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Oral Testimony of

Christine Marcks

President, Prudential Retirement

Before the

U.S. Department of Labor

And 

The U.S. Department of the Treasury

For the 

Hearing on Certain Issues Relating to Lifetime Income Options for 

Participants and Beneficiaries in Retirement Plans

Tuesday, September 14, 2010

U.S. Department of Labor

Washington, DC
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Introduction

Good morning. My name is Christine Marcks, and I am the 

President of Prudential Retirement, a business of Prudential 

Financial.

Prudential Retirement provides administrative, plan 

management, investment, and income products and services 

to retirement plan sponsors and their plans’ participants in the 

public, governmental, private, and not-for-profit sectors.

We provide those products and services to nearly 6,500 

retirement plans—with more than 3.6 million individual 

participants and annuitants, representing $181 billion in total 

account values, as of June 30, 2010.

Context 

Today, I will briefly share our views on American workers' 

growing need for guaranteed, lifetime, retirement income 

and the importance of meeting that need within the existing 

framework of employment-based retirement plans, which is 

core to our vision for "redefining retirement" for tens of 

millions of workers and their families.

I would then be privileged to outline some recommendations 

on how to address that need through specific regulatory 
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guidance and clarifications we believe are necessary to make 

this vision a reality.

Let me begin by providing some context for the need for these 

recommendations.

Framing the Need for Change

While guaranteed income programs are currently available in 

the retirement-plan marketplace, several impediments restrain 

plan sponsors from making these programs available and plan 

participants from electing them. 

First of all, a guaranteed lifetime income form of distribution,

within a defined contribution plan, is a new concept for many 

American workers.

As you know, DC plans have replaced DB plans—traditional 

pensions—as the primary workplace-based retirement vehicle

for millions of American workers.

Unfortunately, and unlike traditional pensions, most DC plans 

do not offer guaranteed lifetime income solutions. And among 

those organizations that do offer a lifetime income option, 

many participants are reluctant to use their plan assets to elect 

and purchase one. 

And because DC plan accumulations are likely to be the 

largest amount of money many workers ever accumulate, even 
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a less-than-sizeable account balance can create an illusion of 

wealth—the mistaken impression that one will have enough to 

live on throughout his or her retirement years. 

That illusion causes many participants to underestimate—if 

they consider it at all—the need to purchase a solution that 

guarantees a stream of income they cannot outlive.

And even if the risk of outliving one’s retirement savings is

recognized and understood, many participants reject any 

solution that locks them into an irrevocable commitment or an 

inflexible payment stream.

Finally, some participants may also fear the loss of a solution’s 

full benefit—that they or their beneficiaries will simply lose 

money—if they die prematurely.

Insurers’ Responses to Participants Concerns

To respond to these concerns, insurers, including Prudential, 

have created new forms of guaranteed lifetime income 

solutions, such as Guaranteed Minimum Withdrawal Benefits, 

or GMWBs. 

GMWBs address participant concerns by providing guaranteed 

lifetime income, while also providing access to one’s account 

value at any time. GMWBs provide protection for retirement 

income against the risk of falling markets alongside the 
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potential to gain from rising markets. Participants have the 

flexibility to control their assets, and the ability to include 

spousal benefits, as well. 

A more thorough discussion of GMWBs and their benefits is 

contained in our written submission.

Recommendations to the Agencies

I would like to turn now to our recommendations.

To facilitate a more favorable environment for guaranteed 

lifetime-income solutions, employers and participants require 

greater clarity and guidance. As such, we have identified the 

following five areas that need the attention of the Agencies:

1. Modernize and update Interpretive Bulletin 96-1 to 

provide assurances to plan sponsors regarding the type 

of information and materials that can be provided to

participants about guaranteed lifetime income without 

being considered investment advice;

2. Issue guidance that encourages plan sponsors to 

disclose annuity values, in addition to lump-sum values, 

on participants’ account statements;
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3. Clarify that the additional fees associated with guaranteed 

lifetime-income solutions do not make these products per 

se imprudent for use as Qualified Default Investment 

Alternatives;

4. Confirm the well-established principle that the prudence 

of a fiduciary’s actions is judged on circumstances at the 

time an investment decision is made or reviewed, not in 

light of subsequent events; and

5. Finally, improve the Annuity Selection Safe Harbor for 

selection of lifetime income options. 

