The Prudential Insurance Company of America 

Prudential Financial, Inc. 

751 Broad St.

Newark, NJ 07102

Filed Electronically

May 3, 2010 

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 RFI (RIN 1210-AB33)

Ladies and Gentlemen:

Prudential Financial, Inc. (“Prudential”) is pleased to respectfully submit this response in connection with the Request 

for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans (the “RFI”) 

initiated by the Employee Benefits Security Administration, Department of Labor and the Internal Revenue Service, 

Department of the Treasury (the “Agencies”).

Our experience in designing and delivering guaranteed lifetime-income products—both within and outside of qualified 

retirement programs—is unique in the industry. We believe that experience provides a perspective that is relevant to 

the issues you are seeking to address. Our Annuities business is the nation’s top variable annuity provider, with more 

than one million contract holders and $80 billion in advisor-sold variable annuity assets. Our Retirement segment, 

which offers retirement-plan solutions for public, private, and non-profit organizations, manages $178.3 billion in 

retirement account values as of December 31, 2009, for more than 3.6 million plan participants and annuitants.

With that as background, Prudential applauds and congratulates the Agencies for their interest in—and commitment 

to—addressing the vital issue of guaranteed lifetime income. We believe that effectively developing, promoting and 

encouraging the use of guaranteed lifetime-income solutions is fundamental to the retirement security of American 

workers.

We hope our submission will prove helpful in the critical evaluation and discussion regarding retirement-income 

products that lies ahead, and we would be delighted to discuss further any of our ideas and responses with you or 

provide any additional assistance that you might find useful. 

Sincerely,

Christine Marcks

Senior Vice President, Prudential Financial, Inc.

President, Prudential Retirement
Request for Information Regarding Lifetime Income Options 

for Participants and Beneficiaries in Retirement Plans

Executive Summa
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

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Executive Summary Prudential Financial supports and applauds the efforts of the U.S. Departmen

of Labor and the Department of the Treasury to examine the Employee 

Retirement Income Security Act of 1974 (ERISA) and plan qualification rules 

under the Internal Revenue Code (IRC) to determine whether and, if so, how 

the Agencies could or should enhance the retirement security of participants in 

employer-sponsored retirement programs and individual retirement accounts 

(IRAs) by facilitating access to, and use of, lifetime-income solutions or 

other arrangements to provide a stream of guaranteed lifetime income after 

retirement.

We believe such an effort—in the context of the ongoing demise of the 

traditional defined benefit pension plan—builds upon the positive momentum 

generated by passage of the Pension Protection Act of 2006 (PPA) and 

represents a compelling opportunity to transform the existing retirement 

landscape by creating a more robust replacement for traditional pensions and 

by helping deliver better retirement outcomes for American workers.

With that in mind, we are pleased to respond to the Agencies’ Request for Information 

(RFI), and we hope our submission—summarized here—provides valuable insight, 

stimulates discussion, and encourages thoughtful, considered steps to stimulate the 

acceptance and adoption of guaranteed lifetime-income solutions.

Current Situati

Defined contribution programs, originally intended only as supplemental 

savings options for traditional pension plans, have now emerged as the 

nation’s primary retirement-savings vehicle. This 30-year trend has left the 

majority of American workers woefully unprepared to generate the levels 

of guaranteed lifetime income once afforded by pension programs, in part 

because of inadequate participation rates, contribution levels and plan 

balances. These considerations, however—each addressed by provisions of 

the PPA—are really only part of the story.

We believe this gap is the result of the historical emphasis on the 

“accumulation” phase of retirement planning, as illustrated by the fact that 

a key metric for individuals in a defined contribution plan is their “account 

balance.” There has been very little attention paid to the fact that the account 

balance is also a future income base that most will need to help replace their 

paycheck once they retire ... often for a period of 25 to 30 years.
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Although the PPA has already had a positive impact on a number of retirementplanning “accumulation risks”—most notably the risks that individuals aren’t 

participating in plans or diversifying assets appropriately—the strong linkage 

between savings levels and a retirement income base has not been made. In 

addition, the corresponding “distribution risks”—such as protecting savings 

from market volatility, converting savings into income, and ensuring that 

individuals do not outlive their nest egg—remain largely unaddressed.

On a positive note, the marketplace currently boasts a growing number of 

effective and innovative in-plan and out-of-plan guaranteed lifetime-income 

solutions specifically designed to minimize “distribution risks” and help promote 

the retirement security of American workers. Unfortunately—though increasingly 

popular in the retail marketplace—these options have faced significant challenges 

in gaining real traction as in-plan features and are looked upon with a degree of 

skepticism by many plan sponsors, plan advisors and plan participants.

In a number of cases, sponsors and advisors remain reluctant to adopt or 

recommend guaranteed lifetime-income solutions due to fiduciary concerns, 

administrative burdens and costs, and a lack of clarity around regulatory and 

legislative guidelines.

Plan participants, though generally aware of the need for guaranteed lifetime 

income beyond Social Security, fear that selecting a guaranteed lifetimeincome solution will force them to give up control of their assets—including 

the ability to pass on account values to their beneficiaries—even though 

a wide range of new products are available that provide unprecedented 

flexibility, control and investment protection. Currently, 90 percent of 

participants who are offered a lump-sum distribution take it, foregoing any 

protection from market downturns or longevity risks. 

Finally, sponsors, advisors and participants alike are all concerned about 

the structure and portability of guaranteed lifetime-income solutions, 

with sponsors worried about the implications of switching providers and 

participants fearful of what might happen to their guaranteed lifetime income 

if they change jobs.

Resolut

As noted earlier, Prudential applauds the Agencies for recognizing and 

considering the critical issue of lifetime retirement income, and we believe 

this effort represents a unique opportunity to build upon and complement 

the PPA with common-sense measures that encourage increased awareness, 

understanding and adoption of guaranteed lifetime-income solutions.
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

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We suggest establishing a new approach—a new environment—for the 

“distribution phase” of retirement planning, one that mirrors the reach 

and impact of the PPA on the “accumulation side” and one that recognizes 

the need for a comprehensive and coordinated effort focused on creating 

retirement security for American workers.

Specifically, we recommend the following actions, each of which is explained 

in much greater detail in our submission: 

• We urge the Agencies to support legislation that would repeal current rules allowing some plans, 

including 401(k)s, to not offer a guaranteed lifetime-income solution as a distribution option.

• Once these rules are repealed, the Agencies should authorize the use of Guaranteed Minimum 

Withdrawal Benefit (GMWB) offerings as income-distribution options because they not only provide 

guaranteed lifetime income, they also ensure that participants retain control of their assets.

• The Agencies should ensure that employers/plan sponsors have the ability to choose from a wide 

range of guaranteed lifetime-income solutions so they can determine which products would be most 

appropriate for their participants. 

• The Agencies should issue regulatory clarifications, guidance and simplifications to remove obstacles 

and provide protection and guidance to plan sponsors who might otherwise be discouraged from 

offering guaranteed lifetime-income solutions within their plans. Specifically:

— Simplify and extend the standards for the selection of guaranteed lifetime-income solution providers.

— Confirm the applicability of QDIA protection to investment products that include guaranteed lifetimeincome solutions.

— Amend Interpretive Bulletin 96-1 to expand its scope to the decumulation phase of retirement 

planning, including addressing education about guaranteed lifetime-income solutions available 

through rollover IRAs.

— Authorize employers to “re-enroll” participants at any point into QDIAs, including those that incorporate 

guaranteed lifetime-income solutions. 

— Explore other mechanisms that could serve as a supplemental backstop to the current state guaranty 

association funds for guaranteed lifetime-income solutions in DC plans in order to address single-issuer 

risk concerns. 

• The Agencies should educate plan sponsors and participants about retirement security and the need 

for guaranteed lifetime income through official Agency publications, websites, webcasts, media 

campaigns and seminars.
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• The Agencies should support industry efforts to standardize the administration of guaranteed 

lifetime-income solutions to facilitate the portability of these solutions from one recordkeeper to 

another or, at the participant level, from an in-plan option to an out-of-plan option. 

By taking these steps, by building on the solid foundation of the PPA, we 

believe the private sector can improve the retirement security of American 

workers, relieving the federal government of any undue or unnecessary 

burdens and responsibilities. We also believe plan sponsors will benefit from 

these actions through their ability to offer retirement programs that support 

effective workforce management, help attract and retain top talent, and deliver 

on the promise of a secure retirement.

Perhaps most importantly, we believe our recommendations can help 

transform the perception and role of defined contribution programs by 

encouraging participants to focus on the income their plans will generate 

rather than on the balance being accumulated. Our experience has shown 

that this simple shift in focus creates a “virtuous dynamic,” leading workers 

to pay greater attention to what their savings-and-investment patterns will 

produce in guaranteed lifetime income. The opportunity, then, truly exists for 

transformational change in the retirement security of American workers ... and 

for defined contribution plans to deliver retirement outcomes similar to those 

achieved through traditional defined benefit plans. 
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

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Addendum t

Executive Summar

Improving retirement outcomes for Amricans:

Defined contribution (DC) plans need to be “redefined” to help ensure a secure 

retirement for American workers. Employees need workplace-provided plans 

that leverage all of the best practices enabled by the Pension Protection Act 

of 2006—including automatic enrollment, contribution escalation, catch-up 

contributions, and automatic asset allocation—and they need plans that mirror 

traditional pensions by delivering a guaranteed lifetime-income stream with 

protections against market and longevity risks.

To help demonstrate the need for change in defined contribution plans, we 

enlisted the aid of Ernst & Young, who used their proprietary Retirement 

AnalyticsTM model to analyze and compare retirement outcomes in a traditional 

DC plan with those of a “redefined” DC plan.

For the purposes of this analysis, the redefined plan is assumed to incorporate 

a guaranteed lifetime-income solution to protect against market and longevity 

risks. The guarantee is integrated into the plan’s existing investment options, 

such as target-date funds, and is usually activated five to 10 years before 

retirement. The guaranteed lifetime-income solution provides three key 

benefits:

• It locks in a level of retirement income based on the participant’s accumulated assets at the time 

the guarantee is activated. The annual level of guaranteed lifetime income is calculated as a certain 

percentage, such as five percent, of the retirement assets the participant has accumulated. Once 

locked in, the level of guaranteed lifetime income cannot decline, regardless of market conditions, 

unless the participant withdraws assets from his or her DC account prior to retirement or unless 

withdrawals exceed the annual amount of guaranteed lifetime income after retirement.

• The level of guaranteed lifetime income can increase before retirement if the participant’s retirement 

assets appreciate and/or if the participant makes further contributions to the DC plan.

• Upon retirement, the guaranteed lifetime-income solution provides the participant with an annual 

level of guaranteed lifetime income, regardless of how the markets perform or how long the 

participant lives.

Traditional annuities are also an option for providing built-in risk protection 

within DC plans. An immediate annuity, bought at the time a participant 

retires, would provide the participant with a stream of guaranteed lifetime 

income for as long as the participant lives. However, for the purposes of this 

analysis, we focused on the newer generation of guaranteed lifetime-income 

solutions because they provide two distinctive benefits not offered through 

more traditional annuities.
Page 7

First, these newer guaranteed lifetime-income solutions leave participants 

with control of their assets at all times, while traditional annuities require 

individuals to cede their assets to an insurer in return for the guaranteed 

lifetime-income stream. Retaining control of assets can be especially 

beneficial for retirees, who may, for example, need to access the funds in 

their retirement account during times of medical or other emergencies. 

Taking withdrawals that exceed the annual level of guaranteed lifetime 

income will generally reduce the future level of guaranteed lifetime income, 

however a guaranteed lifetime-income solution enables participants to 

determine if this trade-off is appropriate or worthwhile.

Second, a guaranteed lifetime-income solution enables participants to remain 

invested in the equity markets—and to benefit from any market appreciation—

because the guarantee includes protection from investment risk.

The tradeoff against these two benefits is that traditional annuities may 

provide a higher initial level of guaranteed lifetime income, depending in 

part on interest rates and the annuity buyer’s age at the time of purchase. 

Also for purposes of this analysis—in addition to including a guaranteed 

lifetime-income solution—it is assumed that the redefined plan includes 

an automatic initial annual contribution rate of four percent and that the 

contribution rate automatically increases by one percentage point each 

year up to 10 percent annually. There are several reasons for this default 

strategy:

• The initial contribution rate was set at a slightly higher level than the most common default 

contribution rate adopted by plan sponsors today, which is three percent.1 It was set slightly 

higher because many participants, especially older ones, need to save more, especially in light of 

the need to rebuild retirement savings after the recent market downturn. 

• The initial contribution rate was not set higher than four percent because doing so increases the 

risk that some participants may opt-out completely.

• The default contribution rate increases each year to gradually increase participants’ contributions 

to a high enough level to help generate sufficient retirement savings and, ultimately, sufficient 

retirement income. Gradually increasing the contribution rate reduces the likelihood that a 

participant will opt-out, because higher contributions can often be funded entirely out of 

annual salary increases. Therefore, participants’ “take-home” paychecks, after removing taxes 

and retirement contributions, will generally not decrease even though the contribution rate 

continually increases.

The redefined plan also assumes that plan sponsors advise participants to 

make an additional $5,000 catch-up contribution each year after age 50, and 

1

 Fidelity Investments, “Fidelity’s 401(k) Data Show 

Auto Enrollment Has Biggest Impact on Younger, 

Lower-Paid Workers,” July 14, 2009.
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

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that the participants do, in fact, make this contribution. The goal of this policy 

is to encourage older participants to review their financial position as they near 

retirement and to begin making higher contributions if they have not saved 

sufficiently either within or outside of their DC plan. The catch-up contributions 

provide a valuable mechanism for older participants to enhance their retirement 

savings though an accelerated savings rate, based on individual circumstances.

Illustrative impact on a plan participa

Meet Sarah Smith. Sarah is a hypothetical DC plan participant meant 

to represent an “average” American worker. She is single and began 

participating in her company’s DC plan when she was 25. She is planning to 

work until age 65, when she will retire. Sarah’s starting salary is $30,000, which 

grows at the rate of inflation plus one percent annually. Sarah’s employer 

matches 50 percent of her contributions to the DC plan each year up to a 

maximum of six percent of her salary. Sarah’s income at retirement, including 

Social Security benefits, is set at a level to replace 63 percent of her preretirement income.2

 This is an estimate of the level of income that Sarah will 

likely need in retirement.

 Exhibit 1: Comparison of Traditional and Redefined DC Plans

Plan Characteristic Traditional DC Plan Redefined DC Plan

Built-in risk 

protection

• Protection against:

 – Adverse market conditions 

immediately before 

retirement

 – Outliving assets during 

retirement

• None • Guaranteed lifetime-income 

solutions provide:

 – Market risk protection after 

being activated

 – Longevity risk protection 

after retirement

Autopilot 

retirement 

planning

• Automatic enrollment

• Contribution rate

• Contribution escalation

• Catch-up contributions

• Asset allocation

• Risk protection

• None

• Participant chosen–3% average 

• None

• None

• Participant chosen–typically 

70% equities, 30% fixed 

income/cash. Rebalanced at 

ages 35, 45, 55, and 65.

• None

• Yes 

• 4% initially

• 1% increase per year up to 10%

• Participant elects to contribute 

$5,000 a year after age 50

• Target-date fund gradually shifts 

towards fixed income to reach a 60% 

equities and 40% fixed income/cash 

allocation 10 years before the target 

date and thereafter

• Automatic activation of income 

guarantee at age 55

Streamlined 

plan design 

(examples)

• Enrollment

• Statements

• Transactions

• Participant education

• On-site and phone

• Paper

• Phone

• On-site and phone

• Automatic

• Electronic, with balance and 

 income value

• Web

• Web

2 “Retirement Vulnerability of New 

Retirees: the Likelihood of Outliving 

Their Financial Assets,” Ernst & Young 

for Americans for Secure Retirement, 

July 2008.
Page 9

Sarah’s employer has embraced all of the plan design best practices enabled 

by PPA, including automatic enrollment, contribution escalation, catch-up 

contributions, and automatic asset allocation. In addition, Sarah’s employer 

offers guaranteed lifetime income in the form of a Guaranteed Minimum 

Withdrawal Benefit (GMWB) product, which protects participants from 

market downturns and longevity risk.

A Monte Carlo simulation was run to compare Sarah’s retirement outcome 

in her employer’s “redefined” retirement plan—which takes advantage of 

all of PPA and provides guaranteed lifetime income—with her expected 

outcome from a more traditional DC plan that lacks any of these features.3

Exhibit 2 projects Sarah’s account balance starting at age 25. The 

“redefined” DC plan outperforms the traditional DC plan at all points in time 

and in all market conditions. This is driven by the higher initial contribution 

rate and subsequent contribution escalations that are facilitated by the 

autopilot features in the “redefined” DC plan. At age 65, Sarah’s account 

balance in the “redefined” DC plan under average market conditions is 

approximately $470,000 in real dollars, more than three times higher than 

in the traditional DC plan. Under poor market conditions, Sarah’s account 

balance in the “redefined” DC plan is approximately $265,000 in real dollars, 

which is also more than three times higher than in the traditional DC plan 

under poor market conditions.

Exhibit 2: Account Values by Plan Type

Account Values by Age in Real Dollars

$600,000

$500,000

$400,000

$300,000

$200,000

$100,000

$0

 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 

Redefined DC Plan—

Average Markets

Traditional DC Plan—

Poor Markets

Point of Retirement

Redefined DC Plan—

Poor Markets

Traditional DC Plan—

Average Markets

Source: Ernst & Young analysis

3 Our Monte Carlo simulation used market 

performance and Sarah’s longevity as variables. A 

total of 2,000 scenarios were generated, and the 

results are presented in real, or today’s, dollars. 

