Filed Electronically: 

Via e-ORI@dol.gov 

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, D.C. 20210 

Attention: Lifetime Income RFI 

 75 Fed. Reg. 5253 (February 2, 2010) 

RIN 1210-AB33 

Dear Sir and Madam: 

AARP appreciates the opportunity to comment on the Request for Information of the Departments 

of Labor (DOL or Labor) and Treasury (Treasury) on the issue of lifetime income for retirement 

plan participants and beneficiaries.1

As the largest nonprofit, nonpartisan organization representing the interests of Americans age 50 

and older and their families, a major priority for AARP is to assist Americans in accumulating and 

effectively managing adequate retirement assets to supplement Social Security. Nearly half of our 

members are employed, full or part-time, with many of those employers providing retirement plans. 

Many defined benefit plans now offer numerous distribution options, other than the default joint and 

survivor option, at retirement, requiring a decision that was not contemplated when ERISA and 

REA were enacted. Moreover, the shift away from defined pension plans to defined contribution 

plans places significant responsibility on individuals to make appropriate decisions concerning their 

contributions, their investments and how they will manage their money once they retire so that they 

will have adequate income to fund their retirement years. The recent financial turmoil and scandals 

underscore the importance of these decisions. 

In order to make the review of AARP’s responses easier, we have grouped our questions and 

answers in the same manner that the RFI has grouped its questions. Finally, AARP has initiated a 

survey and other research on individuals’ views about annuities and other lifetime income products. 

We expect to complete a report on the survey results in late spring and will be happy to share our 

 

1

 AARP will use the term participants and beneficiaries interchangeably; the terms are meant to be inclusive. 
AARP Comments: Lifetime Income Stream RFI Page 2 

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findings with the Departments of Labor and Treasury at that time. Based on the survey’s findings, 

we may also supplement the answers that we are providing today. 

AARP appreciates the opportunity to present its views on the Department’s proposed regulation 

concerning investment advice. Please do not hesitate to contact me at 202/434-3750 

Sincerely, 

David Certner 

Legislative Counsel and Legislative Policy Director 

Government Relations and Advocacy 

cc: Alan D. Lebowitz, Deputy Assistant Secretary 

Robert Doyle, Director, Office of Regulations and Interpretations 

Stephanie L. Ward, Office of Regulations and Interpretations 

Luisa Grillo-Chope, Office of Regulations and Interpretations 

Joseph Piacentini, Chief Economist and Director of the Office of Policy and Research 

Timothy D. Hauser, Associate Solicitor 

William Taylor, Regulation Counsel, Plan Benefits Security Division 

 

 Peter J. Marks, Associate Chief Counsel 

 Office of Division Counsel 

 Tax Exempt & Government Entities 
AARP Comments: Lifetime Income Stream RFI Page 3 

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May 3, 2010

AARP Response to 

Request for Information on Lifetime Income 

75 Fed. Reg. 5253 (February 2, 2010) 

RIN 1210-AB33 

AARP welcomes the interest of the Departments of Labor and Treasury in the issue of lifetime 

income for retirement plan beneficiaries and participants. Today, only about 21 percent of workers 

have defined benefit (DB) pension coverage whereas 43 percent have defined contribution (DC) 

plan coverage.2 Only a small fraction of DC plans offer an annuity or other lifetime income option. 

Moreover, while traditional DB plans provide lifetime streams of income, many DB plan sponsors 

today also offer lump-sum benefits and many retirees are opting for them.3

 Younger workers are 

more likely than older workers to have only a DC plan, and the number of workers retiring with 

substantial retirement account balances received as a lump-sum is growing. It is not clear how, or 

how well, beneficiaries will manage those assets throughout decades of retirement. 

A combination of research, education, a larger and more efficient market for lifetime income 

products, and new policies will be needed to ensure the economic security of future retirees. 

Options for increasing the share of retirement wealth that is annuitized should be carefully assessed, 

and must consider appropriateness for a variety of individuals, costs, and individual preferences and 

behavior. AARP is currently conducting a survey as well as a controlled experiment to assess 

individual perceptions and attitudes about lifetime income options. The survey will ask about the 

plans of older workers and recent retirees for managing income in retirement, and about the 

distribution options offered to plan participants, the planned or actual choice of distribution option, 

and the interest in alternative options. The survey will also examine whether and how information 

about streams of income influences attitudes about lifetime income options. Preliminary results will 

be available later this spring. The experiment will aim to further our understanding of how biases 

affect perceptions about annuities and, in particular, examine whether default settings and the use of 

deferred annuities, such as longevity insurance, are feasible strategies to improve annuity take-up 

rates. AARP will be pleased to provide copies of the research reports to both agencies as soon as 

they are finalized. Results will also be posted to www.aarp.org/ppi. 

Low-cost annuitization options should be readily available and promoted, and employer plans 

should provide an annuity option.4 Policy innovations should include measures to reduce 

 

2

 Sandy Mackenzie and Ke Bin Wu, Employer-Provided Pensions: Less to Count On, (AARP Public Policy 

Institute, October 2009), Table A.5. 

3

 See for example Alan P. Bloston, Payment Options Under Retirement Plans, (U.S. Department of Labor, 

Bureau of Labor Statistics, April 2003) for a discussion of these trends. Accessed at 

http://www.bls.gov/opub/cwc/cm20030409ar01p1.htm. See also n. 17, infra. 

4 Most of AARP’s comments herein reference fixed annuities. A variable annuity can be a useful adjunct to 

other forms of retirement income, but it requires more financial sophistication or the annuitant because of 

greater volatility and risk than a fixed annuity.
AARP Comments: Lifetime Income Stream RFI Page 4 

RIN 1210-AB33 

unnecessary barriers to employer and employee participation in lifetime income solutions, and 

ensure that consumers are informed and protected from unsuitable products including those with 

excessive fees and expenses. Increasing the size of the market for annuities would reduce their cost. 

However, it is important to recognize that annuities or other lifetime income products are not for 

every retiree. Annuities are particularly ill-suited for those who have small account balances, those 

whose wealth in retirement is already substantially annuitized, and those with more limited life 

expectancy. It is therefore necessary to maintain individual choice, and to ensure that workers and 

retirees are well educated about the suitability of lifetime income options to their particular 

circumstances.

Concerns about the importance of a secure stream of retirement income highlight the critical 

importance of Social Security. Social Security is the largest source of annuitized wealth for most 

workers. Social Security is the principal source of family income for nearly half of older 

Americans, and twenty-three percent of those aged 65 and over live in families that depend on 

Social Security benefits for 90 percent or more of their income.5

 Social Security keeps more than a 

third of older Americans out of poverty6

and provides a steady source of income that keeps pace 

with inflation and never runs out, no matter how long one lives. Social Security is the cornerstone 

of retirement security for virtually all Americans and must be preserved and strengthened. 

Moreover, delayed claiming of Social Security is a cost-effective way to increase the share of 

annuitized wealth. Nonetheless, Social Security was never intended to be the only source of 

retirement income and it is important to explore ways to increase annuitized wealth, particularly for 

workers in the middle of the income range. 

We encourage the Departments of Labor and Treasury to keep the issue of lifetime income for 

retirement plan beneficiaries and participants in the forefront of policy development and public 

discussion. 

 

5

 Selena Caldera, Social Security: Who’s Counting On It? (AARP Public Policy Institute, April 2010), Table 

1.

6

 Ibid, Figure 4. 
AARP Comments: Lifetime Income Stream RFI Page 5 

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GENERAL 

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? 

1. Advantages: 

Retirees who choose to take a lump-sum distribution from their plan face a number of challenges. 

First, they must manage their assets to last their lifetime. This is not an easy task for anyone, and 

certainly not for those retirees who are not highly literate financially. For those households for 

whom DC balances represent their primary retirement savings vehicle, their decisions as to the 

investment and use of their DC balances will seriously affect overall retirement wellbeing. Second, 

uncertainty about longevity in retirement (this is referred to as longevity risk) further complicates 

the difficult task of asset management. If retirees live longer than planned, they may end up with 

insufficient resources to finance their remaining years. Alternatively, they may die prematurely, 

leaving a larger than expected estate or having foregone consumption that could have made them 

better off. 