I will devote most of the remaining time to providing details on 

improvements to the Safe Harbor. Our written testimony 

provides further details on all our recommendations.

Improvements to the Safe Harbor for Selection of Lifetime 

Income

Plan sponsors find the availability of regulatory Safe Harbors to 

be very useful as they evaluate products and services. At the 

same time, plan sponsors find the lack of a Safe Harbor, or the 

lack of clarity about Safe Harbors in certain key areas, to be a 

significant barrier to offering products and services within a 

plan. 
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We recommend, therefore, that the Department of Labor issue 

guidance about the annuity selection Safe Harbor to clarify its 

application to guaranteed lifetime-income solutions. 

We have three brief recommendations, which are supported in 

more detail in our written testimony. 

First, the Department should explicitly extend the Safe 

Harbor, and, if necessary, appropriately modify it, to 

include a broad range of guaranteed lifetime-income 

solutions. The fact that a particular guaranteed-income 

solution is not a traditional immediate annuity should not 

be a factor in deciding whether the Safe Harbor applies. 

The more important consideration is whether the solution 

appropriately protects participants against longevity and 

investment risks in a manner similar to a traditional 

distribution annuity.

Second, the Department should also provide greater 

certainty about how frequently fiduciaries need to 

evaluate the financial strength of the provider of a 

guaranteed lifetime-income solution. We ask the 

Department of Labor to confirm that a fiduciary who 

evaluates the product provider’s financial condition at the 

time the provider is initially selected must conduct 

subsequent reviews. When conducting these ongoing 
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reviews, the fiduciaries should evaluate the same factors 

initially considered and at a frequency appropriate to 

existing circumstances, but no less than once per year. 

Third, we believe the Department of Labor should 

reconsider its previously issued guidance and provide a 

list of factors that fiduciaries should use to assess

financial strength. We suggest that these factors include

many of those detailed in Interpretive Bulletin 95-1. 

Specifically, these would include the level of the insurer’s 

capital and surplus; the quality and diversification of the 

annuity provider’s investment portfolio; the size of the 

insurer relative to the proposed contract; the lines of 

business of the annuity provider and other indications of 

an insurer’s exposure to liability; credit ratings; the 

availability of additional protection through state guaranty 

associations; and the extent of the insurer’s guarantees 

and the structure of the annuity contract and guarantees 

supporting the annuities, such as the use of separate 

accounts. We would be pleased to work with the 

Department in identifying this information and where it 

can be obtained. In order to avoid any misunderstanding 

by plan fiduciaries, we ask the Department also to clarify 
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that a plan fiduciary will have protection under the safe 

harbor if the fiduciary gathers relevant information and 

prudently evaluates it. 

We recognize this third recommendation is different from the 

position we took in response to the proposed regulation. 

Since the regulation was finalized, however, our experience 

and the feedback we have received from plan sponsors 

indicate fiduciaries struggle to identify and gain comfort with 

the specific criteria they need to consider. 

Therefore, we believe it would be useful to provide a clearer 

road map for fiduciaries by detailing the list of factors they 

should evaluate when they assess the financial strength of a 

provider. 

