From: Ben Yahr [mailto:ben.yahr@gmail.com] 

Sent: Monday, May 03, 2010 11:13 PM 

To: EBSA, E-ORI - EBSA 

Subject: RIN 1210-AB33

Ladies and Gentlemen:

Thank you for giving me an opportunity to provide comments in response to the Request for

Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement

Plans (RIN 1210‐AB33) (the “RFI”).  I commend the Department of Labor (DOL) and the

Department of the Treasury (Treasury) (collectively, the “Agencies”) for this initiative to learn

more about guaranteed lifetime income solutions and for their willingness to consider possible

rulemaking to facilitate their use.   

  

Based on my experience as an investment advisor to retirement plans, I have addressed several

questions relating to the selection of in‐plan lifetime income solutions and the administrative

challenges they present.   

  

In addition, I have attached a paper ("Individual Pension Account with Purchasing Power

Protection" by Shannon and Yahr) which outlines an in‐plan lifetime income solution that I

believe satisfies many of the RFI’s objectives.  Please let me know if I can be of further

assistance.

Regards,

Ben Yahr

  

RFI Questions:

  

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)?

  

In‐plan solutions have the potential to provide participants with the ability to transfer undesired

risks (i.e., investment risk, longevity risk and/or inflation risk) to another entity during the

accumulation period.  If lifetime income payments are provided outside the plan, the participant

will need to bear these risks until they are able to distribute the funds into another investment

where they are able to transfer them to another party.

  

Another potential advantage to an in‐plan solution is its potential impact on participant

behavior.  Many participants do not make any positive elections with respect to their retirement

benefits.  As such, if the default distribution option for a portion of a participant’s account is an

in‐plan lifetime income benefit, I think that participants would begin to view that portion of

their account as being intended for income purposes and would be less likely to withdraw those

assets as a lump sum.  Outside the plan solutions necessitate a lump sum distribution into

another appropriate vehicle and encourage participants to view their retirement account as a

lump sum amount and not as future income payments.

  
For high net worth investors, out of plan solutions are significantly more flexibility than in plan

solutions.  Retail annuities can be tailored to fit participants’ needs at distribution.  However,

participants with smaller account balances may find it difficult to access good advice and to find

the best product for their needs.  For these participants, an in‐plan solution may offer better or

more appropriate benefits.

  

Interestingly, in today's market, retail variable annuities with riders that provide a guaranteed

lifetime withdrawal benefit appear to offer richer benefits than their institutional counterparts

for a comparable cost.  This observation is opposite what one would normally expect.   

  

14.  What are the impediments to plan sponsors’ including lifetime income options in their

plans, e.g., 401k or other qualification rules, other federal or state laws, cost, potential

liability, concern about counterparty risk, complexity of products, lack of participant demand?

  

While some in‐plan lifetime income solutions are available in the market, plan sponsors have

been reluctant to offer these benefits.  I think that there are several factors contributing to the

lack of use.  

• The in‐plan income solutions are very complex.  As such, these solutions are difficult for

plan sponsors, participants and advisors to understand.  

• The in‐plan solutions are difficult to administer/provide record keeping services.  

Therefore, solutions to date tend to be bundled with a single insurance company’s

recordkeeping platform.  

• Given the potential record keeping requirements (and existing limitations), it is unclear

whether participant benefits will be able to continue when they leave the plan through

termination or if the plan sponsor switches providers.  

• From a fiduciary standpoint, a plan sponsor could potentially be held liable if some

participants lose benefits they paid for because the plan sponsor elects to switch

providers.  

• Plan sponsors are concerned about the safeguards built into the products/in‐plan

lifetime income solutions to protect participants from themselves.  Most of the

guaranteed minimum withdrawal benefit (GMWB) for life product designs are only

guaranteed if the participant doesn’t withdrawal more than the guaranteed amount.  If

more is withdrawn, some carriers re‐determine the guaranteed amount, which could

erode the participant's guaranteed benefit.  

• If an in‐plan lifetime income solution is implemented, low balance participants that

would have historically taken a lump sum distribution would probably remain in the plan

and could increase the administrative cost of the plan.

  

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?

  

Yes.  I believe the benefit statement should include the amount of monthly income a

participant’s current balance may translate to in today’s dollars for both a single life annuity and

a joint and survivor annuity when the participant reaches his/her normal social security

retirement age.  In addition, the benefit statement should include the amount of future income
that may be generated with a 1% of salary monthly contribution until the normal retirement

age.   

  

This information would allow a participant to observe the amount of income in today’s dollars

that he/she may be able to generate from the retirement plan (and social security) and to adjust

his/her savings rate as necessary to achieve the desired income replacement ratio.
INDIVIDUAL PENSION ACCOUNT WITH PURCHASING POWER 

PROTECTION

Benjamin J. Yahr1 and Patrick J. Shannon2

EXECUTIVE SUMMARY

Rather than reinventing the wheel, a new investment election could be introduced into the existing defined 

contribution system in the US, which would satisfy many of the objectives outlined in the Department of Labor’s 

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

Rather than reinventing the wheel, the new investment election would allow participants to purchase an inflation 

adjusted defined benefit inside their existing defined contribution plan and/or IRA. Contributions and fund transfers 

into this new investment choice would purchase units for this benefit. The unit value would be based on the attained 

age and gender of the individual, using the value of a deferred immediate annuity payable at the target retirement 

age using a pre-defined real interest rate. The participant’s total number of units will equal the annual inflation 

adjusted benefit the participant has accrued in today’s dollars. Each year, the number of units would be increased by 

inflation (similar to TIPS). This feature would make it very easy for participants to observe their accrued annual 

retirement benefit in today’s dollars. As a result, their retirement income would be predicable and guaranteed, 

which would make it easier for participants to plan for their retirement. 