The great advantage of lifetime income products is that they provide longevity insurance, by

guaranteeing payments for life. By taking some or all benefits as lifetime income, participants will 

not outlive their resources or be forced to significantly reduce their consumption in their final years 

because they lived longer than planned. 

Because annuities and other lifetime income products pool risks across individuals with different 

life expectancies, they are able to offer a higher rate of return (assuming the annuitant remains 

alive) than conventional fixed income instruments. This means that annuities enable higher 

consumption than otherwise for those who live longer than average. Lifetime income products 

purchased through employer plans can be particularly beneficial to women. Employer plans must 

use a single pricing structure that does not differentiate by the life expectancy of the annuitant. As a 

result, since women live longer than men, they face more favorable pricing on lifetime income 

products purchased through employer plans. 

Another advantage, albeit not one unique to lifetime income products, is that the guarantee of 

monthly payments for life reduces the need to actively manage one’s assets in retirement, which can 

be quite daunting for some individuals. A 2007 AARP/American Council of Life Insurers (ACLI) 

survey found that 55% of surveyed participants were not very confident that they would be able to 

manage their savings and investments to last the rest of their or their spouse’s life. In particular, 

women were less confident than men about being able to manage their savings and investments to 

last the rest of their life. 

Lifetime income arrangements can also reduce transactions costs because once the lifetime income 

arrangement is made, payments are regularly provided. Having a monthly payment that requires 

little to no effort to manage each month to meet their retirement income needs would make some 

individuals better off. 
AARP Comments: Lifetime Income Stream RFI Page 6 

RIN 1210-AB33 

Disadvantages: 

Some individuals may be sufficiently annuitized through other sources and it may be prudent for 

them not to annuitize their DC balance if they need to retain assets to finance uninsurable risk (e.g.: 

out-of-pocket medical and long-term care expenses) or other contingencies. In addition, some 

households may wish to leave assets to their heirs and may not want to completely annuitize their 

assets. According to a 2007 AARP/ACLI survey, 22% of respondents thought it was very 

important to preserve an estate for their heirs and 40% thought it was somewhat important. 

We note some examples of groups of individuals for whom additional annuitization through private 

annuities may be unnecessary. Individuals may be sufficiently annuitized if the annuity income 

they receive from Social Security replaces a high percent of their former earnings. These are more 

likely to be individuals from lower- and medium-income households, for whom Social Security 

benefits provide replacement rates in the range of between 41 and 55% of lifetime average 

earnings.7 Potentially, even retirees with high-income and low SS replacement rates may be 

sufficiently annuitized if they also receive additional annuity income through an employersponsored defined-benefit (DB) plan. Moreover, married persons may have access to annuity 

income through their spouses in addition to their own sources of annuity income. 

Finally, it would be unwise to annuitize all or part of plan balances if the participant is in poor 

health or otherwise has good grounds for believing that his/her life expectancy is limited. 

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? 

2. The research on why individuals do not buy lifetime income products–even when these products 

offer real benefits–spans over 25 years. The evidence suggests a number of (now) obvious reasons. 

As noted in our response to Question 1, these include a preference for liquidity–that is, a desire to 

hold assets to leave to family members when they die and/or to self-insure against uninsurable 

contingencies. Moreover, nearly all workers already receive annuity income through Social 

Security. The annuity income from Social Security represents a sufficient share of retirement 

wealth for many and, given the preference for liquidity, additional annuitization through the 

purchase of lifetime income may not be necessary. These reasons imply that 100% annuitization of 

the retirement nest egg will not be optimal, even if annuitizing part of it is.

 

Research and anecdotal evidence suggest, however, that liquidity and annuitized pension income 

alone cannot completely account for the limited take-up of lifetime income arrangements. Other 

reasons for the low take-up rates include the perceived risk of the annuity provider’s insolvency, 

 

7

 Social Security Administration, 2009 Social Security/SSI/Medicare Information, May 14, 2009, accessed at 

http://www.socialsecurity.gov/legislation/2009%20factsheet.pdf. 
AARP Comments: Lifetime Income Stream RFI Page 7 

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fear of loss of control, perception of poor value for money, unappealing terminology to describe 

lifetime income products, and the prevalence of the lump-sum as the default setting in DC plans. 

Research to date does not allow us to gauge the relative importance of each of these factors in 

inhibiting demand for annuities. We have learned, however, that describing lifetime income 

products as a consumption-enhancing product (Brown, et al., 2009) might improve their appeal, as 

might changing the default option from lump-sum to lifetime income arrangements in DC plans 

(Gazzale and Walker, 2009). At the very least, denominating retirement plan benefits as lifetime 

income, in addition to lump-sum, might be a relatively inexpensive policy change that could have 

some bearing on choice. 

More research in this area is certainly warranted. As noted in the preamble, AARP is currently 

conducting research to further evaluate whether default settings would influence the selection of 

lifetime income products. AARP’s research will also focus on the relative appeal of deferred 

annuities, such as longevity insurance, compared to immediate annuities. The larger payouts 

associated with longevity insurance and the tendency to think of money in nominal rather than real 

terms may make these products more appealing to consumers. 

In addition, AARP’s research will evaluate the extent to which control over use of funds is salient in 

lifetime income selection. A finding that control is important would furnish an additional rationale 

for partial annuity options, which gives participants control over their remaining assets. The lack of 

flexibility to convert part rather than all of one’s plan balance to lifetime income could certainly 

explain low take-up rates, as most plans require all or nothing choices. Admittedly, even without 

the in-plan partial option, participants could still annuitize some of their plan balance by 

withdrawing a lump-sum and purchasing a lifetime income product through the individual market. 

Few do, however, perhaps because of the inefficiency and additional costs in the individual market. 

Lessons could also be learned from understanding the difference in take-up rates of lifetime income 

arrangements between public retirement systems and private DB plans. Most participants in public 

retirement systems take the default lifetime income option. The difference in annuity take-up rates 

may reflect differences in nature of employment in the two sectors (for instance, civil servants have 

longer tenure, making traditional plans more attractive); a perception that the public retirement 

systems are more securely funded; despite the state-level guarantee provided to annuity and other 

insurance policy holders, and less choice between benefit options in the public than in the private 

sector. Anecdotal evidence indicates that concerns over seller insolvency, heightened in recent 

years by media coverage of failing pension plans, may be driving participants away from lifetime 

income arrangements in spite of the protection offered by the Pension Benefits Guaranty 

Corporation (PBGC). Better participant education and knowledge of the PBGC’s safety net could 

impact the move away from lifetime income selection in DB plans.

Those DC participants who choose the annuity option are entitled to fears about provider 

insolvency, however, since equivalent protections do not exist for lifetime income products through 

DC plans. A potential new role for government agencies might be to create or provide a similar 

insurance protection for lifetime income products. An arrangement similar to the Federal Deposit 

Insurance Corporation (FDIC), which insures deposits in banks, could be envisioned for lifetime 

income products. A well publicized government seal of protection might generate consumer 

confidence in these products, sufficient to raise take-up rates. In addition, more research needs to 

be done to evaluate the adequacy of state guaranty funds to meet the needs of a large-scale 
AARP Comments: Lifetime Income Stream RFI Page 8 

RIN 1210-AB33 

insurance company’s insolvency, applicable suitability standards, and the disclosure requirements. 

It would be a huge step backwards if participants and fiduciaries started embracing these products 

and something like the Executive Life debacle occurred. 

 

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 

annual payments from insurance contracts under a defined contribution or defined benefit 

plan? 