The middle 1,600 scenarios in terms of outcomes 

are averaged and called the “average markets” 

results; the bottom 200 scenarios are averaged 

and called the “poor markets” results. The 

analysis assumed fees of 74 basis points for the 

“traditional” DC plan, and 174 basis points for 

the “redefined” DC plan, which includes the cost 

of the income guarantee. The fee for the income 

guarantee is only charged after the guarantee 

is activated at age 55. This analysis does not 

assume any reduction in operational costs or fees 

in a “redefined” DC plan.
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

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The benefit of the guaranteed lifetime-income solution in Sarah’s retirement 

plan is illustrated in Exhibit 3, which contains a projection of her retirement 

income in real dollars for both plans under average and poor market 

conditions. These projections assume that at retirement, Sarah begins to 

withdraw income from her DC assets and receives Social Security benefits to 

achieve her target income replacement of 63 percent.

Sarah’s income is generated in different ways by the traditional and 

“redefined” retirement plans:

• In the traditional plan, Sarah withdraws a sufficient amount of her DC assets each year after 

retirement to achieve her income replacement target. However, after Sarah depletes her assets, she 

can no longer draw an income from her DC account.

• In the “redefined” plan, the guaranteed lifetime-income solution enables Sarah to withdraw a 

certain percentage, such as five percent, of the value of her DC assets at the time she activates the 

guaranteed lifetime-income solution, plus any additional DC contributions made after the activation 

of the guarantee. Sarah’s retirement income may be higher than this value if her assets appreciate 

after the activation of the guarantee. Sarah is able to withdraw this level of income at the time of 

retirement and every year thereafter, no matter how long she lives or how the markets perform.

Exhibit 3: Retirement Income by Plan Type

Annual Income in Retirement in Real Dollars

$30,000

$20,000

$10,000

$0

65 70 75 80 85 90 95 100

Redefined DC Plan—

Average Markets

Traditional DC Plan—

Poor Markets

Redefined DC Plan—

Poor Markets Traditional DC Plan—

Average Markets

Income level required, excluding Social Security, to 

achieve 63% income replacement ratio

Source: Ernst & Young analysis
Page 11

Exhibit 3 demonstrates that the guaranteed lifetime-income feature of the 

“redefined” DC plan has a dramatic positive effect on Sarah’s income in 

retirement.4

• In the traditional DC plan, Sarah rapidly depletes her account because low contributions during 

her working years resulted in a low account balance at the time of retirement. Eventually, 

even during average market conditions, Sarah completely runs of out money and can no longer 

withdraw any income from her DC account. During poor market conditions, Sarah runs out of 

money in her early 70’s—just a few years after retiring.

• In the redefined DC plan, Sarah has the same or higher level of retirement income in average 

market conditions than the traditional DC plan because Sarah retired with a higher account 

balance at retirement and the guaranteed lifetime-income solution provides Sarah with a 

guaranteed stream of income no matter how long she lives or how the markets perform. During 

average markets, the redefined DC plan provides Sarah with sufficient guaranteed lifetime income 

to achieve her 63 percent target-income replacement ratio.

• During poor market conditions, Sarah’s level of guaranteed lifetime income is insufficient to 

achieve the 63 percent income-replacement ratio. However, this lower level of guaranteed lifetime 

income is significantly higher than the income Sarah can expect in her later years in retirement 

from a traditional plan under average or poor market conditions.

The redefined DC plan provides Sarah with a stream of guaranteed lifetime 

income and preserves Sarah’s flexibility to access all of her retirement 

assets at any time. This flexibility is particularly important if Sarah faces 

major medical expenses that require significant out-of-pocket payments. 

However, in any year, if Sarah withdraws a level of assets greater than her 

annual level of guaranteed lifetime income, her future level of guaranteed 

lifetime income will be reduced proportionally.

Overall, it’s clear that the redefined retirement plan provides Sarah with a 

significantly better retirement outcome across all market conditions than a 

traditional DC plan. This example underscores the importance of workplaceprovided plans that leverage all of the best practices enabled by the Pension 

Protection Act of 2006 and that mirror traditional pensions by delivering 

a guaranteed lifetime-income stream with protections against market and 

longevity risks. 

4 Income declines gradually for the traditional 

DC plan because the exhibit shows the average 

across all scenarios, and in some scenarios, 

market appreciation enables Sarah to draw on 

her assets for a longer period of time than other 

scenarios.
Request for Information Regarding Lifetime Income Options 

for Participants and Beneficiaries in Retirement Plans
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

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Question 1: 

From the standpoint 

of plan participants, 

what are the advantages 

and disadvantages for 

participants of receiving 

some or all of their 

benefits in the form of 

lifetime payments?

For defined contribution plan participants, especially those who do not have 

the security of a traditional, annuitized defined benefit (DB) program, the 

advantages of guaranteed lifetime-income solutions clearly outweigh the 

disadvantages. Some of the advantages and disadvantage of products that 

provide lifetime income include:

Advantage

• Participants (and their spouses if they choose) will not outlive their savings if the benefits are paid in 

the form of guaranteed lifetime income.

• As with a traditional DB pension program, investment and longevity risks for the participant are 

transferred to an institution better positioned to diversify and manage such risks.

• In a very real sense, guaranteed lifetime-income solutions are a vehicle for determining how much 

retirement income participants can safely withdraw annually from defined contribution portfolios 

without fear of running out of money. This also means that fewer individuals will resort to hoarding 

their defined contribution wealth for fear of running out of income many years down the road. In 

other words, individuals will feel more comfortable spending down their retirement wealth, resulting 

in a higher living standard during retirement. 

• With guaranteed lifetime-income solutions, longevity risks are pooled among a large group of 

individuals. Since longevity risk is efficiently pooled this way by a third party, participants can often 

generate higher amounts of income than would likely be achievable through alternative strategies. 

Participants are relieved of the burden of estimating, calculating and generating a lifetime retirementincome stream.

• If lifetime payments are delivered through a qualified plan, participants will be able to obtain 

institutional pricing.

• Participants who receive guaranteed lifetime income are less vulnerable to volatility in the financial 

markets.

• With guaranteed lifetime-income solutions, participants limit their “downside” risk should capital 

markets perform poorly. The security provided by this type of guarantee may allow participants 

to take greater risk with the underlying investment assets of the guaranteed lifetime-income 

solutions and/or other parts of their investment portfolio. With guarantees in place, diversification 

automatically improves and volatility and longevity risks are systematically reduced.
Page 3

• With withdrawal-based guaranteed lifetime-income solutions, participants retain control (have access 

to principal at market value without penalty during accumulation and distribution) of their assets, a 

key advantage over traditional annuitization. American workers clearly have misgivings about giving 

up control of the retirement savings they accumulated during their working years.

• Similarly, the latest generation of withdrawal-based guaranteed lifetime-income solutions 

successfully addresses participant concerns that they may die before recouping all the funds they 

paid for the annuity and thus forfeit their funds to the annuity company. Indeed, only about 1% of 

participants in defined contribution plans who are offered an immediate annuity at retirement actually 

annuitize any portion of their retirement-plan wealth. (Source: “The Survey Findings: Trends and 

Experience in 401(k) Plans,” Hewitt Associates 2009). What is interesting to note is that the Hewitt 

survey (which is completed bi-annually) indicates a decline in the number of 401(k) participants who 

are choosing an annuity when it’s offered. The number of retiring participants selecting an annuity 

option has declined from 6% (2005) to 3% (2007) to 1% (2009). 

• Newer guaranteed lifetime-income solutions, such as “Guaranteed Minimum Withdrawal Benefit” 

(GMWB) offerings, also allow for an effective way to transfer unneeded retirement wealth to 

beneficiaries at the time of the participant’s death.

Disadvanta

• To obtain the security of guaranteed lifetime income, participants pay an additional fee, which may 

reduce the amount of wealth passed on to beneficiaries.

• Depending on the type of guaranteed lifetime-income solution, participants may give up some 

level of flexibility or control with respect to their assets, and/or the ability to pass on assets to 

beneficiaries.

• Participants will pay fees for the guarantees associated with the guaranteed lifetime-income 

solution, but may never use the product for lifetime income.

• The investment stability of fixed guaranteed lifetime-income solutions may limit the opportunity for 

participants to take advantage of market upswings and keep up with cost-of-living increases.

• The plan may not provide participants with access to a financial advisor, though participants could 

engage a financial advisor on their own if they so choose. 
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 4

Question 2: 

Currently the vast 

majority of individuals 

who have the option of 

receiving a lump sum 

distribution or ad hoc 

periodic payments from 

their retirement plan or 

IRA choose to do so and

do not select a lifetime 

income option. What 

explains the low usage 

rate of lifetime income 

arrangements? Is it the

result of a market failure 

or other factors (e.g., cost, 

complexity of products, 

adverse selection, poor 

decision-making by 

consumers, desire for 

flexibility to respond to 

unexpected financial 

needs, counterparty risk 

of seller insolvency, etc.)? 

Are there steps that the 

Agencies could or should 

take to overcome at least 

some of the concerns that 

keep plan participants 

from requesting or 

electing lifetime income?

RECOMMENDATION: The Agencies

• Ensure that plan sponsors have the ability to choose from a range of 

guaranteed lifetime-income solutions;

• Promote programs to educate defined contribution plan participants on the 

relationship between their account balance and the income it may provide 

throughout retirement;

• Support legislation that transfers QJSA administrative responsibilities to 

providers; and

• Clarify fiduciary standards, safe harbors and protections, particularly with regard 

to the use of guaranteed lifetime-income solutions as default investments.

The reasons participants are reluctant to embrace guaranteed lifetime-income 

solutions generally fall into three broad categories:

• Market Dynamics—Advisor behavior, market awareness, and product availability are clearly 

impacting the access and availability of guaranteed lifetime-income solutions.

• Financial Needs—Immediate and pressing financial needs are also causing some individuals to shy 

away from guaranteed lifetime-income solutions.

• Behavioral Biases—Some individuals have powerful behavioral biases that influence their decision 

to adopt, or not to adopt, guaranteed lifetime-income solutions.

Market Dy

The current state of the retirement marketplace impacts the selection of 

guaranteed lifetime-income solutions in several critical ways.

First, financial advisors are playing an important role in educating individuals 

about guaranteed lifetime-income solutions, and, understandably, different 

advisors offer varying opinions on the subject, based in large part on their 

area of expertise. Some prefer to focus on investment management, others 

concentrate on tax planning, and still others create holistic income plans 

for clients approaching or already in retirement. The net result is that some 

advisors are more likely than others to incorporate guaranteed lifetime-income 

solutions into their recommendations.

Moreover, some advisors may be reluctant to recommend income solutions 

due to concerns about the fees associated with these products, or about losing 

control of investment decisions for their clients.
Page 5

Also, in general, the public’s perception of guaranteed lifetime-income solutions 

is often colored by incomplete or inaccurate information. For example, some 

individuals believe that all guaranteed lifetime-income solutions require them 

to give up control of their assets, when in reality solutions such as Guaranteed 

Minimum Withdrawal Benefit (GMWB) products leave control of assets and 

investment decisions during both accumulation and distribution in the hands of 

individuals and their advisors. For additional background refer to supplemental 

attachment “The Modern Annuity.” Once understood, the appeal of GMWBs 

is much clearer. In fact, 84% of new variable annuity sales include GMWB 

features, spurred in part by financial advisors who take the time to educate 

prospective clients about these products1. 

Finally, few employers offer guaranteed lifetime-income solutions in their 

plans because the products are generally more highly regulated and subject 

to stricter and more burdensome administrative rules and fiduciary standards 

than mutual funds or bank-savings options. Because the cost structure of 

qualified plans does not support the widespread use of financial advisors 

and to address the aforementioned concerns of employers, Prudential 

recommends that the Department of Labor clarify the acceptance of 

guaranteed lifetime-income solutions as default investments. 

Based on the experience of Prudential representatives who deal directly 

with clients, many plan sponsors are hesitant to be among early adopters 

of a new in-plan product offering such as a GMWB. It is estimated that less 

than 20% of the nation’s DC plans offer in-plan access to guaranteed lifetimeincome solutions2

. And even fewer provide GMWB products. Currently, 

Prudential provides services to 169 clients benefiting over 267,000 participants 

who, during their participation in the plan, will have access to a guaranteed 

minimum withdrawal benefit option.

Still, it’s encouraging to note that current trends point to the increased 

availability of guaranteed lifetime-income solutions, including GMWBs, in DC 

plans. For example, 71% of all variable annuity GMWB purchases are funded 

by rollovers from qualified retirement programs3, which may indicate that the 

adoption of in-plan GMWBs—and guaranteed lifetime-income solutions in 

general—will soon pick up steam. 

Financial N

It’s no secret that too many individuals reach retirement age with limited sums 

in their retirement-savings accounts. In fact, 401(k) participants in their 60s 

have average plan balances of $125,0004 and many individuals have far less.

1

 LIMRA, “Variable Annuity Guaranteed 

Living Benefit Election Tracking Survey 

(2009, 4th quarter),” March 2010, page 2.

2

 Vanguard Center for Retirement Research, 

“Immediate Income Annuities and Defined 

Contribution Plans,” May 2008

3

 Data from Morningstar Variable Annuity 

Research and Data Service

4

 As of December 31, 2008. Includes 

participants who have been in 401(k) plans 

for at least five years. Employee Benefit 

Research Institute, “401(k) Plan Asset 

Allocation, Account Balances, and Loan 

Activity in 2008,” Issue Brief No. 335, 

October 2009.
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 6

For these people, losing control of their retirement savings through 

annuitization is not a viable option because it means losing access to a ready 

source of funds for emergencies or unexpected expenses. Even individuals 

with higher levels of retirement savings are reluctant to “lock up” their account 

balances, due to the challenge of funding significant healthcare or long-term 

care expenses in retirement. 

Research shows that the expected present value of lifetime uninsured healthcare 

costs for a typical married couple age 65 is about $197,000, excluding nursing home 

care, and $260,000, if nursing home care is included5. For those whose longevity is 

threatened by a major illnes, liquidation of their DC plan account balance may be 

the only way that they are able to finance these daunting expenses.

As a result, maintaining access to a ready source of funds is likely to remain 

a key priority, even for individuals with substantial resources. Seen another 

way, “financial need”—or even the perception of financial need—may 

potentially discourage the adoption of guaranteed lifetime-income solutions, 

especially if those solutions do not provide individuals with ongoing control of 

and access to their retirement savings. 

Behavioral B

There’s compelling evidence from a number of academic studies supporting 

the contention that powerful and inherent “behavioral biases” also reduce 

election rates for guaranteed lifetime-income solutions.

For example, when individuals are asked to choose between a lump-sum payment 

or a future stream of guaranteed lifetime income, they tend to undervalue 

the guaranteed lifetime-income solution because they instinctively apply an 

implicit discount rate that is often much higher than prevailing interest rates in 

the financial markets6. In addition, as a result of the “endowment effect” (with 

defined contribution account balances representing the largest accumulation of 

capital for many participants), many individuals are reluctant to give up control of 

their retirement-plan funds, since they believe that they can invest them on their 

own and achieve better returns than from a guaranteed lifetime-income solution. 

As a result, individuals invariably favor lump-sum payouts.

Similarly, the manner in which payment options are explained also impacts 

behavior and, ultimately, the choices people make. Individuals are far more 

likely to elect lifetime-income arrangements that are framed in terms of 

“patterns of consumption” or understandable benefits, such as “guaranteed 

payments to fund retirement spending,” rather than when income 

arrangements are presented in terms of their investment attributes, such as 

“return on investment.”7

5

 The Center for Retirement Research at 

Boston College, “What Is the Distribution of 

Lifetime Health Care Costs From Age 65?”

by Anthony Webb and Natalia Zhivan, 2010.

6

 John T. Warner and Saul Pleeter, “The 

Personal Discount Rate: Evidence from 

Military Downsizing Programs,” 2001.

7

 Jeffrey R. Brown, et. al., “Why Don’t the 

People Insure Late Life Consumption? 

A Framing Explanation of the UnderAnnuitization Puzzle,” January 2008. 
Page 7

In 

Clearly, a broad range of factors are currently converging to discourage 

individuals from electing guaranteed lifetime-income solutions. The Agencies 

should account for these factors by:

• Ensuring that plan sponsors have the ability to choose from a range of guaranteed lifetimeincome solutions to determine which approach would be most appropriate for their 

participants. Some solutions provide individuals with greater control over their assets, while others 

offer a higher starting income payout. Delivering access to a diverse mix of guaranteed lifetimeincome solutions will ensure that plan sponsors can identify the best solutions for their plans.

• Promoting programs that educate individuals about the longevity and volatility risks they 

face, perhaps through DOL publications or website “webinars.” 

• Supporting legislative changes that would ease the burdens of administering guaranteed 

lifetime-income solutions by enabling the transfer to providers of some of the responsibility for 

administering these products. 

• Easing the concerns of some fiduciaries about the standards to be used in the selection 

of a guaranteed lifetime-income solution provider ... clarifying the extent to which fiduciaries 

are protected under Qualified Default Investment Alternative, Section 404(c) and annuity provider 

standard safe harbor rules ... and simplifying the safe harbor selection processing. See responses to 

Questions 31, 32, 34 and 35 for more detail. 
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 8

Question 3: 

What types of lifetime income 

are currently available to 

participants directly from 

plans (in-plan options), such 

as payments from trust assets 

held under a defined benefit 

plan and annuity payments 

from insurance contracts held 

under a defined contribution or 

defined benefit plan?

Guaranteed lifetime-income solutions are made available through the 

participant/plan sponsor relationship through either a defined contribution or 

a defined benefit plan.

First, let’s consider the defined contribution plan. In this context, we will 

be referring to defined contribution plans subject to the profit-sharing 

exemption. In other words, we are referring to plan sponsors that are not 

required to offer an annuity distribution option. 

Defined contribution plan sponsors can offer either in-plan or out-of-plan 

institutionally-priced guaranteed lifetime-income solutions, and, in some 

instances, offer both. Institutional pricing results from “economies of scale” 

and from discounts in fees negotiated by plan sponsors on behalf of their 

participants. 

Additionally, a guaranteed lifetime-income solution can be fixed or variable. 

