May 3, 2010 

FILED ELECTRONICALLY 

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

Room N-5655 

U.S. Department of Labor 

200 Constitution Avenue, NW 

Washington, DC 20210 

Attention: Lifetime Income RFI 

RIN 1210-AB33 

CC:PA:LPD:PR (REG-148681-09) 

Room 5205 

Internal Revenue Service 

P.O. Box 7604 

Ben Franklin Station 

Washington, DC 20044 

The Pension Rights Center, a nonprofit consumer organization that has been working since 

1976 to promote and protect the retirement security of American workers and their families, has 

long been concerned with the diminishing availability of lifetime income options in most defined 

contribution plans. Therefore, we are pleased that the Departments of Labor and Treasury are 

seeking comments on the serious problems that Americans face in managing their assets to 

ensure they have a source of income through their retirement. 

We have already provided comments in the letter dated May 3, 2010, from the Pension Rights 

Center and other signatories, which focused on issues of particular resonance and concern to 

women (hereafter referred to as the Women’s Pension Coalition letter). 

When Congress enacted comprehensive pension reform in 1974, most Americans fortunate 

enough to participate in employer-sponsored retirement plans were covered by a defined benefit 

plan, which paid participants a guaranteed monthly benefit throughout their retirement years. It 

was impossible to outlive these benefits. Moreover, most sponsors of defined benefit plans 

periodically improved benefits to minimize the erosive effects of inflation on these benefits. With 

Social Security, such participants could count on a stream of income that assured that they 

could maintain their standard of living in retirement. 

The last several decades, however, have seen a remarkable change in employer-sponsored 

plans. Today’s workers are far less likely than yesterday’s workers to participate in a defined 

benefit plan. If they participate in a plan at all, it is likely to be a defined contribution plan—

probably a self-directed 401(k) plan—where they must choose to participate, decide how much 

to contribute; manage their investments while they work; and manage their investments and the 

draw-down while they are retired. 

Given the challenges of defined contribution plans, tomorrow’s retirees, on average, will have 

less retirement savings and run a far greater risk of outliving those savings than retirees of the 
May 3, 2010 

Page 2

last generation. Moreover, even defined benefit plans increasingly offer, and plan participants 

increasingly elect, lump-sum payments in lieu of a guaranteed life benefit. To compound the 

problem, Americans are living longer, which makes it even harder for an individual to ensure 

that she does not outlive her assets. 

Creating a climate in which more Americans can count on a lifetime stream of income would be 

a remarkably positive development in retirement policy, with one important caveat: the 

annuities and other products offered to retirement plan participants should be fairly priced, 

comprehensible, and reliable. Unfortunately, many annuity products that are available today -- 

particularly those aimed at individuals with modest retirement accumulations -- offer the twin 

investment demons of high loading fees and low effective returns. Hence it is important for DOL 

to examine ways of providing lifetime income products that are aimed at improving the lives of 

individuals in cost-effective and transparent ways. 

As a final preliminary note, we believe that the diminished availability of lifetime income products 

is a contributing, but not the only, factor to the approaching retirement crisis faced by our nation. 

Too many Americans simply lack access to employer retirement plans and too many of those 

who are fortunate to have access to such plans are not able to accumulate sufficient assets to 

ensure a comfortable retirement. Our nation should be addressing the question of lifetime 

income in the context of these and other issues. We need to begin the process of drafting a 

new blueprint for a retirement system that is universal, secure, and adequate. 

We have divided our comments into three sections. The first section provides background and 

context to our remarks. Here we provide some thoughts on the value of guaranteed lifetime 

payments and some of the various reasons that employees generally do not elect or purchase 

annuities. We also in this section raise some fundamental contextual questions that we think 

need to inform answers to some of the specific questions that the Departments have posed in 

their RFI. 

The second section suggests some ideas on how to expand availability of lifetime income 

options, while at the same time assuring that the lifetime income products are appropriate and 

reasonably priced. The third section focuses on protections for plan participants and their 

beneficiaries. 

I. Background and Context 

This section first answers two of the questions posed in the RFI: what are the advantages and 

disadvantages of lifetime payout options and what are the reasons that result in most people not 

taking annuities? The section also provides some thought on the problems of small accounts. 

