these issues and are considering our views. 

I will comment on all five issues that are the subject of this hearing. My comments on the 

first three issues are closely related and I will combine them. These issues involve: 

(1) addressing participant concerns about matters such as the risk of insurer insolvency, 

inflation, and premature death; 

(2) providing useful information to participants; and 

(3) furnishing participants with estimates of the size of their monthly benefits if their account 

balance were paid in the form of a monthly lifetime income. 

Major employers, like Honeywell, sponsor a wide variety of defined benefit and defined 

contribution plans. As I am sure you are aware, in recent years, a number of large employers have 

announced the freezing of their DB plans or the closing of their DB plans to new participants. 

Although Honeywell continues to provide defined benefit plans to many of its employees, 

there are strong indications that, nationally, the percentage of employees who derive all or most of 

their employer-sponsored retirement benefits from DC plans is likely to increase in the years ahead. 

Under most private sector major-employer sponsored DC plans, the default form of 

distribution is a lump sum, and the overwhelming majority of DC plans do not offer installments or 

annuities as a distribution option. And, with respect to DC plans that provide other forms of 

distribution, ERIC members report that nearly all participants take the lump-sum option. Likewise, 

ERIC members report that 80% to 90% of the employees who have a lump-sum option under a DB 

plan elect to take their benefits in a lump sum. 

Retirees who take their benefits in a lump sum are subject to the risk of overspending and 

outliving their retirement savings. Others may spend too little and live more frugally than necessary. 

Without a doubt, a growing body of research suggests that employees (our future retirees) would be 

well advised to address these risks by including one or more annuity contracts in their investment 

portfolio. 

The mismatch between the academic research and employee behavior may be attributable to 

employees’ lack of information and understanding. Many employees don’t understand what 

annuities are, how they might be helpful, or what they are paying for in choosing an annuity. Many 

believe that annuities are costly, risky, vulnerable to inflation, a poor investment if the annuitant dies 

early, and precludes leaving any assets to their heirs. 

Many are also unsure of where to go to obtain reliable information about annuities and other 

lifetime income arrangements. 

Major employers would like to help employees but are concerned that any assistance that they 

provide will expose them to fiduciary liability under ERISA—that no good deed will go unpunished. 
The ERISA Industry Committee September 14, 2010 

Testimony of Allison Klausner Page 3 of 4 

We have some concrete suggestions on how to address these concerns. 

The Agencies should embark on an educational initiative to acquaint employees and retirees 

with: 

• the potential risks and benefits of investing in annuity contracts; 

• how to compare contracts and how to compare annuity contracts with self-funding 

options; 

• how to evaluate an issuer’s financial condition and how to evaluate state guaranty 

associations; and 

• how to obtain more information about annuity contracts. 

The Agencies should partner with the Department of Education to undertake a major 

initiative, starting with our students, to improve the financial literacy of the Nation’s workforce. 

Although it might not be realistic to expect students and younger workers to focus on retirement 

issues, the educational process must begin early in order to maximize its effectiveness. 

Many employees and retirees are accustomed to receiving useful, accurate and unbiased 

information from their current or former employers. The Department of Labor should make clear 

that employers can educate their employees and retirees about both savings and distribution options 

without being threatened with fiduciary liability and exposing themselves to litigation or penalties. 

IB 96-1, regarding investment education, is a precedent that the Department should follow with 

regard to distribution education. 

Helping employees to estimate the size of the annuity that can be purchased with their account 

balance could also be useful—as long as employees are cautioned appropriately about the 

uncertainties associated with estimates. But there is no reason to require every plan administrator to 

prepare such estimates on its own. Indeed, most plans would be wary of doing so. 

Instead, the Agencies should establish a website that allows individuals to make such 

estimates, after inputting key assumptions, such as the size of the account balance, interest rate, age, 

and annuity commencement date. 

If—contrary to ERIC’s recommendation—an annuity estimate were required to be included in 

each participant's account statement, generic examples should suffice. Plan administrators cannot 

reasonably be required to provide individualized estimates based on volatile and unpredictable 

factors, such as the size of the participant’s account balance and annuity purchase rates at an 

uncertain future date. 

The fourth issue relates to changes in the Department of Labor’s regulation regarding the 

selection of annuity providers to make benefit distributions from defined contribution plans. 

The Department has characterized its regulation as a safe harbor. In fact, it is not. Merely 

characterizing a regulation as a safe harbor doesn’t make it a safe harbor. 

Under the regulation, a fiduciary’s selection of an annuity provider satisfies the duty of 

prudence only: 

• if the fiduciary engages in an objective, thorough and analytical search; 

• appropriately considers information that is sufficient to assess the annuity provider’s 

ability to make all future payments; 

• appropriately considers the cost of the contract in relation to the benefits and services 

to be provided; 

• appropriately concludes, at the time of the selection, that the annuity provider is 

financially able to make all future payment; and 

• if necessary, consults with an appropriate expert or experts.
The ERISA Industry Committee September 14, 2010 

Testimony of Allison Klausner Page 4 of 4 

The ERISA Industry Committee 

1400 L Street, N.W., Suite 350, Washington, DC 2005-3531 

(202) 789-1400 Fax (202) 789-1120 www. eric.org

The Department’s regulation is not a safe harbor. It does not provide that the law will be 

considered satisfied if specific objective steps are taken. Rather, the Department’s regulation is laced 

with critical but vague terms that require subjective judgments. 

The DOL should establish a genuine safe harbor based on objective and uniformly applicable 

criteria, such as approval by an independent fiduciary that meets criteria specified by the DOL or the 

issuer’s receipt of a given rating by one or more rating agencies approved by the DOL. 

The fifth issue relates to in-plan and out-of-plan lifetime income distribution options. 

Experience has shown that offering in-plan annuity distribution options is not attractive to employees 

and just doesn’t work. 

As I have explained, ERIC’s members report that when a DB plan offers a lump-sum option 

to retirees, a vast majority of the retirees elect the lump-sum option. This is true even though the 

annuity is the default option and even though married participants need spousal consent in order to 

elect a lump sum. 

This DB experience indicates quite persuasively that requiring DC plans to offer annuity 

distribution options would be a pointless and costly exercise and, for many employers, yet another 

disincentive to offering a plan. 

By contrast, it remains appropriate to permit the distribution of DC plan assets be in the form 

of a lump sum and, to the extent retirees choose to have their benefits paid in the form of annuity, to 

permit the retirees to roll their lump sum into a vehicle outside the employer-sponsored plan that 

supports a lifetime stream of income. 

DC plans that rely on out-of-plan distribution options offered by insurers, mutual funds, and 

other financial institutions have chosen, in effect, to assign responsibility for the design and 

marketing of distribution options to firms that are in the business of designing and marketing such 

products. This is an entirely sensible approach in my judgment, and it should be encouraged. 

This concludes my prepared remarks. I will be happy to address any questions that the 

members of the panel might have. Also, if it would be helpful, ERIC will be delighted to supplement 

my comments. And we are prepared to work with the Department to ensure a regulation that 

provides workers with appropriate information and choices and employers with a secure and 

objective regulation. 

Thank you for your attention.