Fixed products provide a guaranteed amount of income that remains 

unchanged and set for life. These products are usually invested in the general 

accounts of the issuing insurance company. Variable products provide a 

benefit that will change over time, based on the investment performance 

of an underlying fund. These products frequently take the form of separate 

accounts. 

In today’s market, institutionally-priced income products for defined 

contribution (DC) plans include:

• In-plan immediate annuities—These products provide a guaranteed lifetime income by 

annuitizing a participant’s plan balance at the time of retirement.

• In-plan deferred fixed-income annuities—These products allow participants to purchase 

pieces of income annuities over time and at different interest rates and ages. At retirement, the 

balance is fully annuitized with no access to principal.

• In-plan guaranteed minimum income benefits—These products also allow individuals to 

purchase a guaranteed lifetime-income solution over time, which will be annuitized at retirement, 

and include a “floor” for the guaranteed-income amount. Essentially they are a way to ladder the 

purchase of an in-plan fixed income annuity. Positive investment performance of the underlying 

fund can increase the payout at retirement or during retirement.

• In-plan guaranteed minimum withdrawal benefits—These products protect principal and 

allow participants to lock in a value for their account at retirement, which will then be used as 

the benefit base for the guaranteed minimum amount of income (say 5% annually) that can be 

withdrawn each year for life. The guarantee remains in place even if the market value of the 

underlying portfolio reaches zero.
Page 9

• Out-of-plan immediate annuity—Many plans allow individuals to roll their savings into an 

Individual Retirement Annuity at the point they retire. The out-of-plan immediate annuity delivers 

an annuitized income for life. 

• Out-of-plan immediate annuity rollover platform (shopping service)—Through distribution 

agents who set up IRA Rollover platforms, participants use software to access quotes from several 

insurance companies for the comparison and purchase of immediate annuities at retirement.

• Out-of-plan guaranteed minimum withdrawal benefits—Similar to the in-plan version 

mentioned above, this product is an IRA rollover, with benefits starting only after a participant 

terminates employment and rolls over his or her account balance. 

Traditional pension plans—such as defined benefit or money purchase 

programs—are required to offer and, in the absence of an election to the 

contrary, distribute benefits in the form of an annuity to plan participants as 

the default distribution option at retirement. Although statistics are not readily 

available, utilization of the annuity option appears to decline with traditional 

defined benefit plans if a lump-sum distribution alternative is also available. 

Cash balance defined benefit plans also appear to see most distributions 

taken in the form of a lump sum.

• In a defined benefit plan, the annuity is typically funded by trust assets, unless the plan is 

terminated, and the liability is sold to an insurance provider. 

• In a money purchase pension plan, the annuity is typically provided through an out-of-plan solution 

by purchasing an annuity from an insurer at the time the distribution option is selected.

Profit-sharing plans do not have to offer an annuity option. Only about 14% 

of 401(k) plans offer a traditional immediate income annuity at retirement, 

and only about 1% of participants in these plans choose an annuity form of 

distribution (Source: “The Survey Findings: Trends and Experience in 401(k) 

Plans,” Hewitt Associates 2009). Interestingly, the Hewitt survey, which is 

completed bi-annually, indicates a decline in the number of 401(k) participants 

who are choosing an annuity when offered, even though defined benefit plans 

are becoming less common. The number of retiring participants choosing an 

annuity when offered has dropped from 6% (2005) to 3% (2007) to 1% (2009). 

In addition, a number of new products that provide guaranteed lifetime 

income have recently been introduced in the DC marketplace as in-plan 

options. These “guaranteed living benefit” solutions include Guaranteed 

Minimum Withdrawal Benefit (GMWB) options and Guaranteed Minimum 

Income Benefit (GMIB) products. All are also available for IRA rollovers 

offered through the institutional-plan relationship. 
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 10

Also, as individuals with a trusted financial advisor enter their retirement 

years, it’s important to keep in mind that the retail variable annuity market 

has seen an expansion in innovative product features that offer the benefits of 

guaranteed lifetime income. The popularity of out-of-plan guaranteed lifetimeincome solutions stands in stark contrast to the “annuitization-avoidance” 

trend within employer-sponsored plans and leads to the conclusion that the 

influence of financial advisors and the flexibility of income timing can play key 

roles in helping individuals understand all available options, ultimately leading 

to an increase in the acceptance of guaranteed lifetime-income solutions.
Page 11

Question 4: 

To what extent are the

lifetime-income options 

referenced in question 3 

provided at retirement or other 

termination of employment 

as opposed to being offered 

incrementally during the 

accumulation phase, as 

contributions are made? 

How are such incremental

or accumulating annuity 

arrangements structured?

• About 14% of 401(k) plans offer an immediate income annuity as a distribution option at retirement, but 

only about 1% of the participants in these plans choose an annuity as their “distribution of choice.”8 

• Only a small number of plans offer Guaranteed Minimum Withdrawal Benefit (GMWB) products or 

Guaranteed Minimum Income Benefit (GMIB) products at the point of retirement, generally in the form 

of an IRA rollover.

• When offered within a qualified plan, however, deferred income annuities, GMWBs and GMIBs are 

designed to overcome behavioral obstacles and encourage utilization. Incremental investments are 

made over time during the plan participant’s working years, usually with each contribution cycle, and 

the products are not suddenly introduced as a lump-sum distribution option at the point of retirement. 

By taking this approach, participants benefit from interest-rate averaging (investing in annuities 

during different interest rate environments) and from dollar-cost averaging of their plan contributions. 

Also, plan participants begin to think about their DC account in terms of a stream of retirement 

income, rather than as a lump sum of accumulated wealth. 

• The in-plan products allow participants to benefit from institutional pricing, which results in lower 

fees. These fees are usually not charged until the income guarantees are activated. Though in 

some cases these fees are “always on,” in most others, fees begin generally 10 to 15 years before 

retirement when income guarantees are activated.

• While all these products deliver a guarantee of lifetime income, they also typically provide a current 

market value similar to other investments in the DC plan. Generally, participants have the right to 

transfer out of these products into other plan investment options prior to retirement. 

• The products differ in the degree of guaranteed lifetime income they provide, and in the amount of 

flexibility and control they offer.

— Deferred income annuities and GMIBs typically generate higher guaranteed lifetime income amounts, 

but require annuitization upon retirement resulting in participants giving up access to principal and 

participation in market gains. To generate the higher income, and to benefit from the risk-pooling 

provided by the insurer, participants usually must give up access to their account value when the 

product begins delivering a guaranteed lifetime-income stream.

— Individuals typically receive lower initial amounts of guaranteed lifetime income from GMWBs than from 

income annuities, but they retain the right to change their payment amount or leave the fund at any time 

with their then current market value. Also, GMWBs provide protection from market downturns and offer 

the opportunity to benefit from market upswings. Guaranteed lifetime-income amounts generally can 

increase during retirement if market performance of the underlying investments is positive. However, the 

amount of guaranteed lifetime income generally cannot go down due to poor investment performance. 

8

 “The Survey Findings: Trends and 

Experience in 401(k) Plans,” 

Hewitt Associates 2009
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 12

• Deferred income annuities, GMIBs, and GMWBs protect individuals from severe market downturns in 

the pre-retirement years by allowing participants to lock in future income payments. 

— The deferred income annuities do this by providing for the purchase of a future guaranteed lifetime 

income, payable at retirement. The GMIBs do the same, but also provide a guaranteed floor for 

the future income stream, with the assets invested in a portfolio such as a Balanced Fund that has 

the potential to create an even higher amount of income at retirement due to positive investment 

performance. 

— With a GMWB, the participant accumulates a “benefit base,” a notional value that is tracked for each 

participant. The benefit base is typically the highest annual account value and is enhanced through 

regular, ongoing plan contributions. Upon retirement, participants can generate a guaranteed minimum 

withdrawal benefit, such as 5% of the benefit base, for life. Options include taking a slightly reduced 

amount to provide income for a surviving spouse.

• The types of fees associated with these products differ, depending on the product type. Income 

annuities have fees embedded in the future monthly benefit. The cost to the participant can be 

reflected in the embedded administrative fee, the mortality table used, or the interest rate being 

used in the calculation. With guaranteed minimum income benefits, these same types of fees apply 

once the account balance is annuitized at retirement. Prior to that point, during the accumulation 

stage, a guarantee fee is usually charged in addition to the investment-management fees charged on 

the underlying investment funds. For guaranteed minimum withdrawal benefits, a guarantee fee is 

typically charged when the income guarantee is activated and the Benefit Base starts being tracked. 

The fee is assessed both during the accumulation stage and during retirement. In addition, the 

underlying investment funds will also carry an investment management fee. 
Page 13

Question 5: 

To what extent are

401(k) and other defined 

contribution plan 

sponsors using employer 

matching contributions 

or employer non-elective 

contributions to fund 

lifetime income? To what

extent are participants 

offered a choice regarding 

such use of employer 

contributions, including by 

default or otherwise?

• Although plan sponsors could use the employer match to fund guaranteed lifetime-income solutions, 

we have yet to see widespread use of this practice in the marketplace. Product models are currently 

being developed that would direct employer matching contributions into retirement-income products, 

regardless of the investment elections of the plan participant. The goal is to encourage participants 

to consider these options. It should be noted that not all types of guaranteed lifetime-income 

solutions may be appropriate for the employer match.

• Plan sponsors that have adopted guaranteed lifetime-income solutions tend to allow both employee 

contributions and employer matches to the guaranteed lifetime-income solutions available in 

their plans. We are also aware of a very limited number of plan sponsors directing non-elective 

contributions to guaranteed lifetime-income solutions.
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 14

Question 6: 

What types of 

lifetime-income or 

other arrangements 

designed to provide a 

stream of income after 

retirement are available 

to individuals who 

have already received 

distributions from 

their plans (out-of-plan 

options), such as IRA

products, and how are 

such arrangements being 

structured (fixed, inflation 

adjusted, or other 

variable, immediate or 

deferred, etc.)? Are there 

annuity products under 

which plan accumulations 

can be rolled over to an 

individual retirement 

annuity of the same 

issuer to retain the 

annuity purchase rights 

that were available under 

the plan?

• Numerous types of IRA rollover products provide guaranteed lifetime income, including Guaranteed 

Minimum Withdrawal Benefits (GMWBs), Guaranteed Minimum Income Benefits (GMIBs) and 

immediate annuities. Each allows control and portability for the consumer. Guaranteed living 

benefits have proven to be very popular with annuity purchasers since they deliver a guaranteed 

lifetime-income stream without forcing individuals to abandon control of their assets or limiting the 

ability to bequeath any remaining retirement wealth. Indeed, according to LIMRA statistics, 84% 

of all variable annuities purchased in the fourth quarter of 2009 had a guaranteed living benefit 

included.

• Immediate annuities and deferred annuities offer standard annuitization options that provide 

guaranteed lifetime-income after retirement, either for life or for a fixed period. Benefits can be 

initiated based on the individual’s needs.

• Recently, the marketplace has seen the rollout of mutual funds intended to be used to generate 

retirement income. These products—called managed payout funds—provide distributions for a fixed 

period or at a prescribed percentage. However, they do not guarantee that payments will be made 

“for life” if an individual outlives his or her life expectancy or if market declines occur. Currently, only 

insurance companies can offer products that provide guaranteed lifetime income.

• Also, some currently available IRA products allow participants to transfer their DC in-plan benefit 

should they terminate employment and leave the DC plan. These IRA offerings typically allow 

individuals to transfer any income guarantees and rights, along with market value accrued to-date, to 

the IRA. Fee structures may vary because the costs associated with offering registered products for 

individuals are higher than offering income options through a qualified plan. 

Additionally, it’s important 

• In 2009, $64 billion of advisor-sold variable annuities in the U.S. resulted from qualified rollover 

dollars. The qualified rollovers represented 64% of advisor-sold variable annuity sales for the year.

• 89% of buyers of Prudential’s advisor-sold variable annuities funded with qualified rollover dollars 

elected the optional guaranteed lifetime-withdrawal feature. We believe Prudential’s experience is 

similar to that of other annuity manufacturers in the U.S. advisor-sold market. 

• Individuals who elect optional withdrawal-based guaranteed lifetime-income solutions when they 

buy a variable annuity with their qualified roll-over dollars do indeed use them to provide guaranteed 

lifetime income. In 2008, the latest year for which data is available, 13.5% of those who used taxqualified rollover dollars to purchase Prudential variable annuities began taking withdrawals during 

the first year they owned the annuity.
Page 15

Question 7: 

What product features 

have a significant impact 

on the cost of providing 

lifetime income or other 

arrangements designed 

to provide a stream of 

income after retirement, 

such as features that 

provide participants with 

the option of lifetime 

payments, while retaining 

the flexibility to accelerate 

distributions if needed?

A number of features can impact the cost of providing guaranteed lifetime 

income, many of which are designed to either encourage utilization by 

participants or to enhance the value of the product compared with nonguaranteed withdrawal strategies, such as managed payout funds or 

systematic withdrawals. Generally speaking, features that add flexibility, 

provide higher levels of protection, or deliver guarantees for longer periods 

will increase cost. 

The “cost increase” could be expressed as either a higher explicit fee, or as 

an “implicit” fee in the form of a reduced level of guaranteed payments in 

exchange for the same premium or principal.

Features that result in additional cost

• Opportunity to take non-scheduled or higher payments increases the insurer’s costs associated with 

investing the underlying assets.

• Ability to increase and lock-in higher amounts of guaranteed lifetime income due to positive market 

performance.

• Death benefits that allow individuals to pass on any remaining market value to beneficiaries.

• Opportunity to increase equity exposure through higher allocation to stocks, which increases the potential 

for higher guaranteed lifetime income but further increases the costs to protect against market downturns.

• Flexible liquidation terms upon contract termination at the plan-sponsor level.

• Inflation protection designed as preset increases in the guaranteed income stream, such as 3% 

annually, or as increases tied to the consumer price index. 

Features that deliver longer eriods of guarantee

• “Joint & Survivor” annuity payments that last for the longer of two lives (also known as “spousal benefits”). 

• Guarantees for whichever is longer—a person’s life or a fixed period (or a “period certain”)—rather 

than just for life.

• Optional riders that will double the guaranteed lifetime income if certain criteria are met, such as 

confinement to a qualified nursing home.

• Guaranteed lifetime income based on a pre-determined basis of growth, such as the highest daily 

value ever attained in the account.

• Automatic increases that boost lifetime-income payments by a specified compound rate of interest 

from the date of the highest annual account value.
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 16

Question 8: 

What are the advantages 

and disadvantages 

for participants of 

selecting lifetime income 

payments through a 

plan (in-plan option) 

as opposed to outside 

a plan (e.g., after a 

distribution or rollover)?

Prudential’s 2010 Workplace Report on Retirement Planning found that access 

to an in-plan product that could convert assets into a guaranteed lifetime 

stream of retirement income was viewed as a “positive” plan feature by 71% 

of younger workers and 64% of older workers.9 

Participants are inclined to view in-plan guaranteed lifetime-income solutions 

as desirable, if for no other reason than convenience. But the advantages 

extend beyond perceptions and “feelings.” They include: 

• Improved economies of scale, through the purchasing power of the plan, resulting in lower costs and 

preferred risk-pooling on guaranteed lifetime-income solutions.

• Enhanced protection of principal without losing upside potential during pre-retirement years, when 

participants have less time to recover from investment losses due to market volatility. 

• The ability to “test drive” products, since they rarely, if ever, include surrender penalties in the 

accumulation stage. 

• The convenience of automatic migration at a trigger point from a pure accumulation product to an 

investment that provides guaranteed income protection. With in-plan products, participants can 

purchase guaranteed lifetime-income solutions over time, dollar-cost averaging their investments 

while taking advantage of different interest rates. 

• Access to options such as in-plan Guaranteed Minimum Withdrawal Benefits (GMWB) products, 

which provide participants with guaranteed lifetime income without having to give up control of their 

retirement assets.

• Less potential for leakage due to plan restrictions on distributions.

• Plan fiduciaries perform due diligence on the products being offered.

• For those plan participants who do not have access to a financial advisor, these products enable 

participants to have more confidence in guaranteed lifetime-income solutions since it is believed that 

employers will have scrutinized the products being made available to plan participants. This should 

result in much higher utilization of guaranteed lifetime-income solutions than would otherwise be the 

case. For these participants, this is likely the best way to access guaranteed lifetime-income solutions. 

Advantage of out-of-pla

• The broker/dealer performs product due diligence prior to approving the annuity product to be sold by 

their registered financial advisors. In addition, before an application to purchase the annuity can be 

submitted to the insurance provider, the broker/dealer’s compliance department performs a suitability 

assessment on behalf of individual investors. Financial advisors perform similar due diligence on 

behalf of their clients.

9 Prudential’s “2010 Workplace Report on 

Retirement Planning - The New Economic 

Reality and the Workplace Retirement 

Plan,” 2010
Page 17

• More investment and benefit-level options for individuals to make cost/benefit decisions.

• Today’s retail variable annuity withdrawal-based guaranteed lifetime-income solutions lock in 

protected values for billions of dollars of rollovers from prior employers and allow for guarantees to 

be cancelled at any time if no longer needed or required by the investor. 

• The ability to “test drive” products, since they may not include surrender penalties in the 

accumulation stage. In fact, the guaranteed lifetime-income feature of Guaranteed Minimum 

Withdrawal Benefit (GMWB) options is generally fully cancellable, while the variable annuity itself 

can stay in force even if the owner no longer needs the lifetime-income feature.

Also

• “At retirement” annuitization of DC plan assets—either within the plan or through a lump-sum IRA 

rollover—has existed for at least three decades, yet little annuitization actually occurs. As noted 

earlier, the number of retiring 401(k) participants choosing an annuity when offered has dropped 

from 6% (2005) to 3% (2007) to 1% (2009). Behavioral finance theory tells us that we must learn 

from this and do a better job of educating participants about the benefits of investing in guaranteed 

lifetime-income solutions. Education alone, however, is not enough. Defaults into flexible guaranteed 

lifetime-income solutions are, perhaps, the best path to more secure retirements, as long as the 

defaults are coupled with clear communication to participants about how that product works and 

what benefit it provides. 