1. Advantages and Disadvantages of Lifetime Payment Options 

A lifetime stream of income provides predictability and a certain level of security to retirees and 

their families. In contrast, the risks of managing a lump-sum amount to provide for a secure 

retirement are well documented. Retirees receiving a lump sum are faced with several choices, 

none of them ideal. They must manage the lump sum to last over their lifetimes and yet provide 

steady income. This means not spending it too quickly or conserving too much. They are also 

faced with investment choices which they are often ill-prepared to make or buy an annuity in the 

individual market. 
May 3, 2010 

Page 3

There are of course disadvantages to lifetime options in some situations. Some disadvantages 

are specific to particular individuals: a person with terminal cancer, or a person for whom it is 

sensible to pay off high-interest debt at the start of retirement, may be better served by taking a 

lump-sum payment over a guaranteed lifetime income option. 

Most annuities available today do not protect against inflation risk. Complete annuitization may 

defeat a person’s desire to leave something to their children or grandchildren. And in the 

current marketplace, some annuities are expensive and/or complex and/or risky and thus might 

not be an ideal or even good product for many people. 

But, while there are issues that need to be examined, we also note that annuities can be 

beneficial for many people. They provide guaranteed and predictable benefits for a retiree’s 

remaining life at a level that a lump sum can exceed or replicate only by taking on high levels of 

mortality, investment, and personal management risks. The 2008 market collapse provides a 

graphic illustration of how these risks can result in financial devastation—many retirees had to 

reduce their income streams or markedly increase the risk that they will outlive their assets. 

 

2. Reasons Plan Participants Often Decline Annuities Options 

Individuals often prefer lump sum payments to annuities for a variety of reasons, including the 

following (some of the reasons overlap): 

• Failure to appreciate that they may outlive their assets, and the attraction to a lump sum, 

which may be the largest sum of money ever available to participant; 

• Need for large sum of money for an immediate purpose; 

• Concern about viability of financial institutions over lifetime; 

• High cost of purchasing annuities; 

• Confusion about how to select an annuity, particularly given the complexity of many annuity 

products, and the amount of time and effort needed to select a good annuity product; 

• Inability to compare products; 

• Lack of education about value of annuities and how they are calculated; 

• Tendency to accept option offered by the plan, which in 401(k) plans is generally a singlesum payout; 

• Desire to leave a legacy for children/grandchildren; 

• Small accounts too small to purchase annuity for reasonable premiums; 

• Pressure from financial advisers and investment vendors who would receive fees from lumpsum distributions that they could manage; 

• Concern about medical emergencies or other future expenses; 

• Ability to exercise control over assets; 

• Concern about inflationary erosion of fixed income; 

• Some plans do not permit partial annuitization; 

II. Ways to Increase Use of Lifetime Income Options 

Because there are many explanations for why participants in qualified plans often end up 

without the benefit of guaranteed lifetime income from their retirement savings, there is no 

single policy innovation that will, in isolation, result in the type of dramatic upswing in selection 

of lifetime income options that most retirement policy thinkers believe is optimal. 

Rather, it is our view that a multi-faceted approach is required, including experimentation to 

determine which policy innovations might work best. In this section, we provide ideas—some of 
May 3, 2010 

Page 4

which can be accomplished be regulation, some through legislation, and some through 

government and private sector partnering—that might increase participant usage of lifetime 

income options for their retirement savings in qualified plans. 

1. Require all defined contribution plans to offer lifetime income options as an election 

for participants. 

We support this requirement for the reasons suggested in the Women’s Pension Coalition letter. 

We note, as well, that a plan offering an annuity option will also serve an informational function: 

it will alert participants that annuities are an option that should be considered and the offering of 

a lifetime income option might carry with it an endorsement effect. 

A lifetime income option should offer participants the opportunity to take a portion of their 

account balances in a lifetime income form, which would allow participants who are wary of an 

either/or election to have greater flexibility. It would permit individuals to set aside a certain 

amount of money for emergencies, large discretionary expenditures, or bequests for their 

children. Providing such a partial annuitization option would also accommodate individuals who 

are considering the resources of a spouse or other member of the household when making 

decisions about income needs in retirement. 

The basic lifetime income option should be simple and transparent and subject to the joint-andsurvivor rules applicable to pension plans. 

Requiring profit-sharing, 401(k), and stock bonus plans to offer a lifetime income option would 

require legislation. 

2. Default Annuity Option. 

The Retirement Security Project has recommended defaulting participants into a trial annuity, 

which would be revocable within a certain period. The proposal rests on the premise that the 

tendency towards inertia and procrastination in most people will result in many participants 

defaulting into an annuity option, which will give them a chance to experience the benefits of 

guaranteed annual payments. At the end of the specified period, they can opt out and take a 

lump-sum distribution, if they are not persuaded of the value of the annuity. 