Similar to FEGLI, a government sponsored entity (possibly a committee from the PBGC or Social Security 

Administration) will provide governance of this benefit. This government entity will select an insurance company to 

be the lead provider of the benefits from an open bid process. Government sponsorship of the program would 

ensure portability and enable a broad sharing of longevity risk across the insurance companies who wish to 

participate. The insurance companies will primarily invest in TIPS to hedge the inflation risk. 

As part of the transition process, we recommend changing ERISA Section 404(c) to permit (or prescribe) this 

benefit as a Qualified Default Investment Alternative (QDIA). In addition, to help enable portability and access, we 

recommend establishing state sponsored defined contribution plans that any employer could elect to use in lieu of 

sponsoring their own plan. To help encourage participation and efficient pricing, the US government could create a 

series of TIPS for funding these benefits that have varying times to maturity and a fixed or predetermined real rate 

of interest. In other words, guarantee the availability of a hedging investment. 

While normal variance would be absorbed by the participating insurance companies, the governance structure will 

define a self-adjusting mechanism to respond to extreme events. If experience is significantly different than the 

pricing expectations, the target retirement ages by cohort would be recalculated using a predetermined process. 

1. INTRODUCTION

Historically, many participants were covered by defined benefit plans, which provided guaranteed lifetime income 

on top of social security. However, the number of individuals who are covered by defined benefit plans has 

 

1

 Benjamin J. Yahr, FSA, MAAA, CFA is the Head of Wealth Management at the 1934 Group. ben.yahr@gmail.com 

2

 Patrick J. Shannon, FSA, MAAA is the A&H Actuary at CV Starr. pat.shannon610@gmail.com 
Individual Pension Account with Purchasing Power Protection 2 

diminished rapidly over the last 20 years, due to the plan cost and employers’ desire to eliminate the risk associated 

with administering these plans. Now, only 20% of the employees are covered by these plans. 

Today, the majority of employees are covered under defined contribution plans, which shift all of the investment 

risk, longevity risk and inflation risk on to the participant. Unfortunately, individuals are not equipped to efficiently 

manage these risks. Many individuals lack the necessary knowledge or time to make prudent investments. Others 

suffer from bad decisions such as chasing returns, impulse spending, etc. While target date funds were developed to 

manage a portfolio of assets for an individual who is planning to retire in a particular year, they do not provide 

adequate protection for participants who are nearing retirement, as evidenced by the 2008 calendar year returns for 

the target 2010 funds. 

To compound matters, individuals who are not considered “high net worth” investors may find it difficult or 

impossible to get access to insurance products that create an income stream. Insurance products are complicated and 

intimidating for the average consumer. Therefore, consumers often rely on the advice from their financial advisor, 

insurance agent, or broker, who may not have their incentives aligned with the individual. This lack of trust or 

conflict of interest lessens the likelihood of an individual hedging their longevity risk. There exists a lack of 

transparency in the annuity market, making it nearly impossible for an average investor to evaluate different annuity 

products. Longevity hedging securities (annuities) can be very expensive, due to high distribution costs and 

unnecessary benefits. 

Given the state of the US retirement system, it is important to find a solution that: 

 Provides guaranteed income to individuals to supplement their social security benefits 

 Aligns roles with stakeholder skills 

 Can be adopted into the existing retirement system 

 Can be implemented in an effective low-cost manner 

Rather than reinventing the wheel, a new investment election could be introduced into the existing defined 

contribution system in the US, which would satisfy many of the objectives outlined in the Department of Labor’s 

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

The new investment election would allow participants to purchase an inflation adjusted defined benefit inside their 

existing defined contribution plan and/or IRA. For the remainder of this paper, we will refer to this new investment 

option added to a defined contribution plan as an Individual Pension Account with Purchasing Power Protection 

(IPAwithPPP). 

2. BENEFIT DESCRIPTION

IPAwithPPP mitigates some of the potential moral hazards that plague defined contribution plans. First, the benefit 

is only available in the form of lifetime income or joint lifetime income; thus, much of the behavior risks (loans, 

chasing returns, having too much invested in risky investments, etc.) associated with an individual are eliminated. 

Next, the number of units owned in IPAwithPPP translates directly to the annual retirement benefit in today’s 

dollars at the target retirement age. As a result, it is much easier for a participant to gauge whether they are on track 

with their retirement savings and take action before it is too late. Third, IPAwithPPP enables employees to transfer 

inflation risk and longevity risk to insurance companies, entities with the expertise, ability, and desire to assume 

those risks. 
Individual Pension Account with Purchasing Power Protection 3 

The IPAwithPPP would fit right on top of Tier I social insurance. The total benefit would be communicated to 

participants in the form of guaranteed annual income in today’s dollars. As such, it will be simple for a participant 

to determine the percent of their existing income they will be able to replace when they retire. 