The disadvantages for participants in selecting “in-plan” guaranteed lifetime 

income solutions may include:

• Lack of access to a financial advisor, who can help select the optimal product either within a DC plan 

or in the retail marketplace. 

• Individuals may want to diversify their investments and/or guarantees in ways not available through 

in-plan options.

• Currently these products have limited portability and cannot easily be consolidated. Some individuals 

may end up with a number of small lifetime-income products due to job mobility, and multiple 

products from numerous employers may become confusing and difficult to track. Unlike mutual funds 

and similar investments, these products are difficult to consolidate due to their unique structures.

• The prospect that some people may die prior to retirement and will pay fees for a benefit they will not 

receive. Also, individuals with withdrawal-based guarantees may die prior to depleting their account, 

due to income-withdrawal schedules and investment performance results. 

• Lack of appreciation of the product and its benefits since plan participants are not actively engaged in 

purchasing decisions.
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 18

Question 9: 

What are the advantages 

and disadvantages from 

the standpoint of the plan 

sponsor of providing an 

in-plan option for lifetime 

income as opposed to 

leaving to participants 

the task of securing a 

lifetime income vehicle 

after receiving a plan 

distribution?

RECOMMENDATION: To address disadvantages and plan sponsor c

we recommend that the Agencies should...

• Simplify and extend the standards for the selection of guaranteed lifetimeincome solution providers; 

• Confirm the applicability of QDIA protection to investment products that 

include guaranteed lifetime-income solutions;

• Authorize employers to “re-enroll” participants at any point into QDIAs 

(including those that provide guaranteed lifetime-income solutions); 

• Amend Interpretive Bulletin 96-1 to expand its scope to the decumulation 

phase of retirement planning; 

• Support industry efforts to standardize data needs to facilitate product portability; 

• Provide education for plan sponsors and participants about the need for 

guaranteed lifetime income in order to achieve retirement security; and

• Include innovative and market-tested products such as Guaranteed Minimum 

Withdrawal Benefits in all regulatory or other initiatives designed to 

encourage plan sponsors to offer and workers to use guaranteed lifetimeincome solutions.

Employers seeking to attract and retain top talent must offer attractive, compelling, 

value-added benefits programs. A Prudential study of employee benefits found that 

84% of American workers feel that a company’s benefit package is highly important 

in their decision whether or not to change employers. Among women over the age 

of 30, greater importance is placed on employee benefits when deciding to accept 

a job offer or remain with their current employer compared to men. Additionally, 

the study highlighted that 43% of plan sponsors strongly agree that offering a very 

competitive benefits program can be a significant advantage and can assist an 

employer’s recruiting and retention effort.10

Moreover, Prudential’s 2010 Workplace Report on Retirement Planning found 

that access to an in-plan product that could convert assets into a guaranteed 

stream of retirement income was viewed as a “positive” plan feature by 71% 

of younger workers and 64% of older workers.

With that as background, the ability for participants to receive guaranteed lifetimeincome solutions within a plan offers several advantages for plan sponsors.

• Sponsors can set themselves apart as “employers of choice” by offering a competitive retirementbenefits program that meets the expectations of top talent.

• By offering guaranteed lifetime income in a DC plan, those employers who previously maintained a 

DB plan can continue to provide participants with DB-like retirement security.

10 Prudential Financial Study of Employee 

Benefits: 2007 and Beyond
Page 19

• Guaranteed lifetime-income solutions help ensure sponsor contributions are efficiently converted to 

retirement income, helping create better “retirement outcomes” and a workforce that is more likely to 

be able to retire when desired, instead of “retiring on the job.”

— Remember, the workplace is well-suited to participant education about guaranteed lifetime-income 

solutions, as it allows for education on a larger scale, at a lower cost, in a more convenient venue 

(whether through live meetings, video conferencing or web-based presentations) than could typically be 

achieved by participants on their own.

• Also, in-plan purchases of guaranteed lifetime-income solutions allow participants to “dollar cost 

average” their contribution, which makes their purchases less dependent on the vagaries of the 

interest-rate environment or the performance of the equity markets at any particular time. 

• Similarly, offering guaranteed lifetime-income solutions within a plan should create greater 

opportunities for more favorable retirement outcomes.

• The volume of guaranteed lifetime-income solution purchases within a plan, along with plan sponsor 

oversight and institutional pricing, should enhance plans’ bargaining power as “purchasers” of 

lifetime-income products, thereby reducing overall costs of in-plan lifetime payouts compared with 

payout options available outside a plan.

At the same time, there are legitimate plan sponsor concerns about offering inplan guaranteed lifetime-income solutions, which clearly need to be addressed 

as they create “disadvantages” when compared with out-of-plan offerings.

• Fiduciary Liability—One significant concern is the fiduciary liability associated with making

these options available, monitoring them and explaining them to participants. Allowing participants 

to choose payout options on their own—instead of making guaranteed lifetime-income solutions 

available as plan options—may be viewed by plan sponsors as a less risky approach.

• Selection of Providers—Relief in the form of streamlining and simplifying the safe harbo

standards for selecting and monitoring providers and educating participants about guaranteed 

lifetime-income solutions would be extremely beneficial, as discussed more fully in the response to 

Question 31. 

• Re-enrollment of Participants—Another significant concern among plan sponsors relates

to the applicability of the QDIA regulations and other aspects of ERISA section 404(c) to situations 

where a plan sponsor determines that it is appropriate to “refresh” participant elections, otherwise 

known as “re-enrollment” of participants. We recommend that the Department of Labor support 

the ability of plan sponsors to re-enroll participants in a variety of circumstances by clarifying the 

situations in which the plan sponsor can rely on QDIA protection, as discussed more fully in our 

response to Question 35.
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 20

Portability and Preservation of Guarantees—Plan sponsors may also 

concerned about the administrative, logistical and fiduciary oversight 

implications of preserving the guarantees associated with purchasing 

guaranteed lifetime-income solutions—specifically in cases when the sponsor is 

required or financially compelled to maintain the purchased guaranteed lifetimeincome solution even if the choice is made to replace the recordkeeper and/or 

investment provider or when a participant terminates employment. We urge the 

Agencies to support industry efforts to standardize data needs, service models 

and other components of the administration of guaranteed lifetime-income 

solutions to facilitate portability of these products from one recordkeeper to 

another ... or, at the participant level, from an in-plan option to an out-of-plan 

option. 
Page 21

Question 10: 

How commonly do plan

sponsors offer participants 

the explicit choice of using 

a portion of their account 

balances to purchase a 

lifetime annuity, while 

leaving the rest in the plan 

or taking it as a lump sum 

distribution or a series of 

ad hoc distributions? Why 

do some plan sponsors 

make this partial annuity 

option available while 

others do not? Would 

expanded offering of such 

partial annuity options—

or particular ways of 

presenting or framing such 

choices to participants—be 

desirable and would this 

likely make a difference in 

whether participants select a 

lifetime annuity option?

RECOMMENDATION: The Agencies

• Inform plan sponsors that the use of guaranteed lifetime-income solutions is 

not an “all-or-nothing” decision; and

• Educate participants that they can use less than their entire account balance 

to purchase guaranteed lifetime-income solutions.

• Based on our experience, we do not believe that plan sponsors are consistently limiting participant 

choice, when available, to an “all-or-nothing” selection of annuitizing DC plan balances. 

• Prudential strongly believes that the more flexibility offered to plans and plan participants, the better. 

We expect that more flexibility, such as encouraging partial annuitization, will result in higher rates of 

plan adoption and participant usage.

• For guaranteed lifetime-income solutions to work, each plan must allow for partial investments in 

these products, and participants should be able to freely move in or out of the products, just as they 

would with other investment options, during the accumulation stage of investing.

• Education about all aspects of guaranteed lifetime-income solutions is critical, but taking specific 

steps to “frame” information about contribution amounts is especially important. Participants need 

to understand what contribution levels are required to generate a flow of guaranteed lifetime-income 

that covers projected monthly “essential” expenses.
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 22

Question 11: 

Various “behavioral”

strategies for encouraging 

greater use of lifetime income 

have been implemented or 

suggested based on evidence 

or assumptions concerning 

common participant behavior 

patterns and motivations. 

These strategies have included

the use of default or automatic 

arrangements (similar to 

automatic enrollment in 401(k) 

plans) and a focus on other 

ways in which choices are 

structured or presented to 

participants, including efforts to 

mitigate “all or nothing” choices 

by offering lifetime income 

on a partial, gradual, or trial 

basis and exploring different 

ways to explain its advantages 

and disadvantages. To what

extent are these or other 

behavioral strategies being 

used or viewed as promising 

means of encouraging more 

lifetime income? Can or should 

the 401(k) rules, other plan 

qualification rules, or ERI

rules be modified, or their 

application clarified, to facilitate 

the use of behavioral strategies 

in this context?

RECOMMENDATION: In order to facilitate the use of behavioral str

the Agencies should...

• Confirm the applicability of QDIA protection to investment products that 

include guaranteed lifetime-income solutions;

• Include innovative and market-tested products such as Guaranteed Minimum 

Withdrawal Benefits in all regulatory or other initiatives designed to 

encourage plan sponsors to offer and workers to use guaranteed lifetimeincome solutions; and

• Study further the introduction of “automatic trial” strategies.

The best way to increase utilization of guaranteed lifetime-income solutions by 

participants is for the employer to select a product that participants like as the 

plan’s default distribution option.

This is demonstrated by two examples of “behavioral” patterns related to plan 

participants’ decisions:

• First, the Pension Protection Act of 2006 (PPA) allows DC plan sponsors to automatically enroll 

employees in plans ... and to default their investments into Qualified Default Investment Alternatives 

(QDIAs), such as target-date funds or managed accounts. The PPA has led to a significant increase 

in enrollment in plans that take advantage of auto-enrollment and utilization by participants of 

default investment options. According to the Profit Sharing Council of America, 40% of plans are 

using automatic enrollment.11 Hewitt Associates, a leading DC plan provider, reports that plans 

that implement auto-enrollment increase participation of new hires from an average of 78% to 

approximately 90%.12 In addition, 67% of new hires in auto-enrollment plans allocate their entire 

contribution to the default investment, compared with 21% of new hires who are not in autoenrollment plans.13

• Second, under cash-balance plans, which are required by law to provide a lifetime annuity as the 

default distribution option, the vast majority of individuals choose to opt out of the annuity and take 

a lump-sum distribution.14 This puzzling behavior is exemplified in a study of the military, which 

showed that when individuals are asked to choose between a lump-sum payment or a future stream 

of guaranteed lifetime income, they tend to undervalue the guaranteed lifetime-income solution 

because they instinctively apply an implicit discount rate to the annuity that is often much higher than 

prevailing interest rates in the financial markets.15 

11 Profit Sharing Council of America “52nd Annual Survey of Profit Sharing and 401K plans,” September 2009

12 Hewitt Associates, “Trends & Experience in 401(k) Plans,” 2007, and “Automatic Enrollment Boosts Participation and Retirement Savings,” 2007.

13 Vanguard Center for Retirement Research, “Measuring the Effectiveness of Automatic Enrollment,” December 2007.

14 J. Mark Iwry and John A. Turner, “Automatic Annuitization: New Behavioral Strategies for Expanding Lifetime Income in 401(k)s,” July 2009. 

15 John T. Warner and Saul Pleeter, “The Personal Discount Rate: Evidence from Military Downsizing Programs,” 2001.
Page 23

Participants’ rejection of the default distribution option (an annuity) in cash 

balance plans clearly results from the fact that participants simply don’t like 

the features or understand the value of these products. It also demonstrates 

that merely making guaranteed lifetime income a plan’s default distribution 

option alone will not meaningfully increase utilization. On the accumulation 

side, target-date funds have been the main beneficiary of PPA’s default 

investment authorization, in part because the value proposition of these 

products, a ready-made diversified portfolio with automatic re-balancing, 

is easy for most DC plan participants to understand and appreciate. In plans 

that have elected to use QDIAs, more than 80% are using target-date funds 

as the QDIA.16

This demonstrates that behavioral strategies, such as auto-enrollment, can 

work. With that in mind, we believe it is critical for the Agencies to facilitate 

plan sponsors’ access to a wide range of lifetime-income solutions so they 

can select the option or options that best fit the needs of their participants. 

Specifically, in order to facilitate the use of behavioral strategies in the 

context of guaranteed lifetime-income solutions, the Agencies should:

• Clarify the types of guaranteed lifetime-income solutions that could qualify for QDIA fiduciary 

protections. For example, it should be stipulated that target-date funds combined with a guaranteed 

lifetime-income solution, such as a Guaranteed Minimum Withdrawal Benefits (GMWB), qualify 

for QDIA fiduciary protections and are not subject to a higher standard than other QDIAs. This is 

important because GMWBs are an extremely attractive guaranteed lifetime-income solutions for 

individuals seeking to retain control over and access to their funds.

• Encourage plan sponsors to provide guaranteed lifetime-income solutions that offer participants 

greater flexibility and control, including the option to “opt out.”

• Explore ways to enable further experimentation with behavioral strategies by retirement plan 

sponsors. One promising proposal involves the potential use of an “automatic trial” strategy. 

Individuals would be automatically defaulted into a guaranteed lifetime-income solution at 

retirement, with the option of reversing this decision within a specified period of time.

16 Vanguard Strategic Retirement Consulting, “Improving 

Plan Diversification Through Re-enrollment in a 

QDIA,” September 2008.
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 24

Question 12: 

How should

participants determine 

what portion (if any) of 

their account balance 

to annuitize? Should

that portion be based 

on basic or necessary 

expenses 

in retirement?

• A good rule of thumb is to generate a stream of guaranteed lifetime-income, including Social 

Security, that covers all essential monthly living expenses, such as housing, medical care, food, 

insurance and other essential items. With this approach, participants are assured of a minimum 

standard of living that will allow them to remain solvent, ensure they will not outlive their assets, and 

protect them from poor investment performance. 

• It’s also important to keep in mind that a complete answer here often depends on the type of 

guaranteed lifetime-income solution being considered. Traditionally, “annuitization” has forced 

participants to give up access to the “market value” of their accounts, precluding their ability to tap 

retirement funds to cover unforeseen costs such as medical expenses.

• Newer products, such as Guaranteed Minimum Withdrawal Benefits (GMWBs), do not require 

participants to sacrifice access and control, and include the right to pass on any remaining market 

value at the time of their death to their beneficiaries.
Page 25

Question 13: 

Should some form

of lifetime-income 

distribution option be 

required for defined 

contribution plans (in 

addition to money 

purchase pension 

plans)? If so, should

that option be the 

default distribution 

option, and should 

it apply to the entire 

account balance? To

what extent would 

such a requirement 

encourage or discourage 

plan sponsorship?

RECOMMENDATION: The Agencies

• Support a change in the law that would require DC plans to offer guaranteed 

lifetime-income solutions as a distribution option. Plan sponsors should 

be encouraged to make guaranteed lifetime-income solutions the default 

distribution option provided the participant has the ability to opt out.

We urge the Agencies to support legislation that would repeal the rule 

authorizing some plans, including 401(K)s, to not offer guaranteed lifetimeincome solutions as a distribution option. We believe this would be the most 

effective way to increase access and the most-promising way to enhance 

participant acceptance and utilization of guaranteed lifetime-income solutions, 

especially if an investment fund that includes a guaranteed lifetime-income 

solution became the plan’s default or normal form of distribution for all or part 

of participant account balances.

The emergence of DC plans as the nation’s primary retirement savings vehicle 

has left many, if not most, American workers woefully unprepared to generate 

the levels of guaranteed lifetime income once afforded by traditional DB plans. 

In order to help participants achieve a DB-like outcome from DC plan savings, 

efforts should be focused on providing participants access to guaranteed 

lifetime-income solutions.

We believe there are strong arguments for making a guaranteed lifetimeincome solution the plan’s default distribution option. At this point, the 

decision to make it the plan’s default should be reserved for plan sponsors 

who are in the best position to make determinations about what may be in the 

best interest of their participants. The required offering of guaranteed lifetimeincome solutions will create more opportunities for plan sponsors to evaluate 

and make these determinations.

Plan sponsor decision-making about the role of guaranteed lifetime-income 

solutions requires regulatory clarity on important fiduciary issues and 

additional protections and safe harbors as discussed more fully below (See 

Questions 30 – 35).

It is Prudential’s experience that adding a requirement to offer guaranteed 

lifetime-income solutions would not discourage plan sponsorship.
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 26

Question 14: 

What are the impediments 

to plan sponsors including 

lifetime income options in 

their plans, e.g., 401(k) or 

other qualification rules, other 

federal or state laws, cost, 

potential liability, concern 

about counterparty risk, 

complexity of products, lack of 

participant demand?

Hewitt Associates just released a survey of 160 plan sponsors that included 

the question: How likely are you (the sponsor) to add an in-plan retirementincome solution in 2010?

• 20% answered that they are “very likely” or “somewhat likely” to add this type of option. But among 

the sponsors that said they were “unlikely” to offer, guaranteed lifetime-income solutions:

— 48% were simply not interested at this time, and 45% said it was too early in the product-development 

cycle, and they’d prefer to wait before committing;

— 28% had fiduciary concerns;

— 24% believed employee usage would not be adequate to justify the addition;

— 23% said participant communications would be a hurdle;

— 17% said that they would have difficulty selecting the appropriate insurance provider;

— 14% believed that the cost to implement and administer would be too high;

— 10% had apprehensions about operational difficulties; and

— 7% viewed the DC plan as an accumulation vehicle, not a retirement-income vehicle.

In addition to the above, Prudential has also found that the following also play 

a role in impeding sponsor adoption of in-plan guaranteed lifetime-income 

solutions:

• Concerns about the long-term financial stability of the issuer;

• A lack of clarity about what state guaranty associations cover, which is not helped by restrictions on 

insurers’ ability to provide information on the subject;

• Potential modifications to plan documents; 

• Perceived and actual administrative burdens associated with Qualified Joint & Survivor Annuity 

(QJSA) rules;

• A lack of understanding about newer versions of traditional income-annuity products; and

• Concern that guarantees will not be portable if sponsors switch recordkeepers or if participants change jobs.