This is a serious idea and worth experimenting with, although it may not enjoy the same positive 

participant response that some plans have experienced with automatic enrollment 401(k) plans 

(which are premised on the same assumptions about inertia). 

Employers moved to automatic enrollment primarily for three reasons: it was good for 

employees, it helped satisfy section 401(k) non-discrimination rules, and it did not impose costs 

or burdens on them. With default annuity options, the first of these reasons is present, but there 

is no tax benefit to the employer and there may be additional costs—direct and indirect—to the 

employer in a default option. 

Moreover, employees are likely to reflect at retirement on how they wish to take their benefits, 

and, if they prefer a lump-sum payment, they will elect it despite the default option. In any 

event, we concur with the Coalition’s recommendation that, before lifetime income payments 

become the default option for all plans—whether on a trial basis or not, plans first be required to 

offer lifetime income as an optional form of benefit and then that experience should be studied. 
May 3, 2010 

Page 5

3. Increasing the safety of annuities. 

Although we discuss this in greater detail in Section III of these comments, participants are 

more likely to choose a lifetime income option if they know that their income will not be disrupted 

by the financial insolvency of the insurer offering the income product. Security can be provided 

either by ensuring the adequacy and coverage of state insurance guarantee funds or by a 

guarantee by the Pension Benefit Guaranty Corporation. 

4. Tax incentives to moderate- and lower-income individuals to annuitize. 

There have been numerous proposals over the last decade to encourage people to annuitize by 

offering them individual tax incentives. These proposals generally would create a limited 

exclusion from income for annuity payments. In some of the proposals, the exclusion would 

apply from the first dollar of annuity payment up to a cap; in other proposals, the exclusion 

would apply to a percentage of the annuity payment, up to a cap. Some proposals, but not all of 

them, would not extend tax benefits for people whose total taxable income exceeded a 

designated threshold; some proposals, but again not all of them, would offer tax benefits to 

people who purchased annuities with their own funds directly from insurance companies. 

 

These proposals are problematic. First, the value of the benefit is dependent on a taxpayer’s 

marginal rates, so the incentive would be relatively weak for moderate- and low-income plan 

participants, who in our view should be the primary targets for such individual tax incentives. 

Second, we should expect that an exclusion from income would induce some wealthy 

individuals to annuitize simply to capture the tax benefits, even though they would extract only 

limited benefit from the annuity’s longevity protection. We might also expect the insurance 

industry to devote resources to creating products that are heavy on investment and light on 

insurance to attract this population. 

While we do not favor income exclusions as an incentive to annuitize, we believe that the use of 

tax credits to encourage low- and moderate-income individuals who purchase annuities is an 

idea worth consideration. The value of a tax credit does not correlate with marginal tax rates, so 

tax credits would provide stronger incentives for lower- and middle-income individuals. 

Moreover, insurance companies generally charge more to annuitize relatively small amounts, 

since there are many fixed costs that do not vary with the size of the amount being annuitized. 

Limiting tax credits to low- and moderate-income individuals thus can be seen as a means of 

normalizing the costs of annuitizing large and small account balances. 

5. Issue USA retirement bonds as an investment option for defined contribution plans. 

The federal government currently issues, among other forms of debt, inflation bonds. It might 

be plausible for the government to combine those bonds with an annuity feature, which might be 

provided either directly by the government or through a portion of insurance companies that 

would purchase some of the mortality risk. A participant in a section 401(k) plan could purchase 

such bonds as investments. 

One of the reasons this might be an attractive approach is that younger employees are less 

likely to have good information about whether life expectancy, so they might be more willing to 

pre-commit to an annuity payout than an older individual, who will be deciding between an 

immediate lump sum payout or an annuity. It might also be possible for a default investment to 

direct some assets to such bonds (or to similar deferred annuity products issued by private 
May 3, 2010 

Page 6

insurers). The bonds might have a pre-retirement death feature, or perhaps a cash-out feature 

with an appropriate penalty. They might also be subsidized to make them more attractive to 

purchasers. 

6. Retirement rollovers from defined contribution plans to defined benefit plans. 

When an employee works for an employer that sponsors a defined benefit plan, it can be 

efficient for the employer to offer an employee the option of rolling over defined contribution 

accounts to the defined benefit plan, where it could be paid by the defined benefit plan in an 

annuity form. We are not certain whether any employers currently offer this option, but we 

believe that some might if there were guidance dealing with issues ranging from section 415, 

the nondiscrimination rules, and from PBGC on the insured status of benefits purchased from a 

defined benefit plan with rollover funds. 

7. Enhancing the value of lifetime income products, particularly for lower- and 

moderate-income participants. 

