Another approach is to provide plan participants with a greater incentive to elect annuities
instead of lump sums. This could be achieved by exempting either all or a portion of the annuity
payments from defined benefit and defined contribution plans from the retiree’s taxable income,
which would also help level the playing field between the types of plans. In order to minimize
the revenue impact and focus the tax incentive on the participants most in need of financial
security in retirement, the tax exemption could be tied to the income level of the retiree, with
lower income individuals receiving a greater tax savings. Alternatively, a change in the tax
treatment of lump sums (except from supplemental plans) and other forms of early distributions
that contribute to plan leakage could help further mitigate the revenue impact of this provision,
while simultaneously further encouraging annuity distributions,

Facilitate Defined Contribution Plans that Require Annuity Distributions

There are several factors that contribute to the low utilization of annuities among participants
with defined contribution benefits. One of the most significant issues is the fact that defined
contribution participants generally need to purchase annuities on the private market, and these
annuities are often very expensive to purchase. The high cost of annuities is due in large part to
the fact that insurance companies deliberately price them very conservatively, due to their
experience that individuals who buy annuities tend to have longer lifetimes than the general
population.

Short of direct government intervention in the annuity market, the most effective way to
encourage insurance companies to price annuities more competitively is to greatly increas: the
number of plan sponsors and individuals who participate in the market. While there are many
potential approaches that both regulators and plan trustees can use to encourage participants to
voluntarily annuitize their benefits from defined contribution plans, we believe that these steps
will ultimately produce only minor improvements in participant behavior. The attraction of a .
large lump sum is simply so great to most participants that no amount of education or market
enhancement will convince them to forgo this payment in favor of an annuity.

We suggest that regulators look for ways to encourage plan sponsors to adopt defined
contribution plans that require that participants receive at least a portion of their retirement
benefits through annuities. It would be impractical for this goal to apply to either participants’
current balances or their future elective deferrals. However, it is practical for future employer
contributions to be used to purchase deferred annuities that would be payable to participants
when they retire. In effect, all future employer contributions could be invested in deferred
annuities, while participants would maintain their discretion over the investment of both their
entire current account balances and their future elective deferrals.


increase, the same 7-year funding period applies. These factors result in cash flow volatility that
is potentially crippling for many companies.

Pension plan funding needs to strike a balance between ensuring that companies are not able to
allow plans to remain dangerously underfunded, and providing sufficient flexibility to make it
financially viable for companies to sponsor plans in the first place. The interests of participants
are harmed both by underfunded defined benefit plans, and by companies choosing not to offer
defined benefit plans. Congress and the regulatory agencies should consider if the current
funding requirements are so restrictive that they actually harm participants by making it
impractical for companies to sponsor plans.

In addition, many plan sponsors do not understand how significantly they can reduce the
volatility of their defined benefit plans by investing less in equities and more in fixed income
securities. Although this approach is likely to lower the investment returns over the long term,
movement in interest rates will cause the assets and liabilities to move in tandem, which greatly
dampens the cash flow volatility. This does not imply that investing in fixed income securities is
the necessarily the correct way to fund a pension plan, only that it is an effective technique for
reducing the financial risk associated with sponsoring a plan.

The regulatory agencies could provide a valuable service by taking steps to ensure that
companies fully understand that the financial risk of a defined benefit plan can be significantly
reduced through asset allocation decisions. Since a shift away from equities would almost
certainly result in reduced investment earnings, this shift would need to be accompanied by
either increased contributions, or a modest reduction in the benefit level provided by the plan. In
many cases, both the interests of the company and the interests of the employees would be better
served by such an approach instead of a transition to a defined contribution structure.

Discourage Payment of Lump Sums from Defined Benefit Plans

Under current law, there is little reason for pension plans sponsors to favor either lump sum
distributions or annuity distributions. Since the actuarial factors that are used to convert between
these options typically use assumptions very similar to those used in plan funding calculations,
benefit costs are effectively cost neutral to the plan. However, it should be noted that there are
some modest administrative costs and some residual fiduciary responsibilities associated with of
retaining the participant as an annuitant.

Congress and the regulatory agencies could serve the interests of plan participants by
encouraging defined benefit plan sponsors to reduce or eliminate the availability of lump sum
distributions and other sources of leakage. One option would be to place less onerous funding
requirements on plans that pay the majority of their benefits as annuities. This approach is
financially reasonable, due to the fact that the long time horizon associated with annuity
payments allows the plan assets more time to absorb any adverse investment experience. In
contrast, the short time horizon associated with lump sum payments means that the plan sponsor
needs to replace investment losses in the plan much more quickly.


Although we believe that under current law it is permissible for plan sponsors to allocate all
future employer contributions to deferred annuities, we are not aware of any companies that have
adopted this approach. There are three possible reasons why plan sponsors have not choseri this
plan design approach:

1. Lack of awareness of this design option
2. Concern over the permissibility of this approach
3. Belief that the design is not in the best interest of the company or the employees

While there is little that the regulatory agencies can do to address item (3), items (1) and (2)
could be addressed by formal guidance and publications that discuss the framework within which
these plans would operate. This material would discuss the relevant code and regulatory
sections that would apply to these plans, provide guidance on ensuring compliance with these
sections, and where necessary, establish safe harbors or other thresholds for plan sponsors to use.

Conclusion

The migration away from defined benefit plans in general, and away from annuity benefits and
towards lump sum retirement benefits, poses a serious challenge to the ability of the American
workforce to plan for and remain financially independent in retirement. We encourage the
Department of Labor and the Department of Treasury to champion the implementation of new
defined benefit plans and to increase its support of existing defined benefit plans. We also
encourage the departments to promote the use of defined contribution plans that provide
mandatory annuity benefits. We believe that companies will be interested in implementing these
designs once they become both aware of them and comfortable with their permissibility and
viability.