It’s important to note that employers had similar concerns about automatic 

Source: Hewitt, “Hot Topics in Retirement 2010” features and default investments prior to the Pension Protection Act of 2006. 
Page 27

As a result of clarifications and confirmations under the Act, many plan 

sponsors are now comfortable offering these features. Prudential believes 

the Department of Labor could leverage this experience for the distribution 

stage by issuing clarifications and guidance to plan sponsors about using a 

guaranteed lifetime-income solution as a plan’s default distribution option.

Prudential also believes that the Department of Labor should work with the 

industry to explore other mechanisms that could serve as a supplemental 

backstop to the current state guaranty association funds for guaranteed lifetimeincome solutions in DC plans in order to address single-issuer risk concerns.
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 28

Question 15: 

What are the advantages and 

disadvantages of approaches 

that combine annuities with 

other products (reverse 

mortgages, long term care 

insurance), and how prevalent 

are these combined products 

in the marketplace?

Theoretically, combined product solutions that address the need for 

guaranteed lifetime income and provide protection against other retirement 

risks should form an appealing, compelling and comprehensive “packaged” 

solution for financial and retirement security.

But in the retail variable annuity marketplace, where product innovation on 

guaranteed lifetime-income solutions has been most robust in the U.S., the 

theoretical promise of products that bundle guaranteed lifetime income with 

some other protection has not generally translated into practical appeal. 

To date, the retail-annuity experience suggests that Americans believe the 

added complexity of a combination product outweighs the potential benefits of 

a “one-stop” product that addresses multiple retirement-related risks. 

For example, in today’s market, the purchase of a guaranteed lifetime-income 

solution generally involves no medical or financial underwriting. Coupling a 

lifetime-income guarantee with long-term care coverage would likely introduce 

the added complexity of medical underwriting into the enrollment process. 

Prudential does offer a combination product rider that provides acceleration 

of income when long-term care type events occur. But the election rate of this 

benefit has been less than 10% to date.

Similarly, coupling guaranteed lifetime-income solutions with, say, a reverse 

mortgage introduces financial underwriting considerations. Underwriting of 

any type introduces a new series of intricate burdens and enhances the risk 

that the applicant might not be accepted for the “other protection.”

In 2009, 89% of buyers of Prudential variable annuity products funded with 

qualified rollover dollars elected the optional guaranteed lifetime-withdrawal 

feature. This data suggests that, when consumers are educated about 

withdrawal-based guaranteed lifetime-income solutions, very high election 

rates may be expected with a product that effectively addresses one critical 

issue: the demand for a flexible form of guaranteed lifetime income that does 

not require traditional annuitization.

Based on our retail product experience, Prudential believes that guaranteed 

lifetime-income solutions have the greatest appeal to participants.
Page 29

Question 16: 

Are there differences across 

demographic groups (for 

example men vs. women) 

that should be considered 

and reflected in any 

retirement-security program? 

Can adjustments for any 

differences be made within 

existing statutory authority?

In general, retirement-related risks are more acute for women.

• According to Prudential research, fear of becoming a burden on family members is the greatest 

retirement-income concern of older Americans. While longevity continues to increase for both sexes, 

any visitor to an assisted-living facility quickly observes that women continue to live longer, on 

average, than men. As a result, guaranteed lifetime-income solutions are important for everyone, but 

they are especially vital for women.

• On average, women work fewer years in the workplace compared with men and thus have reduced 

opportunities to save for retirement through an employer-sponsored plan. Statistics show women 

receive only 57% of the average annual retirement income of men.17 Additionally only 20% of women 

receive a pension income versus over 50% of men.18

A number of socio-economic considerations also need to be factored into a 

retirement-security program.

• Guaranteed lifetime-income solutions that complement the guaranteed lifetime income provided by 

Social Security are especially important for retirees with limited or average retirement savings. The 

reason, of course, is that individuals in this group run a real risk that basic living expenses could 

deplete savings at a point when a return to the workforce is impossible due to age or illness. 

• For those with average or slightly above average retirement savings, several factors are key to 

successful income management. These factors include asset allocation, withdrawal strategies, 

inflation protection, and management of mortality and morbidity risk. 

• For more affluent Americans, guaranteed lifetime-income solutions can provide an important 

financial planning tool at retirement. Putting some of their retirement savings into a guaranteed 

lifetime-income solution is clearly a more efficient strategy than “hoarding” to cover income 

needs “just in case” they live to be very old. And with “longevity risk” essentially covered by the 

guaranteed lifetime-income solution, affluent retirees can use their money for other purposes, 

such as covering potential long-term-care expenses or helping grandchildren with educational 

expenses.

Here are some additional statistics from LIMRA’s Retirement Income Reference 

Book that may be helpful.

• Guaranteed lifetime income & Age: The younger the retiree, the more interested he or she is in 

guaranteed lifetime-income solutions.

• Net Worth: Non-retired individuals aged 55-74 have a great deal of wealth, accounting for 26% of 

our nation’s net worth, or $16.8 trillion. This group is approaching retirement, increasing the market 

for lifetime-income and asset-rollover products.

17 “What Women Need to Know About 

Retirement,” Cindy Hounsell, Editor, Heinz 

Family Philanthropies and The Women’s 

Institute for a Secure Retirement, 2007.

18 “Women & Social Security” American 

Association of University of Women, 

June 2004.
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 30

• Retirement Assets: American workers currently have approximately $250 billion in retirement 

savings. Individuals representing nearly 46% of those assets have expressed an interest in 

guaranteed lifetime-income solutions. 

• Income: Higher-income retirees have the most diverse income portfolios and are most likely to need 

retirement-income planning since they will rely on their own resources for a significant share of their 

retirement income. By contrast, lower-income retirees rely primarily on Social Security for retirement and 

are least likely to have other significant resources to supplement their retirement income. Retirees in the 

middle need strategies to best utilize assets to assure a successful retirement-income stream.
Page 31

Question 17: 

What information 

(e.g., fees, risks, etc.) do 

plan participants need to 

make informed decisions 

regarding whether to 

select lifetime income 

or other arrangements 

designed to provide a 

stream of income after 

retirement? When and 

how (i.e., in what form) 

should it be provided? 

What information 

currently is provided 

to participants, who 

typically provides it, 

and when and how is it 

provided to them?

RECOMMENDATION: The Agencies

• Encourage plan sponsors to make guaranteed lifetime income solutions the 

plan’s default distribution option. Education and communication alone will 

not effectively change participant behavior; and 

• Support the passage of the Lifetime Income Disclosure Act and similar 

measures.

Education and communication about all aspects—and types—of guaranteed 

lifetime-income solutions is critical to the growth and acceptance of guaranteed 

lifetime income as a fundamental component of a comprehensive, well-considered 

retirement plan.

Understanding the advantages and disadvantages of guaranteed lifetimeincome solutions, in the context of understanding one’s individual retirementincome needs, will enable individuals to effectively assess the guaranteed 

lifetime-income solutions, in-plan or out-of-plan, that will fit them best.

While we recognize the importance of education and communication to assist 

participants in making informed decisions about the selection of guaranteed 

lifetime income, we strongly believe the most effective way, as discussed 

below, to increase utilization is for plan sponsors to make guaranteed lifetimeincome solutions the default distribution option.

What information should 

The range of information about guaranteed lifetime-income solutions should 

include—but should not be limited to—the following, and should be tailored to 

personal circumstances and preferences:

• Expected payout, death benefits, fees and charges, investment options and associated risks, liquidity 

and tax implications.

• Reasonable levels of information to help participants understand the product and its advantages and 

disadvantages. However, voluminous levels of material should be avoided since it may ultimately 

deter or confuse plan participants.

• Participant educational programs that follow a logical and understandable path, first introducing 

the need to save for retirement, then reviewing the importance of guaranteed lifetime-income as 

a key component of retirement savings, and then focusing on product offerings available to meet 

retirement-income needs. The goal is to build understanding of the “retirement challenge” and to 

demonstrate the need for a solution.
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 32

When should it beg

• Given the importance of this issue, educational programs on both the accumulation and decumulation 

stages of retirement planning—including the availability of guaranteed lifetime-income solutions—

should start as soon as an individual begins his or her path toward saving for retirement.

• Establishing sound and balanced retirement-planning habits early will encourage participants to 

devote proper attention on the decumulation phase throughout the retirement-planning and saving 

process.

Early educational efforts will supply participants with the tools necessary to 

develop a successful and comprehensive retirement plan for the future. The 

educational effort should include special considerations and tailored efforts for 

plan participants nearing retirement. 

How should informatio

Information and education should be made available through a variety of 

communication venues, so that it’s accessible in a manner that’s comfortable 

and appealing to a wide range of individuals, each with different preferences.

• Some people prefer paper ... others want information delivered electronically through email, CDs19, 

DVDs or the internet ... still others learn best through verbal communications and would welcome 

in-person sessions or face-to-face meetings. All approaches should be utilized.

• Moreover, regardless of the media used, the communications must be offered in a clear and 

concise manner. The flexible and comprehensible nature of such communications will help improve 

participant knowledge about the products and their advantages and disadvantages.

• A key component is the idea of lifetime learning. To build acceptance and understanding, lifetime 

income should be discussed throughout an individual’s career, not just as retirement nears. 

Current app

Current approaches to retirement education—which are usually offered on 

an ongoing basis—focus primarily on the accumulation stage of retirement 

planning and include information about participating in the plan, investment 

options, the advantages of saving, and the importance of diversification.

• Arguably and understandably, plan sponsors have a greater incentive to devote their attention and 

resources to encouraging plan participation, as opposed to educating participants about 

decumulation options, primarily because they need to satisfy plan qualification rules. 19 “Prudential Retirement Red Zone, 

https://secure.prudential.com/rrz

(April 30, 2010)
Page 33

• Unfortunately, this means there’s insufficient education about decumulation options and guaranteed 

lifetime-income solutions. As a result, many participants lack even a basic understanding about 

guaranteed lifetime income.

• When provided, information about guaranteed lifetime-income solutions is typically furnished by the 

plan and is usually targeted to older participants. It is not part of the core educational process.

A better

Prudential Retirement offers a guaranteed lifetime-income solution that has 

become a core component of our business. This product, called Prudential 

IncomeFlex® TargetSM, offers the benefits of guaranteed lifetime-income 

with the ease of simplified investing. For additional information refer to 

supplemental attachment “Prudential IncomeFlex Target.”

• Participants are introduced to this product not as a draw-down tool or a later-in-life tool, such as a 

traditional annuity, but rather as an understandable investment product—a target-date fund—that 

can simplify the investing process during the accumulation phase.

• Education for this product begins, naturally, during the investment allocation process and continues 

throughout the participant’s relationship with Prudential. Information is provided to participants 

on their quarterly statements and online ... and supporting tools help participants track their 

progress toward achieving a secure retirement. This facility is in harmony with the Lifetime Income 

Disclosure Act (S. 2832) proposed by Senator Bingaman. Similar provisions were included in the 

Small Businesses Add Value for Employees Act of 2009 (SAVE Act H.R. 4742). Prudential believes 

that these measures would result in increased retirement savings and change participant’s perception 

of defined contribution plans from capital accumulation arrangements to plans designed to generate 

guaranteed lifetime-income. We urge the Agencies to support this proposed legislation.

Despite best intentions and efforts, Prudential’s experience conclusively 

demonstrates that education and information about the importance of 

guaranteed lifetime-income has proven inadequate to increase the utilization 

of guaranteed lifetime-income solutions. The most effective way to combat 

behavioral inertia is for the Agencies to encourage plan sponsors to design 

their plans to make guaranteed lifetime income the default investment and 

distribution option. The Agencies should be mindful of innovative products 

and solutions in whatever actions they take to advance this objective. 
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 34

Question 18: 

Is there a need for guidance,

regulatory or otherwise, 

regarding the extent to which 

plan assets can be used to 

pay for providing information 

to help participants make 

informed decisions regarding 

whether to select lifetime 

income or other arrangements 

designed to provide a stream 

of income after retirement, 

either via an in-plan or 

out-of plan option?

RECOMMENDATION: The Department of Lab

• Issue guidance regarding the use of plan assets to pay for education and 

advice about in- and out-of-plan guaranteed lifetime-income solutions.

We recommend that the Department of Labor issue clear guidance regarding 

the extent to which plan assets can be used to pay for providing educational 

support, given the importance of providing clear, meaningful and actionable 

information about investment products that offer guarantees or other forms of 

lifetime income.

Furthermore, we recommend that the Department of Labor clarify regulations 

governing the use of plan assets to provide information about out-of-plan 

options, if a participant reasonably needs such information in order to make 

an informed decision about investing in an out-of-plan product that can deliver 

guaranteed lifetime income in retirement.

Participants need information in order to make informed decisions about 

investing their plan account balances—in whole or in part—in products 

that offer guaranteed lifetime income, irrespective of whether that income 

ultimately may be delivered in the form of plan distributions or distributions 

from out-of-plan options.

As noted above, education about in-plan options is vital, and a participant 

employed by one plan sponsor until retirement may choose to receive 

guaranteed lifetime income directly from the plan. At the same time, 

individual circumstances—such as changes in employment or even a change 

in plan service providers—may require other individuals to receive guaranteed 

lifetime income from a rollover IRA designed by the product provider for the 

purpose of preserving guarantees.

Making appropriate decisions about investing plan assets in out-of-plan 

options requires the same level of education and information as in-plan 

options, especially if there is a change in employment status or if the plan 

sponsor selects a new plan service provider. It is reasonable to deliver this 

information both while the individual is participating in the plan and, in order 

to avoid frustration about original intent, at the point of distribution. 

Even though the Department of Labor has issued guidance that we believe 

plan sponsors can rely on in using plan assets to pay for the expense of 

providing information about an in-plan option20, it would be helpful for the 

Department of Labor to specifically articulate this position. 

20 Advisory Opinion 2001-01A (Fact Pattern 

Five, confirming that expenses of providing 

plan-related information beyond legallyrequired disclosure is a permissible 

plan expense but stating that expenses 

of providing certain non-plan is not 

permissible)
Page 35

Question 19: 

What specific legal 

concerns do plan 

sponsors have about 

educating participants 

as to the advantages 

and disadvantages of 

lifetime income or other 

arrangements designed 

to provide a stream of 

income after retirement? 

What actions, regulatory 

or otherwise, could the 

Agencies take to address 

such concerns?

RECOMMENDATION: The Department of Lab

• Clarify and expand Interpretative Bulletin 96-1 to address education regarding 

distributions options.

Plan sponsors are concerned that providing any information or education 

about the advantages or disadvantages of guaranteed lifetime-income 

solutions will be deemed as “providing investment advice.”

This potentially exposes them to additional fiduciary risk, including “breach 

of duty,” in the event of a future decline in the financial strength of a product 

provider or a change in participant circumstances that subsequently makes 

the sponsor’s initial decision to offer a guaranteed lifetime-income solution 

appear, in hindsight, as imprudent.

This situation can be addressed by a clarification or expansion of

Interpretative Bulletin 96-1 to cover the provision of education regarding 

distributions. As it stands now, it is widely believed throughout the retirement 

industry that the Bulletin applies solely to the accumulation stage. 

Such a clarification would increase the “comfort level” of plan sponsors about 

providing helpful information and education to participants about guaranteed 

lifetime-income solutions. It would also provide direction about what 

sponsors are permitted to offer ... reduce concerns about potential liability or 

exposure for breach of fiduciary responsibility ... and it would greatly increase 

the likelihood that participants will have access to the important planning 

material and education they need to make informed decisions.
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 36

Question 20: 

To what extent should

plans be encouraged 

to provide or promote 

education about 

the advantages and 

disadvantages of lifetime 

annuities or similar 

lifetime income products, 

and what guidance 

would be helpful to 

accomplish this?

RECOMMENDATION: The Department of Lab

• Clarify and expand Interpretative Bulletin 96-1 to address education regarding 

distribution options.

Workplace retirement plans provide an extremely valuable platform for 

educating American workers about guaranteed lifetime-income solutions, and 

plan sponsors should be encouraged to do just that, either directly or through 

their plan-service providers.

One impediment is the uncertainty about the application of existing regulatory 

guidance about investment education regarding guaranteed lifetime-income 

solutions. In Interpretative Bulletin 96-1 (“IB 96-1”), the Department of Labor 

offers extremely helpful “safe harbor” examples of categories of investmentrelated information and materials that may be furnished to participants 

without the provision of such information and materials being considered the 

rendering of investment advice for purposes of the definition of “fiduciary” 

under ERISA section 3(21)(A)(ii).

It applies irrespective of who supplies the information—the plan sponsor, 

another fiduciary or a service provider—or the form the information takes 

(orally or in writing).

One category is for “plan information,” including “information and materials 

... regarding the operation of the plan” and information that’s required under 

the ERISA 404(c) safe harbor relating to plan investment alternatives. Another 

category is for general financial and investment information. 

The safe harbor examples contained in IB 96-1 generally describe plan 

investment information and reference the educational tools and resources 

that focus on concepts a participant should consider in accumulating and 

allocating assets.

While the safe harbors likely would encompass education about plan 

investment alternatives that offer guaranteed minimum withdrawal benefits 

and other guaranteed lifetime-income solutions—and the potential utility 

of such alternatives in estimating future retirement income needs—the 

Department of Labor should update IB 96-1 to add examples that specifically 

address guaranteed minimum withdrawal benefits and other guaranteed 

lifetime-income solutions. In effect, the Department of Labor should explicitly 

note that providing information and materials regarding guaranteed lifetimeincome can be considered participant investment education for purposes of IB 

96-1.
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Further, as described elsewhere in our comments, guaranteed lifetimeincome solutions are often available outside a qualified plan as rollover IRA 

investments.