There currently is a limited insurance market for lifetime income products for individuals with low 

account balances. We would favor legislation that would permit the PBGC to create low-fee 

annuity vehicles, at least for individuals with low account balances. We also think that it is worth 

discussing the creation of national insurance exchanges, in which insurance companies would 

offer relatively uniform products to enable participants to comparison shop. Such an exchange 

might include a consumer expert panel that would approve products offered on such exchange. 

8. Education on the value of lifetime income options. 

Education during working years and at the time of retirement will help participants make the 

choices that are right for them. Participants need background information about the risks of 

managing money in retirement; longevity risk, health risks and investment risks, including fees. 

At the same time, the purchase of an annuity involves a consideration of fees and often a choice 

among types of annuities. 

Participant education should include guidance on annuity options and fees, as well as the risks 

associated with managing lump-sum distributions. EBSA could provide an informational booklet 

on decisions at retirement with definitions and descriptions of various options, as well as factors 

to consider when making a decision. EBSA also could issue guidance for employers who wish 

to provide education programs. 

Many participants do not have a sophisticated understanding of how an annuity is calculated. 

Providing this information during the working years would help participants become familiar with 

the concept of an annuity. 

Here, the individual benefit statement could be used to educate participants by including an 

estimate of the annuity that could be purchased with the current account balance and an 

explanation of how the estimate was calculated. Estimates should be kept simple without 

complicated calculations so they can be easily understood by participants. The agencies could 

specify by regulation how to calculate an annuity estimate, and the agencies could provide 

interest rate and longevity tables to be used in the calculation. 

 

The Pension Rights Center thus supports the Lifetime Income Disclosure Act, S.2832, 

introduced by Senators Jeff Bingaman, Johnny Isakson, and Herb Kohl, which would require 
May 3, 2010 

Page 7

plans to give participants annual estimates of how much the money in their accounts would buy 

in lifetime monthly payments beginning at normal retirement age. 

III. Protecting Participants 

Participants face numerous risks when they invest some or all of their assets in a lifetime 

income product. They face the risk of high initial fees and low effective investment returns; they 

face the risk of buying an inappropriate product; they face the risk of insurer insolvency. 

Providing protection against such risks is important in its own right—ERISA is a statute informed 

by consumer protection issues—but also because participants are more likely to consider such 

products if they understand what they are purchasing and are confident of its safety. 

In this section, we discuss what we consider are the essential components of consumer 

protection: ensuring the safety of the lifetime income products; the role of the fiduciary in 

selecting such products; and disclosure to the participant. 

1. Safety of Annuity Products 

There are two basic approaches to providing safe lifetime income products: relying on 

fiduciaries, subject to their ERISA duties, to make prudent annuity selections; or providing 

reliable back-up guarantees for such products. Given that the failure of an insurance provider 

would be catastrophic for retirees who are receiving fixed income, we believe that the actual 

back-up guarantees are essential. Even the most careful fiduciary may choose a lifetime 

income product whose issuer later suffers severe financial stress. The losses to the participants 

are no less devastating because the fiduciary was careful and attentive when it initially selected 

the issuer. This is one of the occasions when insurance, not simply prudence in selection, is 

essential. This would, of course, require legislation. 

 

Currently state insurance guarantee funds provide insurance for the products of failed insurers. 

The eligibility for and extent of the guarantees, and the health of the guarantee funds, vary from 

state to state and, even when the guarantees are adequate, there can be a lengthy period 

before the state fund begins payment. The current system, while workable in many states, is 

not fully adequate when considered on a national scale. 

There are different paths for providing effective insurance protection: federal protection, through 

the PBGC or another federal guarantee corporation; setting minimum federal standards for state 

guarantee funds; or a hybrid, both setting minimum standards for state guarantee funds 

combined with a federal guarantee of such funds. 

A legislative effort to create strong guarantees would require resolution of numerous difficult 

policy issues, including the appropriate relationship between federal and state jurisdiction in the 

regulation of retirement plan annuity contracts, but such guarantees are in our view not only 

essential for building consumer confidence in lifetime income products, but also for avoiding 

potential catastrophic consequence for some retirees. 

2. Fiduciary Considerations. 

A fiduciary must comply with ERISA’s fiduciary standards when selecting an annuity provider. 

The Department of Labor has provided guidance for fiduciaries selecting annuities and a safe 

harbor for fiduciaries selecting an annuity contract as a means of benefit distribution. The 

fiduciary’s paramount concern under both the guidance and safe harbor is the safety of the 
May 3, 2010 

Page 8

annuity contract. The RFI specifically asks whether that safe harbor is adequate and how it 

might be modified to increase its usage without compromising participant interests. 