3. Defined benefit plans must offer a lifetime annuity option; an increasing number of plans offer a 

lump-sum distribution option as well. DB plan participants who are married must be offered an 

annuity with a joint and survivor benefit. Married beneficiaries who choose a single-life annuity or 

a lump-sum distribution rather than a joint and survivor annuity must obtain spousal consent. Over 

time, the share of plans permitting a choice has increased substantially, and with it the share of plan 

participants choosing a lump sum. Inflation indexed pensions are extremely uncommon in the 

private sector, but indexation or ad hoc arrangements to provide inflation insurance are normally a 

part of state and local government pensions. 

Most defined contribution plans do not offer an annuity option, and the option is unpopular among 

members of DC plans that do offer it. A survey conducted by Hewitt Associates in 2009 found that 

only 15 percent of the plans surveyed offered an annuity option, and only 6 percent of plan 

members that could avail themselves of this option did so.8 Annuities provided by smaller defined 

benefit and defined contribution plans might be purchased by the sponsor from an insurance 

company, although medium and larger plans tend to assume longevity risk themselves. 

4. To what extent are the lifetime income options referred 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? 

4. By far the most common means of providing retirement income is the exercise of permitted 

options at retirement. The in-service annuity is still rare. One form of the in-service annuity uses the 

401(k) plan as a platform. Each contribution or perhaps a batch of contributions is converted into a 

deferred annuity as it is made. This avoids investment risk, because the 401(k) plan is never 

substantially invested in equities or bonds. It also entails gradual annuitization, rather than 

annuitization in one or several installments near the end of working life. This mitigates interest rate 

risk, because annuitization does not take place in a single year or period of a few years at career’s 

end, but continuously over the period of plan membership.9

 

 

8

 Hewitt Associates, 2009 Trends and Experience in 401(k) Plans.

9

 See Sandy Mackenzie, Hybrids and Other Alternatives to Traditional Pensions. (AARP Public Policy 

Institute, April 2010). 
AARP Comments: Lifetime Income Stream RFI Page 9 

RIN 1210-AB33 

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)? 

8. A plan can offer two broad in-plan options for selecting lifetime income payments. One option 

is to offer lifetime income products as a distribution option at retirement. A second option is to offer 

an in-service lifetime income product. 

One very clear advantage of an in-plan lifetime income product over one that is purchased in the 

individual market is the ease of purchasing the product. In an in-plan arrangement, the participant 

simply selects the annuity option when filing paperwork to take distributions. In addition, the plan 

fiduciaries have performed the initial vetting of the products. An additional advantage of an inservice product is that interest rate risk is managed, as noted in our response to Question 4. 

Outside a plan, purchasing a lifetime income product through the individual market involves several 

steps. First, the participant needs to withdraw funds from their DC plan. Second, the participant 

needs to shop around for a lifetime income provider and choose among a variety of different 

lifetime income products and associated options that are sold with these products. Finally, the 

participant must choose. Many may find the process too daunting, involving too many steps and 

complicated choices, and may choose not to purchase an annuity. Others may be less aware of 

existing products in the market and may not even know lifetime income products are available to 

them, and settle for more simple products as a result. A further issue arises with the tax treatment of 

funds withdrawn from a plan and used to buy a non-qualified insurance product, because tax is no 

longer deferred. (On this point, see our response to Question 28, below.) 

Another advantage of purchasing in-plan is the ERISA protection for spouses. (See our response to 

Question 27 below.) An annuity product selected through a plan must pay a joint and survivor 

annuity, unless the spouse signs a waiver to allow payments as a single-life annuity. This affords 

valuable protection for women, who tend to earn only 80 cents to the dollar men earn and also live 

longer than men (20.1 years at 65 vs. 17.9 years at 65 for men).10

A third advantage is pricing. In-plan lifetime income products may be offered at more favorable 

prices than those sold in the individual market because (1) the pool of annuitants may be larger and 

(2) the insurer has more information about the annuitant pool in a group market than in the 

individual market. In addition, in-plan annuities are generally stripped of a significant portion of 

the sales loads that are typical in the individual annuity marketplace. The plan sponsor usually has 

greater power to negotiate directly with the insurance company, keeping transaction costs lower. 

However, there are some advantages to buying a lifetime income product outside the plan. 

Selection of lifetime income products and options in-plan tends to be more limited than outside the 

plan. Some participants may want longevity insurance, stronger inflation protection or other 

features that their plan does not offer. This greater selection may suit individuals with greater 

 

10 Data on gender wage differences are from the U.S. Bureau of Labor Statistics, Highlights of Women’s 

Earnings in 2008, Report 1017 (U.S. Department of Labor, July 2009) based on median weekly earnings of 

full-time wage and salary workers. Data on life expectancy are from The Social Security Administration, The 

2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal 

Disability Insurance Trust Funds (Social Security Administration, 2009) for persons attaining age 65 in 

January 1, 2010. 
AARP Comments: Lifetime Income Stream RFI Page 10

RIN 1210-AB33 

financial acumen, who may do better customizing their portfolio with a larger selection of products 

through the individual market. A further advantage of going outside the plan is that choice is not 

restricted to all or nothing. In these instances, participants who prefer to convert only part, not all, of 

their assets to lifetime income would prefer the flexibility that the individual market offers. 

Finally, there are two unique issues which should be addressed concerning in-plan lifetime income 

products. One is what happens to these products in the participants’ accounts if the participants 

change jobs and switch plans; can they or will they be required to roll over these products if they 

change jobs. AARP submits that penalties to the participant or fiduciary should be prohibited. 

Second, it is unclear what will happen if the fiduciary changes providers; how would mapping be 

performed and the participant should not pay any penalties for the fiduciary’s decision to change 

providers. Without an adequate resolution of these issues, they may act as barriers to both 

participants and fiduciaries choosing such products. 

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? 

9. There are two major advantages from the plan sponsor’s view point of providing an in-plan 

option for a lifetime income stream.11 First, a plan which offers a lifetime income stream is more 

comprehensive than a plan that does not. All other things being equal, this could be a plus for 

recruitment, as employees would find an employer whose plan offered the lifetime income benefit 

option more attractive than an employer whose plan does not. Second, for those employers who 

believe they have a stake in the long-term well-being of their employees, offering such a benefit 

entails desirable and positive consequences for employees enjoying a more secure retirement. 

Employers offering their retirees the prospect of greater financial security in retirement can enhance 

their public image by doing so. 

There are also several disadvantages to offering a lifetime income distribution option. First, and 

most significantly, the plan sponsor has the fiduciary duty to research the merits and demerits of 

various providers in the market place. ERISA fiduciary standards require the plan fiduciaries to 

perform due diligence in the selection and monitoring of a quality annuity product provider and 

products to incorporate into the retirement plan. Failure to perform the monitoring function will 

expose the plan administrator to statutory liability for fiduciary breach. Because many plan 

sponsors may have limited experience dealing with lifetime income products, this lack of 

information and discomfort with evaluating these kinds of products along with their knowledge of 

their fiduciary obligations may pose a significant barrier to sponsors adoption of these options. In 

addition to these fiduciary concerns, the plan may have to field complaints from employees/plan 

participants who are dissatisfied with either the products or services of the provider the plan 

administrator has chosen. These administrative burdens may be alleviated to some extent by subcontracting out plan administration. 

 

11 For purposes of this discussion, it is assumed that the plan sponsor is the employer, and that the employer 

also acts as plan administrator.
AARP Comments: Lifetime Income Stream RFI Page 11

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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? 

10. There is limited data on the number or share of plan sponsors that allow participants to use only 

a part of their plan balance to purchase lifetime income. Anecdotally, it appears that most plans 

require an ―all or nothing‖ choice. However, some plans are more flexible and do allow partial

annuitization. These include the Massachusetts Institute of Technology’s supplemental retirement 

plan, TIAA-CREF, and the Oregon public employee retirement system. 

Plan sponsors take on additional administrative responsibilities when they offer lifetime income as a 

distribution option. Plan sponsors that consider these responsibilities too burdensome would not 

offer an annuity – whether full or partial, particularly if there appears to be limited demand for such 

lifetime income options. Nonetheless, 15 percent of DC plans do offer lifetime income as an option. 