Several guaranteed lifetime-income solutions allow for rollovers to IRAs 

that retain the investment guarantees and annuity purchase rights that were 

accumulated through an in-plan feature. Therefore, in order to provide useful 

and meaningful education to participants about guaranteed lifetime-income 

solutions, plan sponsors and their service providers need to discuss plan 

distributions and IRA rollover options. We believe that Department of Labor 

guidance in this area is particularly uncertain and requires clarification.
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

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Question 21: 

Should an individual

benefit statement 

present the 

participant’s accrued 

benefits as a lifetime 

income stream of 

payments in addition 

to presenting the 

benefits as an 

account balance?

RECOMMENDATION: The Agencies

• Encourage the disclosure of account balance in the form of guaranteed 

lifetime income; and

• Support the passage of the Lifetime Income Disclosure Act and similar 

measures.

Given the importance of retirement income, and the need to change 

perceptions that a retirement account is simply a “savings account,” 

we encourage the disclosure of existing account balances in the form of 

guaranteed lifetime income on participant benefit statements. In fact, we 

would encourage all plans to clearly illustrate existing account balances in the 

form of guaranteed lifetime income. We support the passage of the Lifetime 

Income Disclosure Act S. 2832 and Small Businesses Add Value for Employees 

Act of 2009 (SAVE Act) H.R. 4742.

According to research conducted by the Gallup Organization, 82.4% of 

Americans find that the annual Social Security Administration benefit 

statement, which among other things discloses estimated payout benefits to 

individuals, is “very to somewhat useful” in increasing their knowledge about 

benefits that may affect them directly.21

Additionally, the report shows that receipt of a statement played a significant role 

in raising the general level of understanding about Social Security. While the 

information on Social Security statements and plan participant benefit statements 

are not completely “apples-to-apples,” disclosing accrued benefits as a guaranteed 

lifetime-income stream would be an important component in a broader educational 

campaign aimed at increasing awareness about the distribution phase of retirement 

planning. In addition, statements should act as a bridge to more detailed 

information available online or through a live representative.

Prudential currently provides participants with the opportunity to project future 

guaranteed lifetime income through tools such as our Retirement Income 

Calculator, and through information contained in the “Retirement Income” 

section of our quarterly statements. We also offer our Retirement Counselors as 

an additional resource for participants who wish to discuss how to best manage 

retirement assets in order to create a sustainable income flow that would satisfy 

retirement-income needs. 

21 Social Security Administration Public 

Understanding Measurement System 

(PUMS), 1999 survey conducted by the 

Gallup Organization 
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sample defined contribution partici
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Sample annuity St
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Question 22: 

If the answer to question

21 is yes, how should a 

lifetime stream of income 

payments be expressed on 

the benefit statement? For 

example, should payments 

be expressed as if they 

are to begin immediately 

or at specified retirement 

ages? Should benefit

amounts be projected to 

a future retirement age 

based on the assumption 

of continued contributions? 

Should lifetime income

payments be expressed 

in the form of monthly or 

annual payments? Should

lifetime income payments 

of a married participant 

be expressed as a singlelife annuity payable to the 

participant or a joint and 

survivor-type annuity, 

or both?

Participants would clearly benefit from receiving statements that not only 

showcase lump-sum values, but also illustrate annuity or other guaranteed 

lifetime-income values.

The best way to illustrate income is to show what account balances would 

generate as a “retirement paycheck” if the participant were currently eligible 

to retire, say age 65, and were to use his or her funds to purchase a 

guaranteed lifetime-income solution such as an immediate annuity. 

By illustrating “income” using this method, no future earnings, future 

contributions or inflation expectations would need to be considered. 
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

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Question 23: 

If the answer to question

21 is yes, what actuarial or 

other assumptions (e.g., 

mortality, interest, etc.) 

would be needed in order 

to state accrued benefits 

as a lifetime stream of 

payments? If benefit

payments are to commence 

at some date in the 

future, what interest rates 

(e.g., deferred insurance 

annuity rates) and other 

assumptions should be 

applied? Should an expense

load be reflected? Are 

there any authoritative 

tools or sources (online 

or otherwise) that plans 

should or could use for 

conversion purposes, or 

would the plan need to 

hire an actuary? Should

caveats be required so that 

participants understand that 

lifetime income payments 

are merely estimates for 

illustrative purposes? 

Should the assumptions

underlying the presentation 

of accrued benefits as a 

lifetime income stream 

of payments be disclosed 

to participants? Should

the assumptions used to 

convert accounts into a 

lifetime stream of income 

payments be dictated 

by regulation, or should 

the Department issue

assumptions that plan 

sponsors could rely upon 

as safe harbors?

As noted above, it’s important for participants to receive benefit statements 

that provide a lump-sum value and illustrate an annuity or other guaranteed 

lifetime-income value.

• Today, most benefit statements received by DC plan participants only show a lump-sum value. This 

can and often does create a false sense of wealth and security.

• Illustrating the benefit that the lump sum can generate in guaranteed lifetime income places a much more 

meaningful and helpful value on accumulation and is likely to result in positive changes in savings behavior.

• Illustrating the benefit could encourage participants to save more if the “illustrated income” is less 

than expected or insufficient to meet the participant’s objectives and needs.

• Adding guaranteed lifetime-income illustrations underscores that the plan is a retirement program 

intended to generate retirement income, not a capital accumulation or savings plan.

• The best way to illustrate income is to show what current account balances would generate as a 

“retirement paycheck” if the participant were currently eligible to retire, say at age 65, and were 

to use his or her funds to purchase a guaranteed lifetime-income solution such as an immediate 

annuity. By illustrating “income” using this method, no future earnings, future contributions or 

inflation expectations would need to be considered. If a hypothetical interest/earnings assumption 

were included, it would also be necessary to make assumptions about inflation. Accordingly, it seems 

easier and more understandable to make “income illustrations” as simple as possible.

• Knowing what a given amount today would purchase in annual retirement income helps clarify the 

“annuity value” of the account.

• The Department of Labor should permit plans that currently offer annuities or other guaranteed lifetimeincome solutions to use the underlying assumptions and purchase rates under the products for illustration 

purposes.

• If no annuity or other guaranteed lifetime-income solution is currently offered through the plan, the 

Department of Labor should allow plan sponsors to use published rates, such as PBGC rates, as a 

safe harbor. Also, the Department of Labor safe harbor should protect employers and plan sponsors 

from liability in the event the amounts that are illustrated exceed the amount of benefit that may be 

purchased at any point in time.

 

It would not be helpful for participants to know the assumptions that are used 

for purposes of making guaranteed lifetime-income illustrations or projections. 

The complexity associated with these assumptions very likely would confuse the 

average plan participant. But such information should be available upon request. 

• Expense loads would be built into rates or included as part of PBGC published rates. Plans would not 

be required to hire an actuary in order to create these illustrations. 
Page 53

Question 24: 

Should an individual benefit

statement include an income 

replacement ratio (e.g., the 

percentage of working income 

an individual would need 

to maintain his or her preretirement standard of living)? 

If so, what methodology

should be used to establish 

such a ratio, such as preretirement and post-retirement 

inflation assumptions, and 

what are the impediments for 

plans to present the ratio in a 

meaningful way to participants 

on an individualized basis?

The concept of a “replacement ratio” when accompanied by a gap analysis 

may be useful in retirement planning. It may not be as meaningful when 

placed on a benefit statement, as it could be taken out of context or may result 

in confusion.

We believe plan sponsors should provide a future projected guaranteed 

lifetime-income amount in addition to the current market value on the benefit 

statement, but “information overload” should be avoided.

Individuals who want additional information can use existing technology 

to access a planning tool that calculates a targeted replacement ratio of, for 

example, 70% - 80%. This could be accomplished by plan sponsors providing 

participants with access to retirement-income ratio calculators.

Additional impediments on the use of “income replacement ratio” on benefit 

statements include:

• Accurate information about participant financial data, spousal financial data, and lifestyle choices are 

not easily obtained or rarely available.

• The impact of inflation is difficult to calculate and understand.

• Lack of consistency about the factors to use in determining the ratio across all participant 

communications can lead to unnecessary confusion.

• Participants in general would need a lot of additional, time-consuming education to understand even 

a seemingly simple 80% replacement ratio.

• The absolute level of income delivered by a 70-80% replacement ratio may or may not be sufficient 

depending upon the adequacy of the individual’s current income.

• Participants might shy away from the product if the replacement-ratio figures and the guaranteed 

lifetime-income figures are not close.
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Question 25: How do

the 401(k) or other plan 

qualification rules affect 

defined contribution plan 

sponsors’ and participants’ 

interest in the offering and 

use of lifetime income? 

Are there changes to 

those rules that could 

or should be made to 

encourage lifetime income 

without prejudice to 

other important policy 

objectives?

Uncertainty regarding the effect of guaranteed lifetime-income solutions 

on a plan’s satisfaction of qualification rules is a disincentive for some plan 

fiduciaries.

This is particularly true with respect to the rules relating to qualified joint-andsurvivor annuities and, to a lesser extent, with respect to required minimum 

distribution rules and non-discrimination testing requirements for “benefits, 

rights and features.”
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Question 26: Could or 

should any changes be 

made to the rules relating to 

qualified joint and survivor 

annuities and spousal 

consents to encourage the 

use of lifetime income without 

compromising spousal 

protections?

RECOMMENDATION: The Internal Revenue Servi

• Clarify the Qualified Joint & Survivor Annuity (QJSA) rules to confirm 

that the participant has the right to start, stop or alter payments under 

a guaranteed lifetime-income solution that are not received in the 

form of an annuity.

Changes should be made to the spousal survivor annuity rules to clarify when 

payments under a guaranteed lifetime-income solution are received in the 

form of an annuity.

This clarification would encourage the availability of guaranteed lifetimeincome solutions by eliminating a disincentive for plan fiduciaries. We 

recommend that the Internal Revenue Service (IRS) issue regulations that 

confirm, with respect to products that offer guaranteed lifetime income, the 

positions taken by the Internal Revenue Service in a recent private-letter ruling 

(PLR 2000951039) regarding application of the spousal survivor annuity rules. 

Specifically, we suggest that the Internal Revenue Service amend regulations 

under section 401(a)(11) to clarify that amounts are not received in the form 

of a “life annuity” if the amount and timing of payments under a guaranteed 

lifetime-income solution remain within the control of the participant ... in other 

words if the participant has the right to start or stop payments and alter the 

amount or form of payments.
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Question 27: Should

further guidance clarify 

the application of the 

qualified joint and survivor 

annuity rules or other 

plan qualification rules to 

arrangements in which 

deferred in-plan insurance 

annuities accumulate over 

time with increasing 

plan contributions 

and earnings?

RECOMMENDATION: The Internal Revenue Servi

• Issue guidance to clarify the application of Qualified Joint & Survivor Annuity 

(QJSA) rules that provide for incremental purchases of deferred in-plan 

annuities.

We understand that this question refers to in-plan deferred fixed income annuities 

that allow participants to make incremental annuity purchases over time and 

at different interest rates and ages. Subject to that understanding, we ask the 

Internal Revenue Service to issue guidance to clarify the application of the QJSA 

and other plan-qualification rules to such arrangements. Greater clarity will 

reduce the uncertainty that currently acts as a disincentive for some fiduciaries 

when considering the addition of guaranteed lifetime-income solutions.

This uncertainty exists both for products that provide payments in the form 

of an annuity and those that provide payments in other forms, including 

guaranteed minimum withdrawal benefits.
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Question 28: Do the

required minimum 

distribution rules affect 

defined contribution plan 

sponsors’ and participants’ 

interest in the offering and 

use of lifetime income? 

Are there changes to 

those rules that could 

or should be made to 

encourage lifetime income 

without prejudice to 

other important policy 

objectives? In particular,

how are deferred annuities 

that begin at an advanced 

age (sometimes referred 

to as longevity insurance) 

affected by these rules? 

Are there changes to the 

rules that could or should 

be considered to encourage 

such arrangements?

RECOMMENDATION: The Internal Revenue Servi

• Clarify how the Required Minimum Distribution rules apply to guaranteed 

lifetime-income solutions that are paid in non-annuity form.

The required minimum distribution rules are not a significant disincentive for sponsors 

interested in offering products that deliver guaranteed lifetime income in a non-annuity 

form. But the complexity and uncertainty of these rules can be an impediment to 

product providers in making these products available at a reasonable cost. 

We would recommend that the Internal Revenue Service issue guidance that 

lifts some of the burdens and allows product-and-service providers to offer 

and service these products in a clear and cost-effective manner.

Specifically, we suggest the Internal Revenue Service should confirm that the 

account balance used in determining the required minimum distribution for a 

calendar year does not include any value for guarantees. Since it is by no means 

assured that the participant will ever draw upon the guarantees—say if the account 

balance drops to zero and the product provider’s general account begins to fund 

payments—it is reasonable not to consider the guarantees for required minimum 

distribution purposes before and unless the participant draws upon them. 

Alternatively, if the Internal Revenue Service is unable to issue such guidance, 

we would ask for confirmation that our current application of the rules, including 

the explanations that we provide to sponsors and participants, is appropriate.

Specifically, the Internal Revenue Service should confirm that the “entire 

interest” of a participant who has invested through a plan in a guaranteed 

lifetime-income solution includes the actuarial present value of any guarantees, 

in accordance with the rule set forth in Treasury Regulation 1.401(a)(9)-6. In 

addition, the Internal Revenue Service should confirm that, for any distribution 

year in which the required minimum distribution would otherwise exceed the 

value of the account balance determined without regard to any guarantees, the 

plan will satisfy the distribution requirement by distributing the same amount 

payable to the plan under the product provider’s guarantee.

Finally, we suggest that the Internal Revenue Service confirm that if a 

participant or beneficiary is receiving payments under the life-expectancy 

method, payments under the plan may continue beyond the final age listed in 

the life expectancy tables set forth in Treasury Regulation sec. 1.401(a)(9)-9 so 

long as the account balance, including any amounts allocated to the account 

balance as a result of payments of a product provider, are distributed within 

the required life expectancy or distribution period.
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

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Question 29: 

Are employers that 

sponsor both defined 

benefit and defined 

contribution plans allowing 

participants to use their 

defined contribution plan 

lump sum payouts to 

“purchase” lifetime income 

from the defined benefit 

plan? Could or should any 

actions be taken to facilitate 

such arrangements? 

Should plans be encouraged

to permit retirees who 

previously took lump sums 

to be given the option 

of rolling it back to their 

former employer’s plan in 

order to receive annuity or 

other lifetime benefits?

Although sponsors of certain governmental defined benefit plans are allowing 

participants to use lump-sum payments from 403(b) and 457(b) plans to 

purchase defined benefit plan “service credit,” we have not seen similar 

activity by sponsors of corporate defined benefit plans.

Few defined benefit plans accept rollovers and more and more sponsors 

continue to freeze and terminate their plans. Given the ongoing decline 

of defined benefit plans in the private sector, we suspect that few of the 

remaining sponsors will be interested in receiving rollovers to purchase 

annuity or other lifetime benefits.
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Question 30: To what

extent do fiduciaries 

currently use the safe 

harbor under 29 CFR 

2550.404a-4 when selecting 

annuity providers for the 

purpose of making 

benefit distributions?

Anecdotal evidence suggests that some plan fiduciaries are using the 

Department of Labor’s safe harbor when selecting providers of distribution 

annuities under defined contribution plans. 

Prudential makes available to plan fiduciaries a product that permits a 

defined contribution plan to purchase annuities at guaranteed purchase 

rates. Fiduciaries who evaluate this product, with or without a formal 

request-for-proposal process, occasionally ask Prudential questions that 

appear to be prompted by the considerations mentioned by the Department 

of Labor in the safe harbor. These questions involve the financial strength 

of the insurer, the overall cost of the contract, and the benefits and services 

provided under the contract.
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

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Question 31: To what

extent could or should the 

Department of Labor mak

changes to the safe harbor 

under 29 CFR 2550.404a-4 to 

increase its usage without 

compromising important 

participant protections? What 

are those changes and why 

should they be made?

RECOMMENDATION: The Department of Lab

• Simplify and extend the standards for the selection of guaranteed lifetimeincome solution providers and engage in further discussions with the 

industry.

The Department of Labor could increase use of the safe harbor if it simplifies 

and clarifies the criteria for the fiduciary’s selection of an annuity provider. 

Prudential supports the need for further discussions with the Department 

of Labor about appropriate simplifications to the standards. This guidance 

should confirm that the fiduciary’s actions are based on facts known at the 

time a fiduciary selects and reviews a product and address any concerns 

unique to selection and monitoring of default investments that include 

guarantees or similar guaranteed lifetime-income features.

The safe harbor requires the fiduciary to conclude “at the time of the 

selection” that the annuity provider is financially able to make all future 

payments under the contract. The safe harbor also permits fiduciaries to make 

this determination either at the time the provider is selected for distribution of 

benefits to a specific participant or, alternatively, when the provider is selected 

to provide annuity contracts at future dates, if the fiduciary periodically 

reviews the continuing appropriateness of the conclusion.

The Department of Labor should confirm that when a fiduciary initially selects 

a provider to offer annuity contracts at future dates—and when a fiduciary 

later reviews the continuing appropriateness of that decision—the fiduciary’s 

actions will be judged based on prevailing circumstances at the time of the 

initial selection and the subsequent review. The fiduciary’s actions should 

be considered in light of available public information, unless the fiduciary 

has non-public information indicating that the provider’s public information 

includes material misrepresentations. 

Finally, we suggest that the Department of Labor address concerns unique 

to selecting and monitoring default investments that include guarantees 

or similar guaranteed lifetime-income features if the Department of Labor 

reissues or clarifies the fiduciary safe harbor in 2550.404a-4. We recommend 

that the Department of Labor reconfirm its applicability to the selection of 

guaranteed lifetime-income solutions that are used as a default or QDIA.
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RECOMMENDATION: The Department of Lab

• Issue guidance that explicitly extends the safe harbor beyond distribution 

annuities to cover other guaranteed lifetime income solutions.