One significant difference from Tier I social insurance is the equity between income levels. Low-middle and 

middle-class workers will be able to replace a significant portion of their income, when combined with Social 

Security. 

2.1. What is the benefit? 

A new investment election would be introduced into the existing defined contribution system in the US. The new 

investment election would allow participants to purchase an inflation adjusted defined benefit inside their existing 

defined contribution plan and/or IRA. 

2.2. How will it work? 

Contributions and fund transfers would purchase units for this benefit. The unit value would be based on the 

attained age and gender of the individual, using the value of a deferred immediate annuity payable at a specified age 

using a pre-defined real interest rate. The participant’s total number of units will equal the annual inflation adjusted 

benefit the participant has accrued in today’s dollars. Each year, the number of units would be increased by inflation 

(similar to TIPS). Please refer to the appendix for a numerical example. 

When the participant reaches the specified retirement age, the default option for a married participant would be a 

joint and 50% survivor life annuity, using an actuarially based adjustment factor. This level of income would be 

included on all statements in addition to the single life annuity income amount. This feature would make it very 

easy for participants to observe their accrued annual retirement benefit in today’s dollars. As a result, their 

retirement income would be predicable and guaranteed, which would make it easier for participants to plan for their 

retirement. 

If the participant dies prior to the specified retirement age, the participant’s accumulated balance would be 

transferred to the participant’s spouse at the spouse’s applicable unit value. Other than the death benefit and 

retirement income, no other benefits would be available. 

2.3. Who sponsors the benefit? 

The IPAwithPPP will be integrated into the current private retirement system available in the US. It operates similar 

to a mutual fund, which can be an investment option available in both defined contribution plans and IRAs. 

2.4. How will the benefit be communicated to participants? 

Employers will still play a big role in terms of access and education. The qualified default investment alternative 

could become the IPAwithPPP. This benefit solves a number of the moral hazard issues which plague the current 

DC system in the US. However, participants need to understand that the money deposited into this option is not 

available for loans, lump-sum distribution, hardship withdrawals, etc. The sole purpose of the IPAwithPPP is to 

provide supplementary retirement benefits on top of Social Security. 

An effective communication mechanism may be to integrate the communication of a participant’s social security 

benefit and their IPAwithPPP benefit. This coordinated communication could either be provided by the Social 

Security Administration two months prior to a participant’s birthday or by the insurance company or recordkeeper 

administering the IPAwithPPP benefits, by linking into the SSA database. Education materials could also be 

available on-line for participants. 
Individual Pension Account with Purchasing Power Protection 4 

3. GOVERNANCE STRUCTURE

3.1. Define governance roles 

A government sponsored entity will provide governance of the IPAwithPPP benefit. This government entity will 

select an insurance company to be the lead provider of the benefits from an open bid process. The government 

entity (or possibly lead insurer under prescribed guidelines) will then solicit other insurance companies that meet 

strict qualification guidelines to join the pool. Any insurance company that the government entity invites and is 

willing to accept the terms of the pool may join the group of insurance companies insuring the benefit. The 

government entity will also be responsible for regular spot checking of the creditworthiness of the companies in the 

pool, periodic review of the appropriateness of the investments supporting the IPAwithPPP benefits, and 

independent analysis of the reserve adequacy of the pool, as performed by the lead insurer. 

In an effort to promote efficiency, employers could elect to offer a state sponsored defined contribution plan, which 

would transfer all responsibility for the retirement plan to the sponsoring state. States’ roles would be similar to 

their role in sponsoring a 529 plan. Each state could choose a plan design from one of several prototype safe harbor 

plans. Then, the state would assume fiduciary responsibility for the plan, including the selection of investment 

options, a custodian, and a recordkeeper. In addition, the state would be responsible for all related compliance 

testing and government reporting. If the employer selected a state/plan design that required employer contributions, 

then the employer would be responsible to make those contributions. In return for being relieved of the 

responsibilities and expenses of sponsoring a retirement plan, employers who choose to offer the benefits through 

the state sponsored plans would have reduced flexibility in selecting/customizing their retirement plans. 

3.2. Formation of Pool 

A pool will be formed to facilitate the sharing of this risk. Companies will be approached to join the pool and asked 

whether they wish to bid on becoming the lead administrator and/or insurer. The board of directors described in 

section 3.3 will be responsible for choosing the lead administrator and the lead insurer. It is not obligatory that these 

two roles are filled by the same company. 

Risk sharers will need to meet designated capital and surplus requirements. In order to remain a risk taker, these or 

updated requirements will need to be perpetually satisfied. The initial shares will be allocated in a way similar to the 

allocation of reinsurance limits on catastrophe programs. Each company will submit terms and limits that they 

would accept. Then, the final terms would be determined such that the capacity would exceed the total expected 

amount of annual contributions into the IPAwithPPP benefit. The shares would be allocated to each company based 

on their limits. In future pool years, current pool members could increase or decrease their shares at the prevailing 

terms. If there was insufficient interest from existing pool members, the pool could open up to new membership. If 

the pool wants to change the terms, then the initial process would be conducted again. 