Although the share of these that offer the option of partial annuitization is unknown, the perception 

is that few do for reasons that are unclear. As noted, AARP is currently fielding a survey to gauge 

employee interest in partial annuitization options. The survey results will be available soon. 

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 of 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 ERISA rules be modified, or their application clarified, to facilitate the use of 

behavioral strategies in this context? 

11. A number of strategies, drawing from the field of behavioral finance, have been successful at 

modifying savings behavior. Some of these strategies have been suggested for encouraging the 

selection of lifetime income products in DC plans. None of these strategies have actually been 

implemented for lifetime income products, to date, however. 

AARP is currently engaged in research to test the strength of a number of behavioral biases 

affecting demand for annuities and the use of policy levers to overcome these biases. In the 

meanwhile, the experience of behavioral strategies applied at the accumulation stage, and 

elsewhere, may shed some light on how well these strategies might work at the decumulation stage. 

Research into annuities and other lifetime income products shows that a number of diverse elements 

enter into the decision to choose them, and that this decision is not entirely based on rational 

decision rules. A single strategy is, therefore, unlikely to be completely successful. It is likely that 
AARP Comments: Lifetime Income Stream RFI Page 12

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strategies that address behavioral biases would have to be combined with strategies that address 

market failures in order to significantly raise take-up rates and, at the same time, minimize potential 

harm to the consumer. 

For instance, one suggested strategy is to default individuals into a lifetime income product at the 

time of distribution, in the hopes of mimicking the successful outcomes observed in 

automatic401(k) plan enrollment. However, the experience of DB plans, which has a built-in default 

annuity option, hints at the possibility that the use of defaults at the distribution stage by itself may 

not produce results equivalent to that observed with retirement saving. Similarly, the suggested 

strategy to denominate assets as a stream of payment (as it is in DB plans) may not result in 

significantly higher take-up rates if implemented by itself. 

Defaults, if implemented, would have to include a strategy that enables individuals to hold some 

liquidity (for reasons explained above). One approach might be to encourage plan sponsors to move 

away from the ―all or nothing‖ option and allow the selection of lifetime income products purchased 

with part (rather than all) of the assets in DC plans. The success of this particular combination of 

policies would depend in large part on their importance relative to the strength of other biases and 

influences. 

The perception that lifetime income products are bad value appear to weigh heavily on consumers. 

This could be, in part, because of prior reputation and, in part, because there are no simple 

comparisons or benchmarks (as there are with financial investments) with which to evaluate value. 

If the choice is between something known or something unknown with a bad reputation, then the 

choice is obvious. Although annuities are not actuarially fair (no insurance product can be due to 

the cost of financial intermediation and administration), many individuals would still benefit from 

annuitizing their retirement assets because of the risk protection it affords. 

The default trial lifetime income proposal gets around some of the impediments to annuitization 

outlined above. The proposal defaults a portion of assets in retirement accounts into a lifetime 

income product. The default feature removes much of the complexity of the decision, reframes the 

way participants view their benefits, and removes endowment bias. Only some assets are defaulted 

into the trial plan so participants still have access to liquidity. The trial period of 24 months enables 

individuals to experience annuities and learn about them, as well as time to evaluate the income 

stream relative to their resource needs. It also buys them time to plan their future retirement needs. 

Finally, because the proposal is a trial, not a permanent, lifetime income product, participants for 

whom it is a bad fit would have the option to take the lump-sum after the trial period or to purchase 

an alternative product. For those who continue with the product after the 24-month period, it 

converts to permanent lifetime income flow. 

Some insurers have expressed interest in developing a trial lifetime income product. Certain design 

and pricing issues still need to be worked out before this proposal could be implemented, however. 

Questions include whether joint and survivor should be included during the trial period. Questions 

also remain about the cost of a cash-out feature with trial lifetime income. The proposal could be 

combined with other proposals, such as those that recommend laddered (sequential) annuitization to 

mitigate interest rate risks, when the plan transitions from a trial to a permanent state. 

Some of the features of the trial and laddered proposal might conflict with certain ERISA 

requirements, such as the requirement for joint and survivor annuity and required minimum 
AARP Comments: Lifetime Income Stream RFI Page 13

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distribution rules. Some modifications to these rules may be required if this proposal is 

implemented. 

12. How should participants determine what portion (if any) of their account balances to 

annuitize? Should that portion be based on basic or necessary expenses in retirement? 

12. AARP recommends that retirees with considerable savings consider annuitizing a large enough 

share to cover recurring expenses, to the extent that they are not covered by Social Security or other 

guaranteed income sources.12

 The decision to annuitize is a very personal one. The right decision 

depends on the particular circumstances of the potential annuitant. Nonetheless, the share of wealth 

that should be annuitized at retirement also depends on some objective factors, and must be made 

taking into account the share of wealth that is already in annuitized form, like Social Security or a 

traditional pension. In addition, annuitization may not be appropriate for small accounts because 

the premium may be high for the small amount of annuity received and the annuitant may not have 

adequate liquidity after the purchase is made. 

The share of wealth to be annuitized will depend largely on how much money a retired person 

wishes to bequeath, and on the predictability of his or her expenditure needs. For example, the 

more comprehensive a person’s health insurance, the more he or she can annuitize without fear of 

being short of money if and when major illness strikes. The same is true of long-term care. Another 

determining factor is the extent to which it is possible to borrow against the stream of income that 

an annuity pays. The greater the amount of money that can be raised using annuities as collateral, 

the less is the risk that unexpected expenditure needs will cause a liquidity crisis. 

The size of the retirement nest egg and the amount of assets relative to income are also important 

considerations. As noted, it is not cost effective to annuitize small account balances. In this and 

other situations, it is possible that annuitizing enough wealth to generate income sufficient to cover 

basic expenditures could leave a retiree with very little non-annuitized wealth. The opposite could 

also apply: for someone with substantial wealth at retirement, annuitizing only enough to cover 

basic expenditure needs could entail a lesser degree of annuitization than was desirable. The 

reliability of a benchmark like basic expenditure will of course depend on how basic expenditure is 

defined. 

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 should it apply to the entire account balance? To what extent would such a 

requirement encourage or discourage plan sponsorship? 

AARP believes that employer-provided plans should give participants the option to take their 

benefits in the form of an annuity. 

 

12 See AARP Money Matters Tip Sheet, “Spending Down Your Assets in Retirement” at 

http://assets.aarp.org/www.aarp.org_/articles/money/financial_pdfs/spend_down_retirement_2009.pdf; and 

Anthony Webb, Providing Income for a Lifetime, Bridging the Gap between Academic Research and 

Practical Advice, (AARP Public Policy Institute, June 2009). 
AARP Comments: Lifetime Income Stream RFI Page 14

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Requiring sponsors to include a lifetime income distribution would increase administrative costs. 

We believe that the cost increase would be small, and that the disadvantages of a requirement would 

likely be outweighed by the advantages of making annuity and other lifetime income options more 

widely available. However, more data on the extra costs a requirement would entail would be 

helpful for evaluating the likely impact of a new requirement. 

In addition to considering whether to require lifetime income options, policymakers should consider 

ways to reduce the costs of lifetime income options to both sponsors and beneficiaries, and 

especially their costs to smaller employers. The Department should provide ample guidance and 

education to employers and employees about choosing lifetime income options. The Department’s 

work on 401(k) fees starting in 1998 provides a useful structure for issuing guidance on lifetime 

income stream products. Checklists, general guidance and model forms will be a starting point for 

fiduciaries in considering such products as potential investment and distribution options for 

participants. Consumer guidance and educational materials will also be helpful to participants. 

These can be issued more quickly than formal guidance and regulations, but can still be illustrative 

of the issues fiduciaries and participants should consider when looking at such products. While 

formal guidance is needed, we also note that by relying more on these tools and increasing the size 

and diversity of the risk pool we will also increase familiarity with the products and reduce 

transactions costs, administrative burden and premiums. 