Respectfully submitted,

Randy G. DeFrehn

Executive Director


Page | of 1

RECIYP6E 1-09

MAY 4 2010
LEGAL PROCE
PUBLIC ROCESSING Division
& REGU! :
BRANCH LATIONS Received, May 23, 2010

Status: Posted
PUBLIC SUBMISSION Preset: veri 208
|Comments Due: May 03, 2010}
Submission Type: Web

Docket: IRS-2010-0006
Request for Information Regarding Lifetime Income Options for Participants & Beneficiaries in
Retirement Plans

Comment On: IRS-2010-0006-0001
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries: in
Retirement Plans

Document: IRS-2010-0006-0073
Comment on FR Doc # 2010-02028

Submitter Information

Name: Randy DeFrehn
Address:
815 - 16th Street, NW
Washington, DC, 20006
Email: rdefrehn@nccmp.org
Phone: 202-737-5315
Fax: 202-737-1308
Submitter's Representative: Josh Shapiro
Organization: NCCMP

General Comment

Comments in attached document.

Attachments

IRS-2010-0006-0073.1: Comment on FR Doc # 2010-02028

https://fdms.erulemaking.net/fdms-web-agency/component/submitterInfoCoverPage?Call=P... 5/4/2010


NATIONAL COORDINATING COMMITTEE FOR MULTIEMPLOYER PLANS

815 16TM STREET, N.W., WASHINGTON, DC 20006 * PHONE 202-737-5315 + FAX 202-737-1308

MARK H. AYERS:
CHAIRMAN

RANDY G. DEFREHN
EXECUTIVE DIRECTOR
E-MAIL: RDEFREHN@NCCMP.ORG

May 3, 2010

Via e-mail to: www.regulations.gov

Department of Labor

Employee Benefits Security Administration
29 CFR Parts 2509, 2520 and 2550

RIN 1210-AB33

Department of the Treasury
Internal Revenue Service
26 CFR Part |

RIN 1545-BJ04

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

The NCCMP is a non-partisan, non-profit organization that works to assure an environment in
which multiemployer plans can continue their vital role in providing benefits to millions of
working Americans. Although some multiemployer plans are defined contribution plans, these
tend to be supplemental plans, while the majority of multiemployer pension plans are defined
benefit plans that, with few exceptions, only pay benefits as annuities. As such, the topic of this
Request for Information (RFI) is directly applicable to a minority of the plans in the
multiemployer community. We are responding to this RFI both to represent the interests of these
plans, and because we recognize that multiemployer plans are part of a larger universe of
retirement plans, and policies that benefit the wider retirement plan community indirectly help to
ensure that our constituent plans are able to survive and flourish.

Background
In recent decades, two trends have materialized among single-employer pension plans:

¢ Defined contribution plans have gradually replaced defined benefit plans as the primary
vehicle for providing retirement income at many companies

¢ Defined benefit plans have increasingly offered participants the option to receive their
benefits as lump sums, often in conjunction with a transition to ‘cash balance’ style
pension plans.


As a result of these trends, a far greater number of participants retiring today are able to receive
their retirement benefits as lump sums than were able to do so in the early days of ERISA. This
ability, combined with a very strong participant preference for lump sum payments, means that
as time goes on, fewer and fewer participants are relying on annuities in their retirement.

It is very difficult to structure a financially sound retirement using a single sum distribution.
Perhaps the most significant problems are the amount of retirement savings most working
Americans can afford to save throughout their careers, and the opportunities for even those
modest amounts to be depleted through “leakage”, which refers to loans, early distributions, and
excessive fees. Beyond these issues, individuals who spend the distribution too quickly and
experience a long life after retirement are likely to exhaust their money, forcing them to rely on
family support or public assistance during their final years. Other individuals may be reluctant to
draw on the money for fear of exhausting it, and are therefore not able to enjoy their retirement
in the manner they should. Lump sum retirement distributions force retirees to make difficult
investment decisions that they may not be equipped to handle, and they also expose retirees to
the dangers of unscrupulous financial advisors. Lastly, all of these concerns are further
complicated when an individual’s retirement benefit is expected to provide not only for his or
her own financial security, but that of his or her spouse as well.

Suggested Objectives

For the reasons listed above, the financial security of millions of retiring Americans will be
enhanced by reversing the trend away from annuity benefits. We have identified three objectives
that Congress and the regulatory agencies should pursue to support the ultimate goal of having
more workers retire with annuity benefits.

e Encourage Use of Defined Benefit Plans

« Discourage Payment of Lump Sums from Defined Benefit and Defined Contribution
Plans (Other than Supplemental Plans)

¢ Facilitate Defined Contribution Plans that Required Annuity Distributions

The following sections provide details on the rationales behind each of these objectives, as well
as potential courses of action that would support each.

Encourage Use of Defined Benefit Plans

Defined benefit pension plans currently provide reliable financial security to millions of retired
Americans. Despite their great success in this area, there has been a substantial decline in their
use in recent years. The primary factors that have driven many companies to abandon defined
benefit plans in favor of defined contribution plans are the administrative complexities imposed
on sponsors of defined benefit plans, and the financial risk that defined benefit plans create for
the employer. The administrative complexities are well known and we will not dwell on them in
this submission, other than to acknowledge what is widely documented. With respect to the
financial risk assumed by such sponsors, under current law, when a single-employer defined
benefit plan incurs a loss on its investments, the employer is obligated to make-up the loss to the
plan over a 7-year period. In addition, the interest rate used to value the defined benefit
liabilities is tied to the bond markets, and when interest rate movement causes the liabilities to