The Department of Labor should issue guidance that explicitly extends the 

safe harbor to cover other guaranteed lifetime-income solutions, in the 

same way it covers distribution annuities. The guarantees associated with 

guaranteed lifetime-income solutions offer protection against “longevity 

risk,” the risk that retirement savings will be insufficient to provide income 

for life, and “investment risk,” the risk that the market value of retirement 

savings will decrease. Similar to a distribution annuity, these protections 

necessarily transfer risk to the product provider and raise the same basic 

concern: Will the provider offer long-term guarantees that could extend for 

25, 30 or more years?

Because this is the fundamental issue the safe harbor is designed to address, 

safe-harbor protections are just as appropriate for other guaranteed lifetimeincome solutions as they are for distribution annuities.

Question 32: To what

extent could or should the 

safe harbor under 29 CFR 

2550.404a-4 be extended 

beyond distribution annuities 

to cover other lifetime 

annuities or similar lifetime 

income products? To which

products should or could the 

safe harbor be extended?
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To satisfy the requirements of ERISA 404(c), plans offering investment 

alternatives that deliver guaranteed lifetime income in annuity or non-annuity 

forms typically present them as non-core investment alternatives.

Plans provide participants with information about these investment 

alternatives in accordance with section 404(c) and applicable securities law 

requirements, and information about guaranteed lifetime-income solutions 

is delivered in prospectuses for registered products and in documents that 

resemble prospectuses for non-registered products. 

These documents include descriptions of the underlying investment funds 

and substantial information about the operation of the guarantees, including 

calculations of guaranteed-withdrawal amounts, explanations about the effect 

of transfers in and out of the underlying investment funds, fee disclosures, and 

discussions about the actions of participants or sponsors that could result in 

the loss of guarantees. 

Question 33: To what extent

are fixed deferred lifetime 

annuities (i.e., incremental 

or accumulating annuity 

arrangements) or similar 

lifetime income products 

currently used as investment 

alternatives under ERISA 404(

plans? Are they typically used 

as core investment alternatives 

(alternatives intended to 

satisfy the broad range of 

investments requirement in 

29 CFR 2550.404c-1) or noncore investment alternatives? 

What are the advantages 

and disadvantages of such 

products to participants? 

What information typically is 

disclosed to the participant, 

in what form, and when? To

what extent could or should 

the ERISA 404(c) regulation 

amended to encourage use of 

these products?
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RECOMMENDATION: The Department of Lab

• Clarify the disclosure requirements for guaranteed lifetime-income solutions 

under ERISA 404(c) plans.

Because American workers clearly want to retain flexibility and control of their 

assets, guaranteed lifetime-income solutions that provide participants with 

flexibility and control of their assets should play a prominent role in qualified 

retirement programs ... and ERISA 404(c) amendments can help encourage the 

adoption and use of such products. 

We see a growing minority of ERISA 404(c) plans that provide guaranteed 

lifetime income through variable annuity contracts or similar guaranteed 

lifetime income solutions. As previously noted, the advantages of such 

products include protection from longevity, investment and inflation risks for 

both participants and their beneficiaries.

Products that do not offer distributions in the form of an annuity may offer 

additional advantages and greater flexibility. For example:

• Unlike a distribution annuity, a product that does not “annuitize” distributions may allow a participant 

to retain investment control and avoid the need to liquidate investments in order to get the benefit of 

distribution guarantees. 

• Moreover, if a participant does wish to liquidate or reduce investments under the non-annuity 

product, he or she may be able to do so by transferring money out of the investment funds, though 

associated guarantees would be relinquished. 

Plans provide information about guaranteed lifetime-income solutions, 

including distribution options, as described in the response to question 33. 

A minor amendment of the ERISA 404(c) regulation, and of the proposed 

fiduciary requirements for disclosure in participant-directed individual 

account plans, would be helpful in allowing providers to offer guaranteed 

lifetime-income solutions in a manner that does not hinder the ability of plan 

fiduciaries to obtain relief under section 404(c) or comply with 404(a).

Question 34: To what

extent do ERISA 404(

plans currently provide 

lifetime income through 

variable annuity contracts 

or similar lifetime income 

products? What are 

the advantages and 

disadvantages of such 

products to participants? 

What information about 

the annuity feature 

typically is disclosed to 

the participant, in what 

form, and when? To what

extent could or should the 

ERISA 404(c) regulati

be amended to encourage 

use of these products?
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 64

Accordingly, we suggest that the Department of Labor amend the 404(c) 

regulation to:

• Require that the description of any investment alternative include a description of any annuity 

purchase rights, investment guarantees, death benefit guarantees or other features ancillary to an 

investment fund; and

• Permit, but not require, consideration of guarantees and other features ancillary to an investment 

fund in determining whether (i) the frequency with which a participant may give investment 

instructions is appropriate in light of expected market volatility and (ii) an investment alternative has 

materially different risk-and-return characteristics from other alternatives.

In addition, we recommend that the Department of Labor—in final regulations 

under sec. 2550.404a-5—permit, but not require, consideration of guarantees 

and other features ancillary to an investment fund in determining:

• The type of investment;

• Whether or not an investment alternative provides a fixed return;

• The value of units of an investment alternative; and

• The total return and operating expenses of an investment alternative. 
Page 65

RECOMMENDATION: The Agencies

• Confirm the applicability of QDIA protection to investment products that 

include guaranteed lifetime-income solutions;

• Authorize employers to “re-enroll” participants at any point into QDIAs 

(including those that provide guaranteed lifetime income); and

• Confirm that offering a QDIA that includes a guaranteed lifetime-income 

solution only to participants who have attained a certain age does not violate 

non-discrimination rules.

Currently, only a small but growing minority of defined contribution plans 

serviced by recordkeepers are using funds or products with ancillary 

guaranteed lifetime-income features as the plan’s qualified default investment 

alternative, even if those plans offer investment alternatives that include 

guaranteed lifetime-income solutions. Within this small but growing universe, 

we believe that the guaranteed minimum withdrawal benefit is the most 

common feature in use.

Additional Guidance Needed on the Selection ad M

The Department of Labor could and should encourage the use of guaranteed 

lifetime-income solutions as QDIAs by issuing guidance regarding the prudent 

selection and monitoring of QDIAs generally, not limited to QDIAs that include 

guaranteed lifetime-income solutions. The Department of Labor did not 

discuss this key issue in the final QDIA regulations and its explicit silence 

has caused some plan fiduciaries to think that there may be a standard for 

selecting investment alternatives as QDIAs that potentially is more rigorous 

than the standard for selecting an investment alternative that participants can 

choose affirmatively. This concern is heightened by the Department of Labor’s 

emphasis on the need for fiduciaries to evaluate service-provider compensation 

and by the fact that guaranteed lifetime-income features ancillary to investment 

funds commonly require additional fees, such as guarantee fees.

In addition, we recommend that the Department of Labor focus on any 

considerations unique to the selection of a default by approving the use of 

reasonable assumptions ... and by permitting the selection of an investment 

alternative that is broadly suitable for the entire default population, without 

the need for separate consideration of the specific circumstances of population 

subgroups or of individual participants. 

Question 35: To what

extent are plans using default 

investment alternatives that 

include guarantees or similar 

lifetime income features 

ancillary to the investment 

fund, product or model 

portfolio, such as a target 

maturity fund product that 

contains a guarantee of 

minimum lifetime income? 

What are the most common 

features currently in use? Are 

there actions, regulatory or 

otherwise, the Agencies could 

or should take to encourage 

use of these lifetime income 

features in connection 

with qualified default 

investment alternatives?
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 66

Clarifications Regarding Certain Anc

Some plan sponsors have questioned whether investment alternatives 

that include guaranteed minimum withdrawal benefits are eligible for 

treatment as a QDIA. This has occurred despite the Department of Labor’s 

confirmation, in the final regulation of text, that “features ancillary” to an 

investment-fund product or model portfolio, including annuity purchase 

rights and investment or death benefit guarantees, will not cause the product 

or portfolio to fail to be a QDIA. We request that the Department of Labor 

clarify this matter by amending section 2550.404c-5(e) (4) (vi) of the final 

regulation to add “distribution or withdrawal guarantees” to the list of 

ancillary features. 

Re-enrollm

As described elsewhere in our response, behavioral inertia—the tendency 

for participants to “leave things alone”—is a powerful force. As a result, 

guaranteed lifetime-income solutions must be available to participants as 

a default option wherever possible. The Department of Labor could and 

should encourage the use of guaranteed lifetime-income solutions as QDIAs 

by explicitly stating that fiduciaries may avail themselves of QDIA relief 

whenever participants have an opportunity to direct their investments, but do 

not do so.

The Department of Labor addressed this issue in the preamble to the final 

regulation. In the context of recordkeepers not being able to distinguish 

funds in an existing default fund that were contributed as a result of a default 

from those contributed via an affirmative election, the Department of Labor 

said the following:

It is the view of the Department that any participant or beneficiary, following receipt of a notice in 

accordance with the requirements of this regulation, may be treated as failing to give investment 

direction for purposes of paragraph (c)(2) of 2550.404c-5, without regard to whether the participant or 

beneficiary was defaulted into or elected to invest in the original investment vehicle of the plan. 

We interpret this preamble language as authorizing a plan fiduciary to initiate 

a re-enrollment of the entire plan in a variety of circumstances. These include, 

but are not necessarily limited to:

• Conversion to a new service provider that offers a different investment lineup;

• The elimination or addition of plan options; and
Page 67

• Plan amendments, initiated by the sponsor, that require previously enrolled participants—for any 

reason, including the attainment of a specified age—to submit new investment elections, even if 

there are no changes to the investment lineup itself. 

In these circumstances, a plan sponsor could default participants who fail to 

make new affirmative elections into a QDIA, as long as the notice and other 

requirements under the QDIA regulations are met. Regulatory guidance or other 

clarification of this treatment would be very beneficial. The guidance should 

specifically state that the plan would be eligible for QDIA relief as long as all of 

the conditions of the QDIA safe harbor have been satisfied. QDIA relief, in such 

circumstances, should be available if funds are invested in any QDIA and not 

limited to QDIAs that include guaranteed lifetime-income solutions.

QDIAs and Seletion of Annui

We further request that the Department of Labor address any concerns 

unique to selection and monitoring of defaults that include guaranteed 

lifetime-income solutions as part of the Department of Labor’s reissuance of 

the fiduciary safe harbor in 2550.404a-4, confirming its applicability to the 

selection of guaranteed lifetime-income solutions as a QDIA if the products 

include features that trigger the guarantees upon the attainment of a particular 

age or number of years to retirement. 

Tax Qualifications and the Avilabili

Feature for Participants Who ave Attai

Some product providers offer investment alternatives with ancillary features 

that only apply to participants who have attained a certain age. There are 

various reasons for such product-design decisions, including the fact that 

younger participants have little short-term need and should not be charged 

fees for investment and distribution guarantees.

Since this design decision necessarily limits the availability of an investment 

alternative only to certain plan participants, it creates a separate “benefit, 

right or feature” that must be subjected to testing under Treasury Regulation 

section 1.401(a)-4 to ensure that it is not currently or effectively available to 

“highly compensated employees” on a discriminatory basis.

The potential burden to plan sponsors of additional nondiscrimination testing is 

an impediment to the availability of investment products with ancillary features.
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 68

This burden is unreasonable if the need for testing is prompted by the design 

decision of a product provider unmotivated by any desire to favor highly 

compensated employees. We suggest that the Internal Revenue Service or the 

Department of the Treasury clarify this matter by amending section 1.401(a)-

4 to disregard age conditions with respect to any form of investment that 

includes guarantees or guaranteed lifetime-income features in determining the 

employees to whom a benefit, right or feature is currently available.
Page 69

Offering guaranteed lifetime-income solutions as in-plan options has a 

number of benefits for plan sponsors, most notably by helping sponsors more 

effectively prepare their participants for retirement.

• Today, only 16% of workers are very confident about having enough money for a comfortable 

retirement.22 Guaranteed lifetime-income solutions can help address this concern by providing 

assurances that participants will continue to receive guaranteed “retirement paychecks,” regardless 

of how long they live or how the markets perform. In addition, in-plan guaranteed lifetime-income 

solutions provide employees with access to institutional pricing for such products. 

• Also, guaranteed lifetime-income solutions will help employers manage their workforce more 

effectively by increasing the likelihood that employees will be able to retire when they want to retire. 

For example, the recent financial-market downturn has contributed to an increase in the percentage 

of workers who expect to retire after age 65, from 11% in 1991 to 33% in 2010.23

• Helping participants to retire when they are financially prepared to retire rather than “retiring on the 

job” will let the next generation of workers move up, and help new entrants join the labor force.

• Offering guaranteed lifetime-income solutions also increases the value and attractiveness of an 

employer’s benefits package, helping attract and retain top talent. 

At the same time, offering in-plan guaranteed lifetime-income solutions 

may result in some incremental expenses for plan sponsors, such as higher 

administrative costs to satisfy fiduciary and other regulatory requirements 

associated with offering these products. These costs, however, may be offset 

through the greater economies of scale achieved in plan administration. 

Remember, in-plan guaranteed lifetime-income solutions should enable plans 

to retain more of a participant’s assets at the time a participant retires.

Solutions like Prudential IncomeFlex® have no extra “hard dollar” or “soft 

dollar” costs for a plan sponsor beyond any other fund option, though 

employers will need to invest the time and attention that any prudent fiduciary 

would expend on any aspect of their defined contribution plan.

To summarize, in analyzing the “benefits” and “costs” to plan sponsors of 

offering a guaranteed lifetime income solution, it’s clear that the benefits to the 

sponsor, to participants and to American society in general outweigh any cost 

considerations. At a very high level:

Benefits to sponsors in

• Helping ensure participants achieve a secure retirement;

• Helping ensure the plan itself delivers on its promise of providing retirement income;

Question 36: What are 

the costs and benefits 

to a plan sponsor 

of offering lifetime 

annuities or similar 

lifetime income products 

as an in-plan option? 

Please quantify

if possible.

22 Employee Benefit Research Institute, “The 2010 

Retirement Confidence Survey: Confidence 

Stabilizing, But Preparations Continue to Erode,”

March 2010.

23 Employee Benefit Research Institute, “The 2010 

Retirement Confidence Survey: Confidence 

Stabilizing, But Preparations Continue to Erode,”

March 2010.
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 70

• Enhancing benefit packages to more effectively attract and retain top talent;

• Lowering per capita administrative costs, at least potentially, due to retaining larger account balances 

for longer periods of time;

• Allowing participants to hedge investment and interest-rate risks by permitting them to make 

purchases over their working lives; and

• Offering guaranteed lifetime-income solutions in a cost-effective manner through institutional pricing.

Costs to sponsors in

• Expenses associated with satisfying uncertain and possibly costly fiduciary standards for evaluating 

and monitoring providers of guaranteed lifetime-income solutions—which in essence is no different 

from choosing another fund provider; and 

• Some incrementally higher administrative costs result from retaining small accounts, but these may 

be offset by maintaining assets in the plan for a longer period of time.
Page 71

RECOMMENDATION: The Department of Lab

• Simplify the safe harbor for the selection of annuity providers;

• Clarify and extend QDIA guidance and protections;

• Provide Department of Labor-sponsored education; and

• Expand the use of electronic technology rules.

The costs borne by sponsors of small plans are major impediments to the 

adoption of lifetime annuities and other guaranteed lifetime-income solutions.

Currently, according to a recent study done by the Employee Benefit Research 

Institute (EBRI), 49% of workers, or 78 million individuals, have no access at all 

to a workplace-based retirement plan. 

This “coverage gap” is preventing nearly half the American workforce from 

beginning to systematically save and invest for retirement. According to a 

survey published in 2008 by Prudential, more than one-half of workers without 

access to a retirement plan have saved less than $10,000 for retirement, 

significantly below the average DC account balance of $46,000. 

Even when small employers adopt retirement plans for their employees, it’s 

clear that they do not embrace optional features that add additional costs and 

administrative burdens. The addition of guaranteed lifetime-income solutions 

—which are optional features in most DC plans—adds administrative burdens, 

complexity and fiduciary risk, as discussed in Questions 30-36.

Several suggestions for eliminating or addressing these issues are as follows:

• Simplify the safe harbor for the selection of annuity providers to enable small employers to select 

providers without the need and expense of hiring an independent expert;

• Clarify QDIA guidance so that products that provide guaranteed lifetime income are more easily 

identifiable as QDIAs;

• Extend QDIA protection into the distribution phase;

• Develop a Department of Labor-sponsored education campaign for small employers about the 

importance of guaranteed lifetime income to achieving retirement security; and

• Streamline the regulatory requirements associated with offering in-plan guaranteed lifetime-income 

solutions by enabling greater use of electronic technology for delivering disclosure material and 

obtaining necessary authorizations and consents. 

Question 37: 

Are there unique costs to 

small plans that impede 

their ability to offer 

lifetime annuities or similar 

lifetime-income products 

as an in-plan option to 

their participants? What 

special consideration, if 

any, is needed for these 

small entities?
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans

Page 72

Making guaranteed lifetime income the default form of payment at retirement 

should have a positive effect on contribution rates. According to recent 

Prudential surveys:

• When presented with ideas for guaranteed investment products, 75% of American workers said 

a product with guarantees for lifetime income, protection of principal, and opportunities to lock in 

market gains would be “important” or “nice to have” as part of their portfolio. If protected by such 

guarantees, 70% said they would be likely to put money back into the stock market after the 2008-

2009 financial crisis.24 These findings demonstrate that income defaults can provide reassurance to 

individuals and lead to an increase in retirement savings.

• More than two-thirds of those surveyed want help with decisions about distribution of their 

retirement income. When presented with an automatic retirement-income option in their workplace 

retirement plan—with the understanding that they could always opt out—two-thirds of Americans 

found such an option appealing. 25

A guaranteed lifetime-income solution default—coupled with a comprehensive, 

in-plan educational program—may also encourage higher contribution rates 

by offering participants a better gauge of how much they need to save for 

retirement. For example, a tool that integrates current account balances with 

lifetime-payout projections would provide participants with an estimate of how 

much lifetime income could be generated by their current account balances ... 

and how much they need to increase savings to achieve their retirement goals.