 

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? 

14. Our responses to questions 9 and 10 state our view as to the perceived impediments to plan 

sponsors to include lifetime income options in their plans. There may also be some concern about 

counterparty risk, i.e., the capacity of the obligor on the annuity contract to deliver payments in 

accordance with the terms of the annuity contract. 

 

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? 

15. Reverse mortgages can be an alternative to annuities as a way to provide economic security to 

older homeowners who are ―house-rich, but cash-poor.‖ A reverse mortgage is a loan that does not 

need to be repaid until the last borrower dies, sells the home, or permanently moves. Because they 

are secured entirely by home equity, reverse mortgage underwriting does not require income or 

credit history checks – making such loans especially attractive for those who would not qualify for 

other types of loans. Reverse mortgages can be structured as monthly payments to supplement 

income, as a one-time lump sum, or as a line of credit to be drawn upon as needs arise. When 

compared to an annuity, a reverse mortgage has more flexibility in how payments are received; 

indeed, a borrower can switch from monthly payments to a line of credit at any time if a major 

expense arises. As loans, reverse mortgages generally do not have the consequences for taxes and 

public benefits that annuities have. Moreover, the vast majority of reverse mortgages are insured by 
AARP Comments: Lifetime Income Stream RFI Page 15

RIN 1210-AB33 

the federal Home Equity Conversion Mortgage (HECM) insurance program, so they do not have the 

risk of the annuity insurer going out of business. They are, however, expensive loans with 

substantial upfront fees. 

Some lenders have marketed reverse mortgages to purchase annuities, a practice now forbidden 

under federal law for reverse mortgages insured by the HECM program. Such transactions add the 

transaction fees of the annuity to large upfront fees associated with a reverse mortgage to purchase 

an annuity with few advantages over a regular reverse mortgage with monthly payments. 

Moreover, the borrower must take out a large sum to purchase the annuity, so compounding interest 

costs are much higher than the incremental interest on smaller monthly payments. In addition, too 

many of the annuities sold to older reverse mortgage borrowers have been variable, investment-type 

annuities more appropriate for younger persons or (worse) deferred payment annuities with terms 

that can only be described as a scam: e.g., a 15-year deferred annuity sold to an 85-year-old woman. 

For these reasons, AARP has opposed the use of reverse mortgages to purchase annuities. 

The combination of annuities with long-term care insurance is another type of combined product 

that has attracted some interest from policy researchers and insurers. From an insurance 

perspective, such a combination would appear to offer economies from the offsetting risks 

associated with these two products: i.e., longevity risk associated with an annuity is offset by the 

risks of declining health associated with long-term care insurance. From a consumer’s perspective, 

a single product could insure against a number of risks and may offer some savings. 

Psychologically, such a combination may assuage the feeling that insurance costs are ―wasted‖ if no 

claim is made. For example, individuals who have paid for an annuity only to find they have a lifeshortening illness a short time later may find it a better deal if they are at least getting a long-term 

care benefit. Similarly, a person who has no debilitating condition may be less likely to feel that the 

money for long-term care insurance is ―wasted‖ if they are receiving annuity payments for an 

extended time.13

Despite these apparent advantages, combining annuities and long-term care insurance can have 

distinct disadvantages as well. To begin with, the potential cost savings are quite modest –

estimated by one study at about 5 percent. Often such hybrids make sacrifices on the quality of one 

or both of the components – annuities with lower monthly payments or lower long-term care 

benefits. The combination may be difficult for regulators to evaluate and effectively monitor. 

Perhaps most importantly, combining two inherently complicated financial instruments into one 

product makes it even more difficult for consumers to understand or to compare to other ways of 

addressing their needs. Even if these products are good ones, the combination products will tie up a 

considerable amount of an individual’s income and assets so that costs not covered may be more 

difficult to pay for – e.g., costs for home modifications or a specialized van associated with dealing 

with a disability. While the combination of annuities and long-term care insurance merits more 

exploration, AARP urges caution before the federal government should encourage consumers to use 

such instruments. 

 

13 See Marc Freiman, Can 1 +1 = 3? A Look at Hybrid Insurance Products with Long-Term Care Insurance, 

(AARP Public Policy Institute, May 2007). 
AARP Comments: Lifetime Income Stream RFI Page 16

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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? 

16. There are differences in life expectancy between men and women, and between healthy and 

less healthy workers, high and low income workers and ethnic or racial groups. In single-pricing 

arrangements, persons with higher than average life expectancy, such as women and healthier 

workers, stand to gain more from the arrangement than persons with lower than average life 

expectancy, such as men and less healthy workers. Allowing price to vary by expected life 

expectancy will improve pricing for the latter group; however, this differentiation also reduces the 

mortality credits inherent in lifetime income products, which reduces the benefits to the former 

group of workers. 

For instance, differentiating by health, which tends to correlate with income, means less healthy 

persons, who tend to be lower-income workers, are less likely to be subsidizing the payouts to 

healthier and, typically, higher-income workers. Differentiating by gender means that female 

workers, who tend to earn 80 cents for every dollar earned by male workers, would lose some of the 

subsidy from male workers. 

Because existing law holds defined benefit plans to a gender-neutral approach insofar as 

annuitization is concerned, we think it is necessary to address the matter of whether annuity 

products purchases within 401(k) plans require gender-neutral annuitization schedules, or if such 

products may be designed based strictly on pertinent mortality tables. 

In the United Kingdom, annuity pricing varies by health status or health behavior. These impaired 

or enhanced annuities pay higher than normal income for individuals in poorer health, who smoke 

or are overweight. A similar arrangement in the U.S. that allows lifetime income to vary by health 

status could make these products relatively more attractive to a larger group of consumers. 
AARP Comments: Lifetime Income Stream RFI Page 17

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PARTICIPANT EDUCATION 

 

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 how is it provided to them? 

17. Participants need a clear description of the basic properties of any lifetime income arrangement. 

If the arrangement would take the form of an annuity, all available riders, including any guarantee 

feature, should be clearly described. Participants should understand the consequences of the absence 

of a guarantee as well. Although the failure rate in the United States of annuity providers has been 

extremely low, the process that would apply in the case of failure of a person’s insurance company, 

including guaranty fund coverage, should be clearly explained. The tendency for the real purchasing 

power of a fixed nominal annuity to decline over time must also be explained. To appreciate the 

insurance value of an annuity, it would be useful to compare its conditional rate of return—i.e. the 

rate of return that would be earned if the annuitant lived to some advanced age—with the rate of 

return of a long-term bond. Because annuities are not well understood, information on them needs 

to be provided some years before the normal retirement date, and should be provided more than 

once. 

The information that annuity providers now furnish their clients varies depending on the type of 

annuity, applicable regulations, and the company. This inconsistency can lead to consumer 

confusion and purchase of the wrong annuity product. Consumers frequently misunderstand or 

receive inadequate explanations regarding surrender charges applicable to deferred annuities, 

regardless of whether fixed, indexed, or variable. 

Disclosures must be timely, tested, and accurate. To that end, disclosure documents should be 

given prior to purchase. Disclosure documents should be standardized, and they should be 

consumer tested prior to their use. Prospectuses required for variable annuities are of little help as a 

disclosure because they can be cluttered with too much information, which can cause consumer 

confusion. 

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? 

18. Guidance, either in regulatory communications, or simply in the form of educational 

information would be useful and desirable to inform plan sponsors, plan administrators, and plan 

participants as to the lawfulness and appropriateness of suitable annuity products to round out 

401(k) distribution options. Guidance as to the use of plan assets to pay for providing information 

to help plan participants make informed decisions regarding the use of annuity products in-plan or 

out-of plan would also be useful. Additional guidance and revision of technical rules as to 
AARP Comments: Lifetime Income Stream RFI Page 18

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minimum required distributions, etc., could be efficacious to promote the appropriate use of stream 

of income concepts either through in-plan or out-of-plan options. 