Conclusion

In closing, I want to congratulate the Agencies for recognizing and 

seeking solutions to address the growing need to redefine 

retirement through the use of guaranteed- lifetime-income 

solutions, and I thank you for the opportunity to share our 

thoughts on this important issue and welcome any questions you 

may have.
Prudential Financial’s

Written Statement for the Record

for the

Hearing on Certain Issues Relating to Lifetime Income Options for Participants 

and Beneficiaries in Retirement Plans

Before the

Department of Labor and the Department of the Treasury

Tuesday, September 14, 2010

U.S. Department of Labor

Washington, DC

Topic 1: Certain Specific Participant Concerns Affecting the Choice of Lifetime 

Income Relative to Other Options

As stated in the Hearing Notice, there has been reluctance on the part of some 

participants to choose a lifetime-income option as the form of distribution from their 

defined contribution plan for the following reasons:

1. The Lifetime Income Form of Distribution in Defined Contribution Plans is a 

―New‖ Concept for Workers 

In the past, defined contribution plans were viewed as supplementary savings 

plans, and most workers depended on their employer’s defined benefit (DB) plan 

to provide them with monthly income in retirement. Those who also participated 

in a defined contribution (DC) plan generally didn’t perceive the need for a 

distribution in the form of lifetime income from their DC plan. With the reduction 

in the number of DB plans in recent years, many workers have only recently 

been confronted with the fact that they must save for their own retirement and, at 

the time of retirement, must decide how to manage the money they have saved. 

For a variety of reasons many are hesitant to convert the funds in their DC plans 

to a lifetime-income option and instead select a lump-sum distribution.

2. Wealth Illusion of DC Plan Account Value

For many, the account balance in their DC plan is the largest amount of money 

they have ever accumulated. Without a strong frame of reference, seeing a large 

account balance can create the mistaken impression that they will have enough 

to live on throughout their retirement years and that they really have no need to 

―manage‖ this money to have it last through their lifetime and their spouse’s 

lifetime. This is known as the ―wealth illusion.‖ 

3. Unwillingness to Give up Control of Assets for Guaranteed Lifetime Income
Plan participants who are given the option of an immediate annuity instead of a 

lump sum are faced with having to turn over what for most is a large sum of 

money to an insurer in return for a promise of lifetime income. That’s a decision 

many individuals are reluctant to make. Participants want a measure of control, 

flexibility and ownership of their assets in the event they are faced with a major 

expense, such as a medical emergency. With most traditional annuities,

individuals are required to annuitize and thus surrender the ability to access their 

assets. Some newer and non-traditional forms of guaranteed lifetime-income 

solutions, such as guaranteed minimum withdrawal benefits (GMWBs), address 

these concerns by providing individuals access to their account values and the 

flexibility to control their funds. (GMWB, which can only be issued by an insurer,

is a guaranteed living benefit option available with a variable annuity. It promises 

participants future guarantee of minimum periodic withdrawals for life while 

providing them a measure of control, flexibility and ownership of their assets. In 

Topic 5 we discuss guaranteed living benefits and GMWB in greater detail.)

4. Aversion to the ―Risk Pooling‖ Concept Inherent with Immediate Annuities

Experts know the most economically efficient way to ensure that a worker will 

have lifetime income in retirement is to purchase a single-life immediate annuity. 

Such an annuity is very efficient because of risk pooling. The insurer issuing the 

annuity assumes the risk that the worker will live longer than his or her life 

expectancy and pools that risk with other annuity purchasers. Among such a 

large group, some individuals will live longer than expected; others will die 

prematurely. Pooling the risk – using some or all of the money of the deceased 

to pay for the living - lets the insurer issue annuities to everyone at favorable 

rates. Unless a retiring worker believes he or she will live longer than expected 

(and family history may reasonably lead to this belief), the worker may be 

reluctant to buy a product that could end up subsidizing someone else’s lifetime 

income.

5. Fears of Market Loss with Non-Guaranteed Form of Retirement Income

Ongoing financial-market volatility has elevated many worker concerns about 

their retirement nest eggs, which suffered dramatic market losses after they had 

begun taking non-guaranteed forms of retirement income, such as those through 

a managed payout fund. A GMWB or a traditional annuity issued by an insurer, 

which guarantees a minimum monthly income for life, can eliminate this concern.