The administrator would be responsible for all record keeping and banking. All interested companies will submit to 

a bid process for the committee to choose the administrator. An administrative agreement between the pool members 

and the administrator will determine the rules under which this pool will operate. 

3.3. Checks and balances 

The board of directors of the government sponsored entity that provides oversight to the IPAwithPPP benefits will 

contain a combination of professional, government and industry representatives. The board members will be 

appointed by congress (or other responsible government agency) and have pre-specified terms (maybe 3 or 5 years). 
Individual Pension Account with Purchasing Power Protection 5 

Every five years, the government sponsored entity that oversees the IPAwithPPP benefit will conduct an open bid 

process to select/re-confirm the lead insurer. This open bid process will ensure that the program continues to offer 

competitive benefits to participants while providing a sufficient amount to time to permit the lead insurer to amortize 

any acquisition costs. The public accounting firm who will serve as the auditor will also be selected every five 

years. 

Each year, a public accounting firm will audit the IPAwithPPP benefits. They will be responsible to verify that the 

lead insurer and other pool members are following the agreed upon guidelines. In addition, they will verify that 

participant benefits are being credited accurately, that reserves are complete, accurate, and in accordance with 

generally accepted accounting procedures, and that the benefits are properly paid. The audit engagement would be 

similar to work conducted for insurance companies and mutual funds. 

Rating agencies will monitor the insurance companies’ risk management practices and solvency. Insurance 

companies who choose to engage in risky practices (i.e. forgoing hedges for potentially increased profit) could 

potentially be downgraded. Most insurance companies desire to keep a certain level of ratings and will make 

decisions in an attempt to maintain their desired rating. Ratings are easily observable for the government sponsoring 

entity as well as the public. 

State regulators will also play an important role as each state’s insurance department monitors the statutory solvency 

of the insurance companies domiciled in its state. If an issue exists in one of the insurance companies that is part of 

the pool, the state regulator would step in to monitor the remediation. At this early stage, the pool could recapture 

the business placed with this insurance company based on a pre-defined formula. This way, if a solvency/liquidity 

issue occurs in one of the companies in the pool, the liabilities attributable to the IPAwithPPP benefit could be 

transferred in an orderly process. Since a process would be in place to transfer IPAwithPPP liabilities back to the 

pool in the event of financial distress, the IPAwithPPP benefit would not be subject to state life and health guarantee 

association coverage. 

3.4. Self Adjusting Mechanism 

It is important to note that normal variance will be absorbed by the insurance companies electing to participate in 

offering these benefits. Profits and losses within certain bounds will flow to their bottom line and their shareholders. 

If an extreme event moves the funding status of the benefits outside of the normal variance, the governance structure 

will allow for a process to change the target retirement age. The definition of an extreme event could be in terms of 

standard deviation (e.g., experience that translates to 6 times the normal standard deviation or more) or in terms of a 

CTE (e.g., an event that leads to a CTE of 99%). Since a small change in the retirement age will have a big impact 

on the level of funding (see the American Academy of Actuaries August 2008 briefing statement where they 

advocated increasing the normal retirement age for an example of the impact of a small change in retirement age), 

the self-adjusting mechanism will keep the funding within balance, even in extreme situations. 

When changes to the target retirement age are necessary, the governance structure will balance the time horizon of 

the cohorts who are retired and about to retire with the intergenerational subsidy that may be occurring. We believe 

it is desirable to keep the retirement age and benefit levels relatively constant for people in or close to retirement. 

We would also want to preserve the purchasing power of the units that participants had accumulated. As a result, 

any positive or negative deviations outside of the normal levels of variance would change the retirement ages of the 

cohorts with a longer time horizon (i.e., younger people with more than 10 years to retirement). 
Individual Pension Account with Purchasing Power Protection 6 

4. STAKEHOLDER ROLES

4.1. Society 

Society will need to encourage employers/plans to establish IPAwithPPP as the qualified default investment 

alternative (QDIA). For most individuals, this investment option would be more prudent than a target retirement 

fund. Society could either mandate the adoption of the IPAwithPPP as the QDIA or create a strong incentive by 

modifying the fiduciary safe harbor that the Pension Protection Act created. 

Similar to FEGLI, a government sponsored entity (possibly a committee from the PBGC or Social Security 

Administration) will provide governance of this benefit. This government entity will select an insurance company to 

be the lead provider of the benefits from an open bid process. The government entity (or possibly lead insurer under 

prescribed guidelines) will then solicit other insurance companies that meet strict qualification guidelines to join the 

pool. Any insurance company that the government entity invites and is willing to accept the terms established by 

the lead insurer may join the group of insurance companies insuring the benefit. The government entity will also be 

responsible for regular spot checking of the creditworthiness of the companies in the pool, period review of the 

appropriateness of the investments supporting the IPAwithPPP benefits, and independent analysis of the reserve 

adequacy of the pool, as performed by the lead insurer. 