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? 

19. Plan sponsors are concerned about the form and content of their communications to employees, 

in view of the responsibility plan sponsors and administrators have to communicate benefits 

information to employees in clear and unambiguous terms. Legal liability for failure to fulfill 

ERISA’s statutory mandate that Summary Plan Descriptions be expressed in language calculated to 

be understood by the average plan participant very likely influence plan fiduciaries in all of their 

communications to participants. It would probably be very helpful for DOL and IRS to make a 

concerted and careful effort to promote use of post-retirement stream of income concepts to plan 

fiduciaries and to participants. This could be done by means of web postings, circulars, forms, and 

other educational tools, perhaps even through dispatching a crew of speakers on the subject in 

settings aimed at all key stakeholders, employers, employees, and professionals who service plans. 

Clear communications to stakeholders as to form and content of annuity subject matter would 

furnish both symbolic and substantive endorsement of the life income concept as integral to 

retirement planning. In addition, model forms and checklists are always helpful to plan sponsors 

and fiduciaries. 

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? 

20. Plan should be strongly encouraged to increase understanding not only of annuities but also the 

broader context of retirement income management and planning, which tends to be deficient even 

among generally knowledgeable investors. The point of retirement provides plan sponsor a unique 

opportunity to engage their workforce (particularly those approaching retirement) on this issue as 

they begin to contemplate life and more importantly their financial situation after they retire. The 

key topics of concern include concepts such as: 

Sources of retirement income 

Guaranteed vs. variable streams for retirement income 

Recurring basic expenses (fixed) vs. lifestyle expenses (variable) expenses 

Claiming social security benefits 

Annuitizing assets and the various income products available 

Managing lump sum assets (withdrawal rates, asset allocation) 

The concept of annuitization and annuity products should be a part of most people’s general

financial education. This requires reforms over which federal agencies would have only indirect 

influence. 
AARP Comments: Lifetime Income Stream RFI Page 19

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Guidance about annuities should begin well before plan members reach retirement age. As our 

response to Question 17 discusses, it is especially important to make potential annuitants aware of 

the insurance aspect of the product, to counterbalance the view that the risk of early death makes 

annuities a bad investment. 
AARP Comments: Lifetime Income Stream RFI Page 20

RIN 1210-AB33 

DISCLOSING THE INCOME STREAM THAT CAN BE PROVIDED FROM 

AN ACCOUNT BALANCE 

21. Should an individual benefit statement present the participants’ accrued benefits as a 

lifetime income stream of payments in addition to presenting the benefits as an account 

balance? 

21. Yes. This simple change to the standard reporting format would serve a very valuable purpose. 

People have considerable difficulty in converting a stock of assets to a lifetime flow. The 

conversion should, however, be done at several rates of interest, or three different yield curves. At a 

minimum, the assumptions underlying the estimated stream of income need to be clearly stated. 

22. If the answer to question 21 is yes, how should a lifetime stream of income 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 single-life annuity payable to the 

participant or a joint and survivor-type annuity, or both? 

22. The income stream should be calculated assuming that it begins at a specified retirement age, 

based on the current plan balance, and on reasonable assumptions regarding contributions and rates 

of return between the present date and the date of retirement. The calculation could be derived from 

a formula supplied by the DOL, or from assumptions made by the plan sponsor, although these 

should be subject to DOL guidelines. Another possibility is to base the calculation on quoted 

annuity prices. This method would require that assumptions be made about the relationship between 

current annuity premiums and premiums as of the year of retirement. 

The assumptions underlying the calculation of a lifetime stream of income should be made clear. 

For example, the calculation might assume that salary in the pre-retirement period is equal to the 

average salary earned during the current and previous three years. Payments could be expressed in 

either monthly or annual terms. Finally (and ideally), when the plan participant is married, the 

benefit statement should include the value of both the single-life and the joint and survivor 

pensions. 

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? 

23. At a minimum, the calculation of the regular annuity payment requires that assumptions be 

made about the term structure of interest rates and the mortality rates of retirees. Assumptions about 

separation and mortality rates of the active workforce are also necessary. 
AARP Comments: Lifetime Income Stream RFI Page 21

RIN 1210-AB33 

In the case of a deferred or in-service annuity, the same assumptions are necessary, but the 

projection of interest and mortality rates must now cover a longer period. This extra requirement 

may pose a problem for the projection of interest rates, because the plan’s most distant liabilities 

may have a duration longer than that of long-term bonds. For deferred and immediate (or near 

immediate) annuities, a caveat to the effect that the calculations are illustrative is a good idea. 

The DOL could recommend the use of the mortality table that PBGC has constructed, and use of 

this table could be required or regarded as fulfilling a safe harbor. Plans will typically have to hire 

an actuary even if they take their interest rate and mortality assumptions from a standard source, 

because the work involved is relatively specialized. 

The Federal Thrift Savings Plan (TSP) statement may provide a useful model. However, the TSP 

information would have to be modified to reflect the cost of annuities purchased in the private 

sector. For example, if an in-plan annuity is not offered, the annuity calculations should be based 

on gender-specific actuarial assumptions, consistent with annuity offerings in the individual market. 

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 pre-retirement 

standard of living)? If so, what methodology should be used to establish such a ratio, such as 

pre-retirement 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? 

24. While an income replacement ratio could be a helpful tool, we believe it may be impractical for 

periodic individual benefit statements to contain a homogenized statement of post-retirement 

income needs. The diversity of individual and family circumstances, lifestyles, and life 

philosophies suggest that there are too many variables to permit a clear process for determining the 

standards that would be necessary ingredients to formulate such a statement. Substantial further 

research would be needed to create a meaningful targeting tool. 
AARP Comments: Lifetime Income Stream RFI Page 22

RIN 1210-AB33 

401(K) AND OTHER PLAN QUALIFICATION RULES 

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? 

25. We believe that rules and regulations regarding the timing and amount of required and 

permissible distributions from 401(k) plans and IRAs of all types should be examined to ascertain if 

any of them detrimentally impact the selection of an annuity option, if and where available, for 

partial or full distribution of retirement plan assets.

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? 

27. Current protections for spouses of plan participants are stronger in defined benefit plans than in 

defined contribution plans. Under the Retirement Equity Act of 1984 (REA), beneficiaries of 

defined benefit plans must obtain written spousal consent to take payment in a form other than a 

joint-and-survivor annuity.14

 These rules were enacted in order to ensure that both spouses were 

involved in decisions concerning retirement benefits that had been earned during the marriage and 

to protect spousal rights to a portion of the benefit in the event of divorce or death. During the 

hearings of the bills leading up to the passage of the REA, many spouses spoke of the financial 

hardship after their husband’s death.15

 

Such protection for spouses is unavailable in individual retirement accounts and rare in defined 

contribution plans.16 Thus, employees can withdraw and use retirement monies in such plans 

without spousal consent, undercutting marriage as an economic partnership. This is a serious 

shortcoming in the area of spousal pension protections. AARP believes that these protections need 

to be strengthened, not reduced. 

 

Moreover, the spousal consent rules certainly have not prevented individuals from taking lump sum 

distributions from defined benefit plans. For those participating in defined benefit plans, lump-sum 

distributions are increasingly available.17 Participants who take a lump sum distribution are not 

 

14 ERISA § 205. 

15 Steven Cohen, Autoenrollment and Annuitization: Enabling 401(k) “DB-ATION”, 5 N.Y.U.J.L. & BUS. 281, 

n. 180 (Spring 2009). Statistics showed that many women fell into poverty after their husband’s death. 

Retirement Equity Act of 1983, Hearing Before the Subcomm. on Labor of the Senate Comm. on Labor and 

Human Resources, 98th Cong. at 27-29 (Oct. 4, 1983) (statement of Janie Sowards of the Oklahoma 

Federation of Business and Professional Women’s Clubs).