6. Fees and Complexity of Insured Guaranteed Lifetime Income Forms of 

Distribution

Some have claimed that variable annuities with guaranteed lifetime-income 

benefits, which can only be issued by an insurer, are ―too expensive‖ and ―too 

complex.‖ While there certainly are fees associated with a solution that requires

an insurer to assume the risk of a retiree running out of money and provides 

protection against downside market risk, many individuals with such contracts 
believe those guarantees have been worth the cost. This was especially true for 

those who were nearing retirement during the past few years and would have 

otherwise seen their retirement income drop substantially if it were not for the 

downside market risk protection for future retirement income payments afforded 

by the guarantees under guaranteed minimum withdrawal benefit contracts. In 

the case of in-plan guaranteed lifetime-income payments participants also benefit 

from institutional pricing resulting from ―economies of scale‖ and from discounts 

in fees negotiated by plan sponsors. As to complexity, Prudential has found that 

when these solutions are properly explained, sponsors and participants 

understand and value them. 

7. Longevity Risk Associated with ―Lifetime Income‖ Solutions that are not 

Guaranteed for Life

Retirees are concerned that they may outlive their assets. Lifetime-income 

solutions are available that estimate how much money a retiree can withdraw

from accumulated assets on a monthly basis, based on anticipated life 

expectancy. Since a retiree cannot really predict ―length of life,‖ concerns about 

longevity risk are not addressed by such systematic withdrawals. An insurance 

solution that guarantees to pay monthly income as long as the retiree lives does 

address this concern. According to research conducted by Greenwald and 

Associates, 72% of participants said the ability to ―get payments guaranteed to 

continue for as long as you live‖ was an important factor for buying a guaranteed 

lifetime-income solution.

8. Lifetime Income Solutions That Are Not Guaranteed Do Not Protect Spouses

Some workers are concerned about lifetime-income solutions that do not assure 

spouses that they will not outlive their assets. Annuity solutions issued by an 

insurer address this concern by providing spousal benefits in their contracts. 

The first four concerns, above, contain the primary reasons why participants have been 

reluctant to opt for a traditional lifetime-income solutions when they retire. These

reasons and concerns were the primary drivers for the development of guaranteed living 

benefit solutions—both as in-plan solutions and as retail products. We will describe 

these solutions more fully in our response to Topic 5.

Topic 2: Information to Help Participants Make Choices Regarding Management 

and Spend Down of Retirement Benefits

Recommendation: The Department of Labor should...

Modernize and update Interpretive Bulletin 96-1 to provide employers with the 

assurance that if they provide information and materials regarding guaranteed 

lifetime income, including examples that describe innovative guaranteed 

lifetime-income options and information to employees on the risks they will 
face in retirement, it will be considered participant education and not the 

provision of investment advice.

All stakeholders in the retirement plan industry (including plan sponsors) need to 

change the way they provide education to defined contribution plan participants 

regarding the management of retirement-plan assets and the distribution, or ―spend 

down,‖ options available to participants. As the Agencies are aware, defined 

contribution plans were once viewed primarily as supplemental savings vehicles, and, 

until recently, the focus of educational campaigns has been on helping participants 

make informed investment decisions to accumulate assets. In fact, the Department of 

Labor’s Interpretive Bulletin 96-1 provides plan sponsors with fiduciary relief for 

participant investment education. Today, however, we’re witnessing a dramatic 

transformation of the retirement landscape, as traditional defined benefit plans continue 

to be frozen or terminated, and as defined contribution programs continue to emerge as 

the primary employer-based retirement-income source for most workers.