We have two general comments about the application of ERISA’s fiduciary rules and then offer 

some specific suggestions about how to revise the safe harbor to make it both more useful to 

fiduciaries and more protective of participants. 

General Comments 

1. Until the issue of guarantees for retirement annuities is addressed legislatively, the 

issue of annuity safety must be the first consideration for a fiduciary. 

2. An equally important fiduciary concern, and one that currently is not clearly reflected 

in Department of Labor guidance, is product suitability. There are many annuity and 

other lifetime income products—and there will almost certainly be new products in the 

future--that may not be “safe” and fairly priced but nevertheless may be unsuitable to the 

typical participant. 

Some of these products would expose retirees to risk that they might not understand and 

might not be equipped to handle. Thus, we believe that the Department should work on 

guidance to ensure that plan fiduciaries consider product suitability and provide 

disclosure and other necessary information, education and advice to assist participants 

in choosing appropriate products for their needs. 

Regulatory Safe Harbor 

The current regulatory safe harbor that applies to fiduciary annuity selection is processbased. For an annuity to fit the safe harbor, the fiduciary must engage in an objective, 

careful, and thorough process to select an annuity, with a substantive focus on the 

issuer’s ability to satisfy future annuity payments and the relationship between the 

annuity’s cost and the annuity’s benefits (including administrative services) to the 

participant. (Other DOL guidance provides the factual considerations in determining an 

issuer’s claims-paying ability and directs the fiduciary to also consider the quality of state 

guaranty programs.) 

We have two concerns with the safe harbor. The first concern is that the safe harbor is 

essentially a statement of what the ERISA prudence and exclusive benefit rules already 

require of a fiduciary in terms of process, without providing concrete examples of 

annuities whose selection would satisfy ERISA standards. The second concern is that 

the safe harbor does not focus sufficiently on suitability of a particular annuity product for 

the typical plan participant. 

We urge the Department of Labor to redesign the safe harbor to reflect these concerns. 

Specifically, we would suggest that the safe harbor cover single-life annuities for 

unmarried participants and joint-and-survivor annuities for married participants. The 

safe harbor might also cover a limited number of easy-to-understand variations on these 

basic annuities as alternatives (for example, a trial annuity, end-of-life annuity, or an 

annuity with a limited right to reach a percentage of the principal). We do not believe 

that a safe harbor should apply to annuity vehicles that expose participants to substantial 

investment risk. 
May 3, 2010 

Page 9

For small employers, the ability to determine claims-paying ability in accordance with the 

current regulatory safe harbor is not realistic—it imposes too much cost unless smallplan fiduciaries have access to reasonably priced expert advice. We note that it may not 

be cost-effective to have every fiduciary go through an independent and rigorous 

process to re-determine what we would hope would be a relatively stable conclusion 

about claims-paying ability and credit-worthiness. 

Thus, we believe that in designing a safe harbor, the Department should consider 

innovative means to help fiduciaries assess claims-paying ability and creditworthiness of 

insurers (and the extent and coverage of applicable state guarantees) on a cost-effective 

basis. Perhaps the Department could create an independent expert panel that would, 

from time to time, provide information to assist fiduciaries in evaluating particular 

insurers. 

3. Disclosure 

Most participants in defined contribution plans are not familiar with annuities. In addition to 

general background information on annuities, participants should have information on the 

specific annuity products available from the plan. This information should be written in a direct 

and simple manner to be easily understood by participants, thus enabling them to choose 

among the various plan options at retirement. 

Required disclosures should include: 

• A description of the type of annuity and what it means, such as single life annuity or variable 

annuity; 

• The calculations used to determine the monthly amount; 

• Definitions and descriptions of the features of the annuity, such as death benefits. 

• All fees, including fees applied when the annuity is purchased and any fees applied 

throughout the years of payment; 

o Any one-time fees triggered by an annuitants’ request, such as fees for changing 

investments, should be disclosed at the time of annuity purchase. 

• Investment risks; 

• Participants at retirement who are deciding either between two or more annuity options or 

between a lump-sum payment and an annuity should be given the calculation of the exact 

amount of monthly income the annuity will provide. 

o If the amount could vary due to changing interest rates or other factors, then that 

should be clearly explained. 

These disclosures should be written and provided according to the current Department of Labor 

rules for plan disclosures. 

If you have any questions about these comments, please contact Karen Friedman, Executive 

Vice President and Policy Director, at 202-296-3776. 

Respectfully submitted, 

Pension Rights Center