16 Steven Cohen, Autoenrollment and Annuitization: Enabling 401(k) “DB-ATION”, 5 N.Y.U.J.L. & BUS. at 

318.

17 See, for example, U.S. Department of Labor, Bureau of Labor Statistics, National Compensation Survey: 

Employee Benefits in Private Industry in the United States, 2005 BULLETIN (2007), 
AARP Comments: Lifetime Income Stream RFI Page 23

RIN 1210-AB33 

receiving the benefit that a joint and survivor annuity provides. By choosing a lump sum 

distribution, a participant bears both the longevity risk and the post-distribution investment risk. 

The longevity risk most affects the spouse and has the greatest negative implications.18

We urge the Department to ensure that spousal protections are in place for deferred in-plan 

insurance annuities that accumulate over time with increasing plan contributions and earnings, 

along with any other retirement income stream product. For example, participants generally receive 

information describing an account balance and may not realize that a joint and survivor option 

better protects their spouses. The value of a joint and survivor option should be pointed out in the 

IRS relative value notice. 

Finally, an ―in-plan insurance annuity‖ is merely a ban on at least part of the benefit being in a lump 

sum. It seems counter-intuitive that a participant should buy insurance with the attendant costs as a 

plan investment option. An ―in-plan insurance annuity‖ makes even less sense in a defined benefit 

plan where the plan would be paying the extra cost of the insurance product rather than being selfinsured–which is the nature of a defined benefit plan.

28. How 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? 

28. Guidance regarding the tax treatment of deferred annuities (including longevity insurance) and 

the partial annuitization of retirement accounts is needed. However, to our knowledge, neither plan 

sponsors nor individuals focus on the RMD rules as a reason not to purchase a lifetime income 

stream product. Any changes to the RMD rules should be carefully considered, so that the benefits 

of increasing retirement security outweigh the costs of added complexity, unequal treatment of 

income from different sources, and revenue losses. 

From a tax perspective, a more troublesome issue arising with the use of lifetime income streams 

for participants are potential constructive receipt issues. Currently, in order not to be immediately 

taxed on their account balance, individuals who want to annuitize but do not have an in-plan option 

must roll over any amounts into another tax qualified plan. That is, in order to continue to defer 

 

www.bls.gov/ncs/ebs/sp/ebbl0022.pdf and National Compensation Survey: Employee Benefits in Private 

Industry in the United States, 2002–2003 (2005), www.bls.gov/ncs/ebs/sp/ebbl0020.pdf. In 2005, fifty two 

percent of all private industry employees were eligible for a lump-sum distribution. Id. A study by 

researchers at Vanguard found that 27 percent of defined benefit plan participants from two large plans who 

were eligible for a lump-sum distribution chose to take annuity as the payout option. Gary R. Mottla and 

Stephan P. Utkus, Lump Sum or Annuity? An Analysis of Choice in DB Pension Payouts, VANGUARD CENTER 

FOR RETIREMENT RESEARCH, Vol. 30, November 2007,https://institutional.vanguard.com/iam/pdf/CRRLSA.pdf. 

18 Steven Cohen, Autoenrollment and Annuitization: Enabling 401(k) “DB-ATION”, 5 N.Y.U.J.L. & BUS. at 

324-25. 
AARP Comments: Lifetime Income Stream RFI Page 24

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taxes, the lifetime income stream product must be held by a custodian of a qualified plan. This rule 

can be a trap for the unwary. AARP suggests that the Service review these rules to facilitate the use 

of lifetime income stream products and the equitable treatment of taxpayers who are annuitizing 

their retirement account nest eggs. 
AARP Comments: Lifetime Income Stream RFI Page 25

RIN 1210-AB33 

SELECTION OF ANNUITY PROVIDERS 

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? 

31. To what extent could or should the Department of Labor make 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? 

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? 

30, 31, 32. The regulations governing transactions under section 404 should be consistent. It is 

imperative that the selection and monitoring of investment options, annuity providers and products 

and providers of other lifetime income stream products should be subject to the general prudence 

and loyalty requirements under Section 404.19 The Department’s consistent position as set forth in 

its amicus briefs should be clarified in both regulations. See AARP Response to Questions 33-34, 

infra. The duties of prudence and loyalty are even more important, if that is possible, at the 

distribution stage because of the finality of the decision. 

AARP suggests expanding the safe harbor in 29 CFR 2550.404a-4 to cover other types of lifetime 

income stream products. However, fiduciaries need to be aware of potential suitability issues 

depending on the demographics of the plan participants. Not unlike 401(k) fee disclosures, 

disclosures to fiduciaries from the providers will be necessary along with participant disclosures. 

As products become more complicated, disclosures alone may be inadequate to protect participants. 

For example, for those individual account plans which offer a variable annuity as an investment 

option, many people do not realize that if they take a lump sum as a distribution at the time of 

retirement that they have abrogated the rationale for using this as an investment option. 

Although the Department omitted a detailed list of criteria to be considered as to the insurer’s 

claims paying ability, AARP suggests that the Department reissue this list as part of a checklist for 

fiduciaries when selecting an annuity or other lifetime income stream product. In addition, the 

availability and maximum amounts of state guaranty association protection would be useful 

information to a plan fiduciary. If there should be a carrier insolvency, participants may get cents 

on the dollar, thereby jeopardizing their economic security. AARP hopes that lessons learned 

surrounding Executive Life would be heeded. 

The checklist should also include criteria which will help fiduciaries to engage in an ―objective, 

thorough and analytical search‖ among annuity providers, including consideration of the costs, fees 

and commissions of the annuity products. In addition, guidelines suggesting trigger points at which 

time ―the fiduciary is to periodically refresh its conclusions under the safe harbor‖ would be helpful. 

We question, however, whether it makes sense to use DB plan assets to purchase an annuity. (See 

our response to Question 27 above.) 

 

19 Compare 29 CFR 2550.404a-4 with 29 CFR 2550.404c-1.
AARP Comments: Lifetime Income Stream RFI Page 26

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ERISA SECTION 404(c) 

 

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(c) 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 non-core 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 be amended to encourage use of these products? 

34. To what extent do ERISA 404(c) 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) regulation be amended to encourage use of these products? 

33, 34. Section 404(c) of ERISA relieves the fiduciary of an individual account plan of liability for 

losses stemming from the plan's investments, when the plan allows the participants to exercise 

control over the investment of the assets in their plan accounts, and the plan meets the requirements 

in the Department of Labor's regulations. Accordingly, Section 404(c) provides an affirmative 

defense to a claim for breach of fiduciary duty under ERISA.20 

In a analogous issue concerning the selection and monitoring of investment options in individual 

account plans, the Fifth Circuit addressed the applicability of ERISA’s fiduciary rules to plan 

provisions requiring (―hard-wiring‖) the offering and maintaining of specific investments. Where 

the plan sponsor ―hardwired‖ the investment option into the plan, the Fifth Circuit held that the 

company had no fiduciary duty to modify the terms of a plan.21

 Consequently, under this rationale, 

a plan sponsor could require a specific lifetime income stream product, require a specific type of 

insurance annuity product or prohibit the offering of such products. In all of these examples, there 

would be no entity which is responsible for the decision to select, not select or monitor an option, 

even if the fees are expensive and it is an unsuitable product for certain demographic segments of 

the plan participants. This issue will continue to be even more important as the market place 

changes, and new products are offered. 

 

20 In re Unisys Sav. Plan Litig., 74 F.3d 420, 446 (3d Cir. 1996). In Hecker v. Deere & Co., 556 F.3d 575 (7th 

Cir. 2009), the Seventh Circuit Court of Appeals ruled that Section 404(c) protects plan fiduciaries from 

liability for the alleged imprudent selection of mutual funds with excessively high fees. This holding was 

consistent with other circuit court decisions which also held that in a section 404(c) plan a fiduciary’s duty 

does not include the selection and monitoring of investment options. See Langbecker v. Electronic Data 

Sys., 476 F.3d 299, 307 (5th Cir. 2007); Jenkins v. Yaeger, 444 F.3d 916 (7th Cir. 2006); In re Unisys Sav. 