In the DC plan construct, the responsibility for generating retirement income and the 

risks associated with this endeavor now fall on the shoulders of workers. It is not solely 

about accumulating assets but also ensuring that those assets are used effectively to 

generate a secure amount of guaranteed lifetime income. This creates challenges for 

the average worker that extend well beyond simply ―accumulating assets.‖ As a result, 

participant education must also move beyond investment decision-making and must 

cover topics such as: how to generate retirement income; the benefits and risks 

involved in different distribution approaches, and the solutions workers have available to 

help them manage the risk and responsibility of generating retirement income for an 

uncertain life expectancy.

Beginning when workers first enroll in their plan, it is imperative to let them know that 

the plan’s primary purpose is to generate retirement income and to provide them with 

periodic updates about their future projected retirement income amount, as well as their 

current account balance. Today, many participants place most or all of their focus on 

accumulating assets and are lulled into complacency by the so-called ―wealth illusion‖ of 

viewing their retirement plan as a capital accumulation vehicle, which is reinforced by 

seeing their retirement account balance presented only as a lump-sum amount. 

Conditioning plan participants to think in terms of future retirement income will help 

place the emphasis where it belongs and will, in fact, encourage greater savings, since 

workers will better understand and be more aware of the differences between their 

current projected retirement income and what will actually be needed in retirement.

Specifically we recommend updating Interpretive Bulletin 96-1 to:

Generally state that providing information and materials regarding guaranteed 

lifetime income can be considered participant investment education.

Add examples that specifically address guaranteed lifetime-income options 

with sufficient flexibility so they can encompass innovative solutions such as 

guaranteed minimum withdrawal benefits (GMWBs). Currently, there is 

widespread uncertainty about the applicability of existing regulatory guidance 
to guaranteed lifetime-income options, as well as to the distribution phase of 

retirement planning in general.

Explicitly permit the provision of information to employees, especially as they 

enter their pre-retirement years, on the risks they will face in retirement, 

specifically as they enter their pre-retirement years, on the risk they will face 

in retirement, specifically investment risk, longevity risk and inflation risk.

Topic 3: Disclosure of Account Balances as Monthly Income Streams

Recommendation: The Agencies should...

Issue guidance that encourages plan administrators and service providers to 

issue participant account statements that describe the accrued benefit in the 

form of an annuity or other guaranteed lifetime-income value, in addition to 

simply a ―lump sum.‖

Currently, most benefit statements received by DC plan participants provide only the 

total account value. Plan participants who receive account balance information solely in 

the form of a lump-sum value can, or in many cases do, have a false sense of wealth 

and security. 

In contrast, disclosure of account balances as guaranteed lifetime income stream would 

give participants an accurate sense of the potential retirement income that their savings

will generate. This disclosure would be an important component of a broader 

educational campaign aimed at increasing awareness about the retirement-income 

phase and help raise awareness and drive participants to increase contributions or 

modify investment strategies to close projected income gaps. Participants clearly would 

benefit from receiving statements that disclose not only lump-sum values, but also 

illustrate annuity or other guaranteed lifetime-income values. The addition of 

illustrations to the participant’s benefit statement would draw needed attention to the 

primary objective of the plan—generating sufficient retirement income—and not merely 

to accumulating a sizeable nest egg regardless of the participant’s retirement time 

horizon. As important as this information is to plan participants, it is unlikely that plan 

administrators and service providers will furnish it if the legal framework for doing so is 

unclear.

We ask the Department of Labor to promote the disclosure of account balances in the 

form of a guaranteed lifetime-income stream by issuing guidance that encourages plan 

administrators and service providers to issue participant account statements that 

describe the accrued benefit in the form of an annuity or other guaranteed lifetimeincome value, in addition to lump sum form. Such guidance should permit a simple

illustration of what the current account balance would generate as retirement income if 

the participant were currently eligible to take a distribution of the account balance and 

use it to purchase an annuity with distribution beginning at a future date, for example 

age 65. The illustration would be accompanied by a statement of the material 

assumptions used in computing the income amount. For simplicity, plan administrators 

and service providers should be permitted to use published rates, such as those used 
by the Pension Benefit Guaranty Corporation, as a safe harbor for generating the 