Rather than relying solely on employers to provide access and have to bear the administrative costs of running a 

defined contribution or defined benefit plan, we recommend establishing state sponsored defined contribution plans 

that any employer could elect to use in lieu of sponsoring their own plan. States’ roles would be similar to their role 

in sponsoring a 529 plan. Each state could choose a plan design from one of several prototype safe harbor plans. 

The state would assume fiduciary responsibility for the plan, including the selection of investment options, a 

custodian, and a recordkeeper. In addition, the state would be responsible for all related compliance testing and 

government reporting. Another potential advantage of the state sponsored plans is that they would provide a 

recordkeeping facility to ensure portability of the IPAwithPPP benefit for terminated workers. 

This approach could enable small employers to offer retirement benefits without worrying about taking on fiduciary 

risk, financial risk and compliance risk. If the employer selected a state/plan design that required employer 

contributions, then the employer would be responsible to make those contributions. In return for being relieved of 

the responsibilities and expenses of sponsoring a retirement plan, employers who choose to offer the benefits 

through the state sponsored plans would have reduced flexibility in selecting/customizing their retirement plans. 

Since the state offered plans would be optional, small employers who wish to set up a more complex plan designs to 

enable the owners to maximize their contributions would be able to continue these plan designs. 

4.2. Individuals 

Employees are still responsible for saving for their individual retirement. However, IPAwithPPP helps mitigate 

some of the potential moral hazards that plague defined contribution plans. First, the benefit is only available in the 

form of lifetime income or joint lifetime; thus, much of the behavior risks (loans, chasing returns, having too much 

invested in risky investments, etc.) associated with an individual are eliminated. Next, the number of units owned in 

IPAwithPPP translates directly to the annual retirement benefit in today’s dollars at the target retirement age. As a 

result, it is much easier for a participant to gauge whether they are on track with their retirement savings and take 

action before it is too late. Third, IPAwithPPP enables employees to transfer inflation risk and longevity risk to 

insurance companies, entities with the expertise, ability, and desire to assume that risk. 

While normal variance would be absorbed by the participating insurance companies, the governance structure will 

define a self-adjusting mechanism to respond to extreme events. If experience is significantly different than the 

pricing expectations, the target retirement ages by cohort would be recalculated using a predetermined process. To 
Individual Pension Account with Purchasing Power Protection 7 

the extent a funding shortfall exists, the retirement age of younger participants may be adjusted to restore balance in 

the system. 

4.3. Employers 

Employers have historically provided access to retirement plans and a communication channel to educate employees 

on various aspects of retirement planning. Under IPAwithPPP, we envision that employers would continue to 

encourage workers to save for retirement and provide them with educational resources related to retirement 

planning.. For employers who wish to provide a more attractive employee benefit, they would still have the ability 

to make non-elective, matching or discretionary employer contributions, as they can do under the current defined 

contribution plans. Employers will also have the ability to transfer all responsibility for the retirement plan to state 

sponsored entities, as discussed in Section 4.1. Employers who currently do not sponsor retirement plans may 

decide to begin offering retirement benefits by using the state sponsored plans. 

4.4. Markets 

4.4.1. Insurance Companies 

Insurance companies will assume inflation risk and longevity risk. They will retain the longevity risk and hedge the 

inflation risk by purchasing TIPS. Insurance companies will also provide a death benefit to transfer a participant’s 

accumulated balance (i.e., # of units times the unit value) to a participant’s spouse in the event of a participant’s 

death prior to retirement. 

The lead insurer will take the expense risk of administering the pool. 

4.4.2. Hedging Instruments 

The insurance companies will primarily purchase TIPS to hedge the inflation risk. A small portion of the portfolio 

may be invested in corporate bonds or other investments to help increase the spread/lower the cost of the benefits. 

While the program could certainly work today, the efficiency of the program could be greatly improved if the 

government is willing to make a special series of TIPS available for the purpose of providing IPAwithPPP benefits. 

The key item is for the government to agree to supply TIPS of varying durations with a specific real rate of return. 

This will allow insurance companies to price deferred immediate annuities with a known real interest rate. As a 

result, the insurance companies will be able to determine the unit value at each age with certainty and the number of 

units a participant has accumulated will correspond to his/her annual benefit in today’s dollars. We believe there 

may be secondary benefit of allowing the government to “to refinance” part of the current debt held by foreign 

entities while supporting a program aimed at shoring up retirement saving for the middle class. Having a regular 

purchaser of US debt securities may help to stabilize the US currency and possibly lead to lower inflation on 

imported commodities. 

4.4.3. Recordkeepers 

Recordkeepers will be responsible for tracking the number of units that participants have purchased, communicating 

this information to participants, making payments to retired participants, answering participant phone calls, 

administering death claims, etc. While the IPAwithPPP benefit will look similar to a mutual fund on their existing 

platform, the recordkeeper will need to be able to identify the participant’s age and gender to ensure that they are 

using the proper unit values. They will also need to be able to identify a participant’s marital status on the death of 

the participant and at retirement, which could be accomplished through claim forms. 
Individual Pension Account with Purchasing Power Protection 8 

5. ADMINISTRATIVE COSTS

The administrative costs and risk charges will be covered by the spread between the real interest rates earned by the 

insurance companies and the real interest rates assumed in the development of the unit values. 