Plan Litig., 74 F.3d at 455 (holding that a fiduciary that committed a breach of duty in making an investment 

decision for a Plan may nevertheless take advantage of the section 404(c) defense). Contra, DiFelice v. 

U.S. Airways, Inc., 497 F.3d 410, 418 n. 3 (4th Cir. 2007). 

21 Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243 (5th Cir. 2008). Accord, In re Citigroup ERISA Litig., 

2009 WL 2762708 (S.D.N.Y. Aug. 31, 2009), appeal pending (2d Cir. Dkt No. 09-3804-cv). 
AARP Comments: Lifetime Income Stream RFI Page 27

RIN 1210-AB33 

Quite simply, this jurisprudence will significantly impact the protections participants could receive 

concerning the selection and monitoring of annuities and other lifetime income stream products 

offered in their individual account plans. 

The Deere court noted that the DOL is free to issue regulations that would more specifically address 

the section 404(c) issue: 

.. . [I]t should go without saying that the Secretary is free to propose and enact 

new regulations addressed more specifically to the way in which choice of 

investment options in a plan relates to the safe harbor provision, if she believes 

that this would be appropriate.22

AARP commends the Department for its long held position that when plan fiduciaries have 

breached their fiduciary duties in the selection and/or monitoring of investment options in 

individual account plans, participants have not exercised and could not, in fact, exercise effective 

control over the assets in their accounts. AARP appreciates the Department’s strong continuing 

advocacy on the fact that a plan’s hard wiring of investment options into a plan does not necessarily 

overcome a fiduciary’s duty of prudence. These positions must be extended to include the selection 

and monitoring of annuities and other lifetime income stream products. 

However, AARP submits that without these suggested changes in the Department’s regulations, 

ERISA’s prudence standards will be seriously undermined.23 As a consequence, participants will 

continue to have little protection from a menu of poor investment choices including annuities and 

other lifetime income stream products. Accordingly, participants may have no recourse for a 

challenge to a fiduciary's bad selection of investment options. Moreover, the more complicated the 

choices, the more important the protections -- participants with the least experience should not be 

forced to make a choice between bad, worse and worst. 

Accordingly, AARP urges the Department to clarify its position in regulations on both of these 

issues. The Section 404(c) regulation must be clarified so that is clear that the scope of a fiduciary’s 

duty includes the selecting and monitoring of investment options including lifetime income stream 

products. Without this clarification, Section 404(c) will act as a ―get out of jail free card‖ for those 

fiduciaries who do not take the Department’s stance seriously. AARP also strongly supports the 

synchronization between the disclosure requirements under section 404(c) and those under 404(a). 

Finally, AARP believes that there may be situations where fiduciaries may have disclosure 

obligations beyond those explicitly set forth in regulations. 

 

22 569 F.3d 708, 710 (7th Cir. 2009). 

23 ERISA §§ 404(a)(1)(A) & (B) (providing plan fiduciaries shall prudently carry out their duties for the 

exclusive benefit of participants and beneficiaries). 
AARP Comments: Lifetime Income Stream RFI Page 28

RIN 1210-AB33 

QUALIFIED DEFAULT INVESTMENT ALTERNATIVES 

 

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? 

35. AARP understands the need to consider retirement income solutions during the accumulation 

phase (via in-service annuities such as those allowed in the QDIA) and also at the point of 

retirement. Furthermore, AARP does support Agency actions to promote greater adoption of QDIA 

products with lifetime income protection. 

However, prior to actions to promote further adoption, AARP suggest additional review by the 

Agencies of the use of annuities or other products which guarantee lifetime income as qualified 

default investment alternatives (QDIA). AARP suggests that a determination of whether such 

products are appropriate as a QDIA should be based on whether a fiduciary would choose these 

products as investments for a defined benefit plan. 

Moreover, many of these products have high fees. We question whether a product with potential 

fees including redemption fees, back-end sales loads, reinvestment timing restrictions, market value 

adjustments, equity "wash" restrictions, and surrender charges are appropriate for a QDIA. 

Participants may get caught up in a web of fees which will greatly reduce the amount in their 

account balances, not realizing that they need to keep their accounts in such a product for a period 

of time longer than expected. We believe that the QDIA should have fee structures that are much 

simpler, so participants are not plagued by ―gotcha‖ fees. 

Perhaps more important is participant’s lack of understanding of how these products work. 

Unfortunately, many participants treat lifetime income stream products like any other investment 

option. Many participants with annuities or other lifetime income stream products totally cash out 

of the product when they terminate their employment or participation in the plan. They have paid 

for the guarantee but then do not take advantage of it. And, these are the participants who have 

actually chosen this option. Accordingly, this scenario raises two concerns. First, participant 

disclosures on such products need to be very clear and comprehensive. Second, for those 

participants who rely on fiduciaries to choose a default investment, disclosures are not going to be 

enough to protect them. 
AARP Comments: Lifetime Income Stream RFI Page 29

RIN 1210-AB33 

COMMENTS REGARDING ECONOMIC ANALYSIS, REGULATORY 

FLEXIBILITY ACT, AND PAPERWORK REDUCTION ACT 

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. 

36. A plan sponsor offering lifetime annuities or similar products is not in the same position as the 

sponsor of a traditional pension plan. It would not guarantee a premium at retirement for its plan 

participants who chose these products, unlike a traditional plan where the conversion of contributions 

into the pension annuity is set by the terms of the plan. The sponsor could buy annuities at group rates 

from an insurance company, and thus off-load longevity risk to the insurance company. Effectively, 

the sponsor is a middleman for the decumulation phase of retirement financing. It assumes no risks for 

its involvement, except perhaps some risk of fiduciary liability. 

If the sponsor chose to offer longevity insurance itself, it would have to decide whether it would set the 

terms in advance, or whether it would simply offer a premium based on the current term structure of 

interest rates and longevity tables to its employees on the verge of retirement. Doing so would mean 

that it would be acting like an insurance company and assuming the same risks. In particular, it would 

be assuming select longevity risk—the risk that its pool of annuitants did not have the same average 

life expectancy as that assumed for the population—as well as aggregate longevity risk—the risk 

entailed by uncertain average life expectancies. In addition, it would have to deal with the problem of 

matching the duration of its assets with its pension liabilities. This do it yourself strategy would only 

be feasible for large companies, and even for them the risks involved might not make it worthwhile. 

The sponsor of a 401(k) plan could contract with an insurance company to offer a variable annuity 

with a guaranteed minimum or an in-service annuity. As with other annuities, the only obvious risk in 

this case is the risk of fiduciary liability. 

Plan sponsors benefit from offering lifetime income products to the extent that their employees 

appreciate the benefits they are getting. It is uncertain what share of the older population would 

perceive annuities favorably, although there is reason to believe that that share is growing. 

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? 

37. Offering such products requires an increased investment in legal advice, because the plan becomes 

more complex when these options are added. These and any related administrative expenses are 

basically lump sum; they do not increase with the size of the plan or its sponsor. Consequently, they 

impose a burden on the small sponsor. A further consideration for small plan sponsors is that–absent a 

larger pooling arrangement–they may not be able to negotiate premiums as low as those of larger 

plans, and self insurance will not be an option. 
AARP Comments: Lifetime Income Stream RFI Page 30

RIN 1210-AB33 

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? 

38. As long as employees understand that they ultimately choose whether or not to use the lifetime 

income option, adding this option and making it the default should not reduce contribution rates and 

might eventually increase contributions. 

Information about the costs and benefits of the lifetime income and other distribution options, and 

the opt-out feature, should be clearly described to participants and provided at critical points, such 

as when employees first join the firm, when they become eligible to participate in the retirement 

plan, when they first enroll in the plan, and at the time of distribution. In addition, the annuity 

default should only be used for account balances over a certain size, and partial annuitization 

options should be made available for those with larger accounts.