Question 38: 

Would making a 

lifetime annuity or 

other lifetime-income 

product the default 

form of benefit 

payment have an 

impact on employee 

contribution rates? If

so, in which direction 

and why?

24 Prudential Financial, “Impact of the Market Crisis 

on Retirement Preparedness,” 2009.

25 Prudential’s “2010 Workplace Report on Retirement 

Planning - The New Economic Reality and the 

Workplace Retirement Plan,” 2010
Page 73

Annuitization rates within qualified retirement plans remain modest, as do 

elections of other guaranteed lifetime-income solutions in the qualified plans 

that offer them.

• In DB plans that offer a lump sum as an alternative to an annuity, a majority choose the lump sum. 

A Vanguard study of two large Fortune 500 DB plans with a lump-sum option reported annuitization 

rates among retirees of 17% and 27%.26

• Data also exists on annuity use for select types of plans, with annuitization rates range from 1% for 

federal workers to 45% for workers in higher education.27 The latter group typically has access to 

retirement plans from TIAA-CREF, which requires access to guaranteed lifetime-income solutions 

as a standard part of its offering. The high election rate for annuitization across higher education 

plans suggest that it is possible to drive adoption of guaranteed lifetime-income solutions through 

persistence, sufficient participant education, and by providing access to appropriate solutions.

• An ICI survey of 600 recent retirees in DC plans conducted in late 200728 found that, at retirement, 

18% of respondents annuitized their entire balance. In addition, 9% chose more than one distribution 

option; presumably a portion of that group annuitized some of their assets. 

• Anecdotal evidence suggests that current usage of guaranteed lifetime-income solutions within DC 

plans is “modest but promising” for future efforts to increase the adoption of guaranteed lifetimeincome solutions. 

The low participant adoption rate of income annuities within DC plans is partly 

driven by the fact that less than one-fifth of DC plans offer an annuity payout 

option.29 However, current adoption rates may also reflect the simple fact that 

individuals are not being offered guaranteed lifetime-income solutions that 

meet their needs. 

For example, the retail market provides individuals with access to guaranteed 

lifetime-income solutions, such as Guaranteed Minimum Withdrawal Benefits 

(GMWBs), that offer individuals more control and access to their funds than 

traditional annuity products. Eighty-four percent of new variable annuity industry 

sales include GMWB features.30 In addition, 71% of all variable annuity purchases 

are funded by rollovers from plan sponsors31, demonstrating the attractiveness 

of GMWBs to qualified plan participants. This indicates that election rates for 

guaranteed lifetime-income solutions within qualified plans can be enhanced 

by ensuring that sponsors have access to a wide range of guaranteed lifetimeincome solutions to select the one most appropriate for their plans.

Question 39: For plans 

that offer lifetime 

annuities or similar 

lifetime-income products, 

what percentage of 

eligible workers elect to 

annuitize at least some 

of their retirement assets 

and what percentage 

elect to annuitize all of 

their assets?

26 Vanguard Center for Retirement Research, “Immediate Income Annuities and Defined Contribution Plans,” May 2008. 

27 Vanguard Center for Retirement Research, “Immediate Income Annuities and Defined Contribution Plans,” May 2008.

28 Investment Company Institute, “Defined Contribution Plan Distribution Choices at Retirement,” Fall 2008.

29 Vanguard Center for Retirement Research, “Immediate Income Annuities and Defined Contribution Plans,” May 2008.

30 LIMRA, “Variable Annuity Guaranteed Living Benefit Election Tracking Survey (2009, 4th quarter),” March 2010, page 2.

31 Data from Morningstar Variable Annuity Research and Data Service
Annuities have been around a long time. But the retirement landscape is changing—traditional defined benefit pension plans are going by the wayside in the private 

sector, and people are living longer in retirement. More 

and more retirees will be faced with having to convert 

retirement savings into a retirement paycheck. In response to the changing needs of retirees, the annuity 

concept has evolved. It is worth taking a fresh look to 

see how today’s modern annuities can play a role in 

your retirement income plan. Today’s volatile markets 

only serve to underscore the importance of protecting 

retirement nest eggs and the income streams that individuals need to get from those nest eggs. 

First, how do the traditional annuities work?

An annuity is a contract between you and an insurance 

company where you deposit a sum of money with the 

insurance company, and in exchange, if you so choose, 

annuity payments are paid to you on a regular basis and 

are guaranteed for a set period of time or for life. Usually, the money in annuities grows tax-deferred. There 

are a number of options and features to explore, including fixed or variable investment and payment options. 

· Fixed annuities offer guaranteed rates of return 

and safety of principal. This can give you a hedge 

against market volatility. The downside is that, over 

time, inflation may eat into the buying power of this 

fixed amount.

· Variable annuities can provide you with access to 

a variety of investment portfolios without a guaranteed rate of return. There is potential for higher 

earnings when market conditions are good, but 

lower earnings or losses when the market is down, 

depending on investment performance.

Additional options allow you to choose a payment start 

date that is either immediate or deferred, and payments 

that are payable to just yourself or to a beneficiary 

after you die. Further, annuities traditionally have both 

death benefits, which guarantee a value payable to a 

beneficiary, and living benefits, which guarantee levels 

of accumulation and/or income payments. The focus of 

this article is on living income benefits. 

With most traditional annuities, the individual has the 

option to annuitize, at which point control (ownership) 

of his/her assets is surrendered to the insurance company in exchange for a guaranteed stream of payments. 

Historically, annuity contract holders have been reluctant to annuitize, because they do not want to cede 

control and ownership of their money. 

Now here’s what’s different about the new generation of annuities.

Prudential and other retirement companies listened to 

their customers, and responded with a new generation 

of annuities. The result—a living benefit option for 

guaranteed income for life without annuitization. In essence, individuals can maintain access to their account 

values—while receiving guaranteed lifetime income. 

(There are typically fees associated with this option, so 

it is important to speak with a financial professional to 

understand any applicable fees.)

Today’s modern annuities build on many of the features 

of traditional annuities: they grow tax-deferred and 

offer guaranteed income for life. Further, they allow 

individuals to customize their retirement income to 

meet specific retirement needs. Customization can be 

achieved through the optional living benefits available. 

Some of the new and more significant features of optional living benefits include:

· A measure of control and ownership of assets while 

receiving guaranteed lifetime income. 

· Ability to capture market upswings in your “Protected 

Withdrawal Value”—used to determine income payments—while helping to protect income from market 

downturns. This may be particularly important during the five years before and after retirement—which 

Prudential refers to as The Retirement Red Zone®. 

(The Protected Withdrawal Value is a separate value 

from the annuity’s account value and is only available 

through guaranteed withdrawals, not as cash or a 

lump sum.) 

· Wide selection of investment portfolios to meet your 

risk tolerance, whatever it may be. The guaranteed 

1

The Modern Annuity
income under the optional living benefit is protected 

regardless of how portfolios are invested. 

The table below highlights key differences between 

traditional variable annuities and the new generation of 

variable annuities with guaranteed lifetime income benefits – also known as a guaranteed minimum withdrawal 

benefit. A key difference not addressed in the table is tax 

treatment. Whether payments are received as a guaranteed minimum withdrawal benefit or through traditional 

annuitization, distributions of investment returns are 

taxed at ordinary income tax rates. However, payments 

received from guaranteed minimum withdrawal benefits 

are generally considered to be distributions of taxable 

investment earnings first, until all such gains have been 

paid out, and then tax-free distributions of the original 

investment. In contrast, payments received through traditional annuitization are generally considered to contain 

proportional amounts of investment earnings and the 

return of the original investment, the result being that 

taxes are spread more evenly over the annuitization period. Information on a variable annuity’s fees, expenses, 

tax treatment, and surrender charges can be found in the 

prospectus for that specific product.

2

Provides for tax-deferred accumulation √ √

Has fees and surrender charges √ √

Offers a variety of investment options and may

include asset allocation models √ √

Addresses longevity risk √ √

Provides guaranteed lifetime income without

annuitization through optional benefits, such as √

a guaranteed minimum withdrawal benefit

Provides flexibility once lifetime income has begun 

(e.g., income can be stopped and started, and √

contract holders can access the underlying assets)

Potentially provides downside protection from

market risk (for lifetime income) √

Offers potential to “lock-in” market gains for

retirement income purposes √

Passes any remaining account value to

beneficiaries after lifetime income has begun √ (*) √

Traditional Variable

Annuities

(with guaranteed

lifetime income

through

annuitization only)

New Generation of

Variable Annuities

(with Guaranteed

Lifetime Income

Benefits)

Side-by-Side: Traditional vs. Modern Variable Annuity

(*) This feature is available with some traditional variable annuities as well as with most of the new generation 

of variable annuities with guaranteed lifetime income benefits.
In effect, with a guaranteed lifetime income option, you’ll 

never have to worry about outliving your income stream 

regardless of how the market performs. Like traditional 

annuities, you have income for life; unlike traditional 

annuities, you have a measure of control over and access to the underlying assets. (For example, you can 

withdraw an amount in excess of the guaranteed income 

payments, but this will reduce your future guaranteed income payments proportionately.) This control allows you 

to potentially grow your assets, access your money when 

needed, and possibly leave money behind for your heirs. 

What’s right for you?

Annuities aren’t for everyone. There are many features 

from which to choose. That’s why you should talk to 

your trusted financial professional and tax professional 

to be sure a variable annuity makes sense for your retirement plan and to help you select the variable annuity and optional features that are right for you. 

Investors should consider the contract and the underlying portfolios’ investment objectives, risks, 

charges and expenses carefully before investing. 

This and other important information is contained 

in the prospectus, which can be obtained from your 

financial professional. Please read the prospectus 

carefully before investing.

This material was prepared to support the promotion 

and marketing of variable annuities available through 

Prudential. Prudential, its affiliates, its distributors and 

their respective representatives do not provide tax, accounting or legal advice. Any tax statements contained 

herein were not intended or written to be used, and 

cannot be used for the purpose of avoiding U.S. federal, 

state or local tax penalties. Please consult your own 

independent advisor as to any tax, accounting or legal 

statements made herein.

Your needs and the suitability of an annuity product 

should be carefully considered before investing. When 

evaluating your needs, please consider other variable 

annuities available from Prudential Financial companies.

Annuity contracts contain exclusions, limitations, reductions of benefits and terms for keeping them in force. 

Your licensed financial professional can provide you 

with complete details.

All guarantees, including optional benefits, are backed 

by the claims-paying ability of the issuing company and 

do not apply to the underlying investment options.

Variable annuities are appropriate for long-term investing and designed for retirement purposes. Investment 

return and principal value of an investment will fluctuate 

so that an investor’s unit values, when redeemed, may be 

worth more or less than their original cost. Withdrawals 

or surrenders may be subject to contingent deferred sales 

charges (CDSC). Withdrawals and distributions of taxable 

amounts are subject to ordinary income tax and, if made 

prior to age 59 1⁄2, may be subject to an additional 10% 

federal income tax penalty. Withdrawals, for tax purposes, 

are deemed to be gains out first. Withdrawals can reduce 

the living benefit, death benefit and account value.

Variable annuities offered by Prudential Financial Companies are available at an annual cost of 0.65% to 1.65% for 

mortality, expense and administration fees, with an additional fee related to the professional investment options. 

Optional living and death benefits may not be available 

in every state and may not be elected in conjunction with 

certain optional benefits. Optional benefits have certain 

investment, holding period, liquidity and withdrawal 

limitations and restrictions. The fees are in addition to 

fees and charges associated with the basic annuity.

Variable annuities are issued by Pruco Life Insurance 

Company (in New York, by Pruco Life Insurance 

Company of New Jersey), Newark, NJ, or by Prudential 

Annuities Life Assurance Corporation, Shelton, CT. 

Prudential Annuities Distributors, Inc., Shelton, CT, 

distributes all. All are Prudential Financial companies 

and each is solely responsible for its own financial 

condition and contractual obligations. Prudential 

Annuities is a business unit of Prudential Financial.

Prudential, Prudential Financial, Prudential Annuities, 

the Rock logo and the Rock Prudential logo are 

registered service marks of The Prudential Insurance 

Company of America and its affiliates.

IFS-A155426 Ed. 7/09

3
Investing made simple...guaranteed.

Prudential IncomeFlex Target now available

Key benefits of Prudential IncomeFlex®

TargetSM include:

•Simplified investing—you just invest in the fund that

is right for you, and everything else is automatic.

• Automatic asset allocation—each fund uses the

fundamentals of asset allocation to create an asset

mix that is automatically adjusted over time to

address the needs of individuals at different stages

of their lives.

• Downside income protection—guarantees1 that your

income in retirement will be based on no less than

what you contribute to the fund, once guarantees

are activated. This is your minimum Income Base.

• Upside potential—allows you to stay invested in the

market so your Market Value can grow over time.

• Flexibility and control—like any other investment

within your plan—you can start, stop, or dip into

your account balance at any time.2

• Spousal benefit—you can elect to provide

guaranteed lifetime income for your spouse.3

• Guaranteed income for life—with IncomeFlex Target,

you can rest assured that you won’t outlive your

income during your retirement years.

• IncomeFlex Target is portable—meaning if you leave

the plan, you can take your guarantees with you by

moving them into a Rollover IRA, which is subject to

different charges.4

1

 Guarantees are based on the claims-paying ability of the insurance company and are subject to certain limitations, terms, and conditions.

2

 Withdrawals proportionately reduce guaranteed values prior to locking in. After lock-in, Withdrawals in excess of the Lifetime Annual Withdrawal amount will reduce guarantees 

proportionately.

3

 If you choose the spousal benefit, there is no additional fee, but your annual withdrawal rate will be reduced by 0.50% and determined based on the younger of your or your 

spouse’s age.

4 The annuity contract offered under the IRA may have substantially different fees, investments, and provisions affecting the guarantees than what is offered through your retirement 

plan. Availability varies by state jurisdiction.

n Equities and

Non-Traditional

n Fixed Income

IncomeFlex Target’s automatic asset allocation

The five pie charts below show you how an IncomeFlex Target fund’s asset allocation will change over the years. As you

can see, the allocation to fixed income increases as you near retirement, when goals typically shift towards safety of

principal and creating income.

In addition, as indicated by the last two highlighted pie charts, a guarantee feature is activated 10 years prior to the

fund’s target retirement date. This will both protect against market volatility and ensure you have a guaranteed stream

of income when you begin taking withdrawals.

94% 90%

6% 10%

76%

24%

60%

40% 40%

60%

40 yrs from

retirement

20 yrs from

retirement

30 yrs from

retirement

10 yrs from

retirement

At target

retirement date
Prudential IncomeFlex® TargetSM Funds are separate accounts under group variable annuity contracts issued by Prudential Retirement Insurance and Annuity Company

(PRIAC), Hartford, CT. PRIAC does not guarantee the investment performance or return on contributions to those separate accounts. 

You should consider the objectives, risks, charges, and expenses of the Funds and guarantee features before purchasing this product. Like all variable investments, these funds 

may lose value. Availability and terms may vary by jurisdiction, subject to regulatory approvals. Annuity contracts contain exclusions, limitations, reductions of benefits and terms 

for keeping them in force. Contract form # GA-2020-TGWB4-0805 or state variation. For this and other information, please access the participant website or call 

1-877-778-2100 for a copy of the Prudential IncomeFlex Target Important Considerations before investing. Before electing the Spousal Benefit (if available) on behalf 

of any beneficiary not recognized as your spouse under Federal law, be aware that provisions of the Plan or Internal Revenue Code might prevent, limit or otherwise affect 

the ability of the beneficiary to receive the Spousal Benefit.

Prudential Retirement, Prudential Financial, PRU, Prudential, and the Rock logo are registered service marks of The Prudential Insurance Company of America, Newark, NJ and 

its affiliates. Prudential Retirement is a Prudential Financial business. 

0162133-00001-00 RSF1192

Ed. 09/2009 

Get started with simplified investing—here’s how

Step 1 – Make the election 

Select the IncomeFlex Target fund most closely

matched to your expected retirement date. (Your plan

sponsor may have already made this election for you.)

Step 2 – Enjoy the simplicity

Your fund will automatically adjust as you edge

closer to your expected retirement date. Ten years

prior to the fund’s target retirement date, an income

guarantee feature is activated and Prudential begins

tracking an Income Base, and charging an additional

fee for the guarantee.

Step 3 – Determine your benefit 

On the day you decide to lock-in your IncomeFlex

Target benefit, generally at retirement, Prudential

will convert your Income Base into a guaranteed

income amount that you can withdraw for the rest

of your life. This amount is based on your age at the

time you lock-in:3

• 4.25% (If you are between the ages of 55 and 64)

• 5.00% (If you are between the ages of 65 and 69)

• 5.75% (If you are 70 or older)

Step 4 – Live your retirement 

Now you can retire knowing that you have a source of

income in retirement that will last as long as you live.

IncomeFlex Target’s guarantees continue

through retirement 

• Withdrawals for the rest of your life—you can

continue to withdraw guaranteed income even

if investment performance and guaranteed

withdrawals bring your IncomeFlex Market Value

to zero.

• Potential to increase guaranteed withdrawals—

if the Market Value of your IncomeFlex Target fund

exceeds the Income Base on any of your birthdays,

your guaranteed withdrawal amount will increase.

• Ongoing flexibility—you can cancel the guarantee

by transferring out of your IncomeFlex Target fund

at any time. You can withdraw more than your

guaranteed amount during retirement (this will

reduce the guarantee).

• Providing for beneficiaries—as with all of your plan

investments, any remaining Market Value will

pass to your beneficiaries.

• Affordability of guarantee—this protection is

provided in exchange for a 1% guarantee fee

(in addition to the standard management fees

associated with your account).

For more information about 

IncomeFlex Target and all the investment 

options available in your plan, go to

www.prudential.com/online/retirement

or call 1-877-778-2100