illustration assumptions. This simple method would not require the development of 

hypothetical future earnings, contributions or inflation expectations, all of which would 

add burdens and complexities for plan sponsors, as well as potentially confuse the 

average participant. If a participant elected to personalize illustrated benefits with 

certain assumptions, retirement-income planning tools are widely available from plan 

sponsors or through external resources available in the marketplace. In the case of 

plan sponsors that currently offer annuities or other guaranteed lifetime-income 

solutions, the Department of Labor should permit the use of underlying assumptions 

and purchase rates under the products for illustration purposes.

To help facilitate this important educational component, we urge the Agencies to 

support the passage of the Lifetime Income Disclosure Act S.2832 and similar 

measures contained in the Small Business Add Value for Employees Act of 2009 

(SAVE Act) H.R. 4742 requiring the illustration of account balances on benefit 

statements. 

Topic 4: Fiduciary Safe Harbor for Selection of Lifetime Income Issuer or Product

and Related Fiduciary Concerns

Recommendation: The Department of Labor should...

Extend the safe harbor to cover a broad range of lifetime income options;

Confirm how frequently fiduciaries need to consider the financial strength of a 

product provider; and

Provide a list of specific factors for use in evaluating financial strength of a 

product provider.

With respect to fiduciary matters other than the safe harbor, the Department of 

Labor should:

Confirm that a fiduciary’s actions are judged on circumstances at the time a 

decision is made rather than in light of subsequent events;

Clarify that the additional fees associated with downside market risk 

protection and guaranteed lifetime-income payouts do not make these 

products per se imprudent for use as Qualified Default Investment 

Alternatives; and

Confirm the scope of a fiduciary’s duties in connection with an investment that 

is used as a QDIA.

Annuity Selection Safe Harbor

Plan sponsors find the availability of regulatory safe harbors to be very useful in 

evaluating products and services. At the same time, plan sponsors find the lack of a 

safe harbor, or the lack of clarity in certain key areas, as a barrier to offering products 

and services under a plan. Therefore, we recommend that the Department of Labor 
issue guidance concerning the annuity selection safe harbor that clarifies its application 

to guaranteed lifetime-income solutions in three key areas:

First, explicitly extend the safe harbor, and if necessary appropriately modify 

it, to include a broad range of guaranteed lifetime-income solutions. The fact 

that a particular solution that provides guaranteed lifetime income is not a 

traditional immediate annuity should not be a factor in deciding whether or not 

the safe harbor applies. More important is whether the solution protects 

participants and beneficiaries against longevity and investment risks in a 

manner similar to a traditional distribution annuity. 

Second, provide greater certainty regarding how frequently fiduciaries need to 

evaluate the financial strength of the provider of a guaranteed lifetime-income 

solution. Currently, the safe harbor offers fiduciaries the option of evaluating 

financial strength at either the time the provider is selected for distribution of 

benefits to a specific participant or when the provider is selected, generally, to 

distribute benefits at future dates. The fiduciary that chooses to make the 

determination in advance of distributions to specific participants is required to 

periodically review the continuing appropriateness of that determination. We 

ask the Department of Labor to confirm that a fiduciary evaluating a 

guaranteed lifetime-income solution is permitted to evaluate the product 

provider’s financial condition at the time the provider initially is selected, as 

long as periodic reviews follow. Regarding the nature of subsequent reviews, 

we ask the Department to confirm that, in general, fiduciaries should review 

the same type of information considered in the initial evaluation of the 

provider and at a frequency appropriate to existing circumstances, but no less 

than once per year. 