The administrative costs for IPAwithPPP fall into several categories: governance, recordkeeping, and insurance. 

The most significant of these expenses will be the insurance cost, which we believe would be around 50bp and 

would be absorbed by the spread between the real rate TIPS earn and the rate credited to participants. This 

insurance cost will cover the risk charge, profit margin and expenses incurred by the insurance companies 

participating in the pool. The lead insurance company will receive slightly more of the expense charge to offset 

their extra expenses in administering the pool. Similar to a mutual fund back-office, they would be responsible to 

determine the number of units outstanding, the unit value of each and communicate this information to each 

custodian/recordkeeper. In addition, they would be responsible to produce reports on the funds received and 

send/receive money from each of the pool members. The insurance companies will also need to either provide 

recordkeeping of these benefits or provide a modest amount of revenue sharing to offset the recordkeeper’s expenses 

associated with administering this benefit. Also included in this insurance cost is the amount needed for the death 

benefit of married participants. 

The cost of governance should be modest in light of the expected scale of this benefit. It will likely consist of the 

salaries of the governing board members and independent auditor fees. In total, this should be less than a few 

million dollars per year. 

Recordkeepers may need to enhance their systems to enable them to identify and track a participant’s age and 

gender, which are key items in determining the unit value of a participant’s benefits. Since the system changes will 

likely be a one-time enhancement, they can be amortized over many years. 

6. TRANSITION ISSUES

6.1. Legislative Changes 

6.1.1. Changes to ERISA Section 404(c) 

While not a necessary constraint for success, the government could encourage this benefit as the qualified default 

investment alternative. However, at a minimum, several changes will need to be made to ERISA Section 404(c) to 

permit the use of the IPAwithPPP benefit by plan fiduciaries. Specifically, since the IPAwithPPP would not permit 

the transfer of funds out of the benefit (money allocated to this fund are purchasing a deferred immediate annuity), 

the rules governing transfers in and out of the core funds and low risk funds will need to be modified to permit the 

use of the IPAwithPPP benefit. Also, it may make sense to allow a plan to simply offer the IPAwithPPP benefit as 

the only option. In this case, the requirement to allow participants to choose between three or more alternatives 

would need to be modified. It may also be desirable to modify the legislation to permit plans to allocate employer 

contributions to the IPAwithPPP benefit instead of allowing participant investment control over these contributions. 

6.1.2. Beneficiary Changes 

Under current rules, a participant’s funds are passed along to their spouse or beneficiaries upon their death. These 

rules would need to be slightly altered for funds that are deposited into the IPAwithPPP benefit. If a participant in 

IPAwithPPP dies before they reach retirement age, any funds in the IPAwithPPP account will flow into their 

spouse’s account if they are married or be forfeited if they do not have a living spouse at the time of the participant’s 

death. In this way, those who die prematurely will provide funds for those participants who live longer than their 

life expectancy. 
Individual Pension Account with Purchasing Power Protection 9 

6.1.3. Federal Insurance Regulation 

Because of the nature of the IPAwithPPP benefit and the desire to have it be added as an investment option in the 

current structure of the defined contribution system, this specific insurance benefit should be regulated by federal 

statutes instead of the 50 individual state rules. State regulation is important and will definitely be one of the checks 

and balances to ensure that moral hazard is held in check. However, the desire to have a uniform set of benefits 

enacted uniformly across states (both initially and in the future as experience may warrant) is critical. If this 

uniformity was not the case, a participant in one state may be subject to a very different deal than a participant in 

another state, which would make administration very complicated and undermine public confidence in the solution. 

6.1.4. Eligibility and Vesting Rules for Employer Contributions 

Because of the nature of IPAwithPPP benefits (they are effectively a deferred immediate annuity) and the 

availability of state sponsored plans, rules would become very complicated if vesting schedules are permitted on 

employer contributions. As such, rules should be changed so that employer contributions vest immediately. 

Employers who wish to limit contributions for short-term employees could establish a waiting period before 

participants become eligible for employer contributions. 

6.2. State Sponsored Plans 

Current IRS rules for groups that can provide retirement benefits would need to be expanded/modified to permit 

employers to join state sponsored defined contribution plans. Rather than relying solely on employers to provide 

access and have to bear the administrative costs of running a defined contribution or defined benefit plan, we 

recommend establishing state sponsored defined contribution plans that any employer could elect to use in lieu of 

sponsoring their own plan. States roles would be similar to their role in sponsoring a 529 plan. Each state could 

choose a plan design from one of several prototype safe harbor plans. The state would assume fiduciary 

responsibility for the plan, including the selection of investment options, a custodian, and a recordkeeper. In 

addition, the state would be responsible for all related compliance testing and government reporting. The state plans 

would also provide recordkeeping services to facilitate portability of the IPAwithPPP benefit for terminated 

workers. 

6.3. New Series of TIPS 

To help encourage participation and efficient pricing, the US government could create a series of TIPS for funding 

these benefits that have varying times to maturity and a fixed or predetermined real rate of interest. In other words, 

guarantee the availability of a hedging investment. Additional details are discussed in Section 4.4.2. 

6.4. Recordkeeper Technology 

One significant implementation issue is the ability of recordkeepers to identify the age and gender of participants. If 

the government encourages the development of IPAwithPPP, we believe that existing recordkeepers will make the 

necessary enhancements. In addition, entrepreneurs may be enticed into this marketplace with new technology that 

enables them to administer existing benefits along with the IPAwithPPP benefits. 

6.5. Investment Advisor Resistance 

It will be difficult for investment advisors to be paid an asset based fee when the IPAwithPPP benefit exists in a 

defined contribution offering. As such, a move to a flat fee arrangement may be necessary. Then, the investment 

advisor will need to work with the employer or participant to determine how to structure compensation such that the 

investment advisor receives the same compensation regardless of which investment choices a participant makes. 
Individual Pension Account with Purchasing Power Protection 10

7. CONCLUSION

The IPAwithPPP, a new investment option offered within the existing defined contribution system in the US, would 

satisfy many of the the objectives outlined in the Department of Labor’s Request for Information Regarding 

Lifetime Income Options for Participants and Beneficiaries in Retirement Plans. This investment election would 

allow participants to purchase an inflation adjusted defined benefit inside their existing defined contribution plan 

and/or IRA. As we discussed, this benefit will provide guaranteed inflation adjusted income to individuals to 

supplement their social security benefits, align roles with stakeholder skills, and can be adopted into the existing 

retirement system in an effective low-cost manner. 

8. BIOGRAPHIES

BENJAMIN J. YAHR has worked in the financial services industry since 1993. In August, 2006, he joined the 1934 

Group, an independent financial services firm that is part of the M-Financial Group. Ben heads up the firm's wealth 

management services, which include investment advisory services for individuals, endowments, foundations and 

qualified plans, retirement income planning, and holistic financial planning. Prior to joining the 1934 group, he held 

a variety of traditional actuarial positions in two insurance companies and a consulting firm. Ben is a Fellow of the 

Society of Actuaries and a member of the American Academy of Actuaries and holds a Chartered Financial Analyst 

designation. 

PATRICK J. SHANNON has worked in the insurance industry since 1985. In June, 2009, he joined CV Starr. Pat 

is responsible for all actuarial functions for the Accident and Health operation. Prior to joining CV Starr, he held a 

variety of traditional actuarial positions at CIGNA and Towers Perrin. Pat is a Fellow of the Society of Actuaries 

and a member of the American Academy of Actuaries. 
Individual Pension Account with Purchasing Power Protection 11

9. APPENDIX: A NUMERICAL EXAMPLE

Assumptions: 

 Mortality: 80% of the Annuity 2000 mortality table with mortality improvement of 1.0% per year. 

 Real Return assumed in unit values: 1.0% 

 Specified Retirement Age for IPAwithPPP: 70 

 Sample Individual 

o Age: 40 year 

o Gender: Male 

o Salary (in 2010 dollars): $40,000 

o Percent of salary contributed to retirement plan: 10.0% 

o Social Security Benefit at age 70: $22,152 (estimated using the quick calculator on the Social 

Security website 

For this sample person, Social Security would replace approximately 55.4% of his pre-retirement income. If all of 

his retirement plan contributions beginning today were allocated to the IPAwithPPP benefit, he would replace an 

additional 18.6% of his income. Therefore, when the IPAwithPPP is combined with social security, the individual 

in this example would have replaced 74.0% of his pre-retirement income on an inflation adjusted basis. 

The unit values for the IPAwithPPP benefit equals the cost of purchasing $1 of inflation adjusted income per year 

that begins at the specified retirement age for the program. Using the assumptions above for the specified retirement 

age, mortality and real return, the unit values for a male retiring in 2040 have been calculated in Table 1. 

Year Age Unit Value Year Age Unit Value Year Age Unit Value

2010 40 13.62 2020 50 15.24 2030 60 17.35

2011 41 13.77 2021 51 15.43 2031 61 17.60

2012 42 13.92 2022 52 15.62 2032 62 17.85

2013 43 14.07 2023 53 15.81 2033 63 18.12

2014 44 14.22 2024 54 16.01 2034 64 18.39

2015 45 14.38 2025 55 16.22 2035 65 18.68

2016 46 14.55 2026 56 16.43 2036 66 18.99

2017 47 14.71 2027 57 16.65 2037 67 19.31

2018 48 14.89 2028 58 16.88 2038 68 19.64

2019 49 15.06 2029 59 17.11 2039 69 20.00

Table 1

Unit Values for a Male Retiring in 2040

Note: The unit values represent the present value of an annuity of $1 of inflation adjusted income per year 

beginning at age 70.
Individual Pension Account with Purchasing Power Protection 12

Table 2 shows an example of the accumulation of units of IPAwithPPP for the sample individual we outlined above. 

As you can see, in 2040, the IPAwithPPP benefit will replace 18.6% (=7434/40000) of his pre-retirement income. 