Third, after several years of attempting to use these standards, we believe 

(for the reasons stated below) that the Department of Labor should reconsider 

its previously issued guidance and should provide fiduciaries with a list of 

factors to evaluate in assessing financial strength. If the provider can supply 

fiduciaries with a certification regarding financial information, then, upon 

prudent evaluation, fiduciaries would be deemed to have satisfied their duty to 

evaluate the financial condition of the provider. We suggest the factors that 

the providers supply to fiduciaries track many of those detailed in Interpretive 

Bulletin 95-1, specifically as they relate to the selection of an annuity provider 

for the purpose of benefit distributions from a defined benefit pension plan. 

Specifically, the factors would include the level of the insurer’s capital and 

surplus; the quality and diversification of the annuity provider’s investment 

portfolio; the size of the insurer relative to the proposed contract; the lines of 

business of the annuity provider and other indications of an insurer’s 

exposure to liability; credit ratings; the availability of additional protection 

through state guaranty associations; and the extent of the insurer’s

guarantees and the structure of the annuity contract and guarantees 

supporting the annuities, such as the use of separate accounts. 
We recognize the recommendation in point three is contrary to the position we took in 

response to the proposed regulation on the selection of annuity providers for individual 

account plans. But since the promulgation of the regulation, our experience and the 

feedback we have received from plan sponsors have shown that fiduciaries have 

struggled to identify and gain comfort with the appropriate criteria to consider in meeting 

the requirements for the safe harbor. Therefore, we believe it would be useful to 

provide fiduciaries with a clearer road map by detailing the list of factors they should 

evaluate in assessing the financial strength of a provider.

Related Fiduciary Concerns

Plan sponsors also inform us that the lack of clarity on certain key fiduciary issues, as 

they related to guaranteed lifetime-income solutions, is a barrier to offering these 

solutions. Therefore, we recommend that the Department of Labor issue guidance in 

the following areas:

First, confirm the well-established principle that the prudence of a fiduciary’s 

actions is judged on circumstances at the time an investment decision is 

made, not in light of subsequent events. This confirmation is important in the 

context of guaranteed lifetime-income solutions. Some plan sponsors decline 

to consider offering guaranteed lifetime-income solutions because of a 

mistaken belief that they will have fiduciary liability if the insurer’s financial 

strength deteriorates in the future, even if the sponsor periodically monitors 

the financial strength of the insurer.

Second, clarify that guaranteed lifetime-income solutions are not per se 

imprudent for use as QDIA merely because they require the payment of 

fees—in addition to investment management fees—that compensate the 

product provider for offering various guarantees. This clarification would 

address the concern of plan sponsors that certain fees (e.g., guarantee fees 

that compensate a product provider for offering guaranteed minimum 

withdrawals) somehow make a lifetime-income solutions per se imprudent for 

use as a QDIA because of concerns that the contractual guarantees may 

never get fully utilized by a participant. We don’t share that view; instead we 

believe that a fiduciary must evaluate any particular fee as a component of 

the overall determination about whether the total fees to be charged to 

participants are reasonable in relation to the underlying investments and 

services to be provided.

Third, confirm the scope of a fiduciary’s duties in connection with an 

investment that is used as a QDIA. We ask the Department to clarify that a 

fiduciary may, if the fiduciary determines it prudent, (1) use more than one 

investment as a QDIA under the plan (e.g., different funds for different groups 

of participants) and (2) replace a QDIA or modify the terms on which an 

investment is used as a QDIA (e.g., discontinue use of an investment as a 

QDIA but only for contributions made after a certain date). We specifically 

ask the Department to offer an example indicating that QDIA protections 

remain available if a fiduciary prudently decides to retain an investment as a 

QDIA for contributions invested prior to a certain date but replace it for 
contributions invested after that date. Such an example would be particularly 

useful to fiduciaries who are considering using a lifetime income solution as a 

QDIA and unsure whether QDIA protections would be available in the future if 

the fiduciary determines that an insurer’s product is inappropriate for 

additional investments. In determining the prudence of retaining an 

investment as a QDIA for past contributions, a fiduciary may consider, for 

example, that participants have been charged fees – in addition to investment 

management fees- for guarantees that would be forfeited if the fiduciary 

replaced the investment as a QDIA for both past and future contributions. 