Year Age Salary Contribution

Beginning

Balance Purchased Credited

Ending

Balance

2010 40 $40,000 $4,000 0 294 0 294

2011 41 $40,000 $4,000 294 291 0 584

2012 42 $40,000 $4,000 584 287 0 872

2013 43 $40,000 $4,000 872 284 0 1,156

2014 44 $40,000 $4,000 1,156 281 0 1,437

2015 45 $40,000 $4,000 1,437 278 0 1,715

2016 46 $40,000 $4,000 1,715 275 0 1,990

2017 47 $40,000 $4,000 1,990 272 0 2,262

2018 48 $40,000 $4,000 2,262 269 0 2,531

2019 49 $40,000 $4,000 2,531 266 0 2,796

2020 50 $40,000 $4,000 2,796 262 0 3,059

2021 51 $40,000 $4,000 3,059 259 0 3,318

2022 52 $40,000 $4,000 3,318 256 0 3,574

2023 53 $40,000 $4,000 3,574 253 0 3,827

2024 54 $40,000 $4,000 3,827 250 0 4,077

2025 55 $40,000 $4,000 4,077 247 0 4,324

2026 56 $40,000 $4,000 4,324 243 0 4,567

2027 57 $40,000 $4,000 4,567 240 0 4,807

2028 58 $40,000 $4,000 4,807 237 0 5,044

2029 59 $40,000 $4,000 5,044 234 0 5,278

2030 60 $40,000 $4,000 5,278 231 0 5,508

2031 61 $40,000 $4,000 5,508 227 0 5,736

2032 62 $40,000 $4,000 5,736 224 0 5,960

2033 63 $40,000 $4,000 5,960 221 0 6,181

2034 64 $40,000 $4,000 6,181 217 0 6,398

2035 65 $40,000 $4,000 6,398 214 0 6,612

2036 66 $40,000 $4,000 6,612 211 0 6,823

2037 67 $40,000 $4,000 6,823 207 0 7,030

2038 68 $40,000 $4,000 7,030 204 0 7,234

2039 69 $40,000 $4,000 7,234 200 0 7,434

Note: Each unit represents $1 of inflation adjusted income beginning in year 2040 (age 70).

# of Units of IPAwithPPP

Table 2

IPAwithPPP Illustration assuming no inflation
Individual Pension Account with Purchasing Power Protection 13

Table 3 extends the prior example by showing the mechanics of what happens when inflation exists. In this 

example, we will assume inflation is 3%. As you can see, in 2040, the IPAwithPPP benefit will still replace 18.6% 

(=17518/94263) of his pre-retirement income, since all else is equal other than the inflation assumption. Similar to 

TIPS, the number of units added (labeled as “credited” in Table 3) to a participants balance will equal the starting 

balance times the rate of inflation in the prior year. By increasing units in this manner, the # of Units of 

IPAwithPPP will always represent the annual amount of income a participant will receive in today’s dollars. 

Year Age Salary Contribution

Beginning

Balance Purchased Credited

Ending

Balance

2010 40 $40,000 $4,000 0 294 0 294

2011 41 $41,200 $4,120 294 299 9 602

2012 42 $42,436 $4,244 602 305 18 925

2013 43 $43,709 $4,371 925 311 28 1,263

2014 44 $45,020 $4,502 1,263 317 38 1,618

2015 45 $46,371 $4,637 1,618 322 49 1,988

2016 46 $47,762 $4,776 1,988 328 60 2,376

2017 47 $49,195 $4,919 2,376 334 71 2,782

2018 48 $50,671 $5,067 2,782 340 83 3,206

2019 49 $52,191 $5,219 3,206 347 96 3,649

2020 50 $53,757 $5,376 3,649 353 109 4,111

2021 51 $55,369 $5,537 4,111 359 123 4,593

2022 52 $57,030 $5,703 4,593 365 138 5,096

2023 53 $58,741 $5,874 5,096 371 153 5,620

2024 54 $60,504 $6,050 5,620 378 169 6,167

2025 55 $62,319 $6,232 6,167 384 185 6,736

2026 56 $64,188 $6,419 6,736 391 202 7,329

2027 57 $66,114 $6,611 7,329 397 220 7,945

2028 58 $68,097 $6,810 7,945 403 238 8,587

2029 59 $70,140 $7,014 8,587 410 258 9,255

2030 60 $72,244 $7,224 9,255 416 278 9,949

2031 61 $74,412 $7,441 9,949 423 298 10,670

2032 62 $76,644 $7,664 10,670 429 320 11,420

2033 63 $78,943 $7,894 11,420 436 343 12,198

2034 64 $81,312 $8,131 12,198 442 366 13,006

2035 65 $83,751 $8,375 13,006 448 390 13,844

2036 66 $86,264 $8,626 13,844 454 415 14,714

2037 67 $88,852 $8,885 14,714 460 441 15,616

2038 68 $91,517 $9,152 15,616 466 468 16,550

2039 69 $94,263 $9,426 16,550 471 497 17,518

Note: Each unit represents $1 of inflation adjusted income beginning in year 2040 (age 70).

Table 3

IPAwithPPP Illustration assuming 3% Inflation

# of Units of IPAwithPPP