We recommend that the Department of Labor recognize that enhanced participant

education is, by itself, an insufficient way to reach our common goal of helping workers 

retire with more lifetime financial security. Given this fact, guidance from the 

Department on the QDIA safe harbor is especially important. Behavioral finance 

research in the 401(k) arena shows that many plan participants will not pay attention to 

the message ... or, even if they do, will fail to take appropriate action due to what the 

researchers call ―participant inertia,‖ a difficult-to-overcome tendency to ―leave things as 

they are.‖ We have experienced this with our in-plan GMWB. Despite surveys showing 

us that plan participants would be ―very interested‖ in investing in an investment option 

that delivers a guaranteed stream of retirement income, a relatively small percentage of

plan participants have actively elected this option. We, therefore, have encouraged plan 

fiduciaries to consider offering a GMWB as a QDIA. Participants defaulted into a 

guaranteed lifetime-income product would be notified of when the guarantee would 

commence, receive disclosure of additional fees and have the opportunity to opt-out. 

The recent proliferation of plan sponsor-directed defaults for the accumulation of assets 

has worked, due in no small part to legislation enacted and regulatory safe harbors 

promulgated as part of The Pension Protection Act of 2006, which encouraged the 

widespread and successful adoption of automatic enrollment, automatic escalation, and 

qualified default investments. We strongly believe that employers who wish to help 

ensure retirement security for their workers should also consider defaulting participants 

into a solution that features guaranteed retirement income. 

Topic 5: Alternative Designs of In-Plan and Distribution Lifetime Income Options.

In our response to Topic 1, we set forth various reasons that workers are reluctant to 

choose a lifetime-income option as their form of distribution. These included: resistance 

to ―new‖ ideas; the ―wealth illusion‖ created by large lump-sum account balances; an 

unwillingness to give up control of that lump sum; concerns about fees and complexity 

of guaranteed lifetime-income solutions; the inflexibility and the irrevocability of 

traditional guaranteed lifetime-income options; opposition to risk pooling; the need for a 

spousal benefit; and concerns about ―longevity risk,‖ specifically running out of money in 

retirement. 

As we stated in our response to Topic 1, experts know the most economically efficient 

way to ensure a worker will have monthly income in retirement is to purchase a singlelife immediate annuity. However, while such annuities have been available for many 
years, few retirees select them because of a reluctance to give up control of their assets 

and opposition to buying a product that, of necessity, requires risk pooling. 

In the past decade, insurers have responded to workers’ concerns about lifetime income 

in general—and immediate single-life annuities in particular—by developing guaranteed 

living benefits. These solutions are now available as both in-plan and retail options, and

may take one of a number of forms: The most popular provide either 1) a guaranteed 

minimum annuitization benefit or 2) a guaranteed minimum withdrawal benefit (GMWB) 

upon retirement. 

The emerging favorite is the GMWB. In fact, 84% of new variable annuity purchasers in 

the fourth quarter 2009 elected the feature. Additionally, 86% of those with a withdrawal 

benefit, such as what is offered by a GMWB, said it was an important factor in buying 

the variable annuity. The benefits of GMWBs, and how they address traditional 

participant concerns about lifetime-income options, are addressed in greater detail 

below.

For both types of guaranteed living benefit products, the contracts have two different 

sets of values: the contract or market value and the protected or guaranteed value. 

The contract value is the market value of the investments, which may change 

on a daily basis depending on market conditions and the specific investments 

selected by the individual. Under some offerings, individuals are given a 

choice of investments from an array of equity, bond and stable value 

portfolios.

The protected value is a value established by the insurance company through

a calculation that is stated in the contract. This value will be the basis of the 

annuitization benefit or the guaranteed withdrawal benefit once the individual

retires or otherwise starts taking monthly income. Generally, the protected 

value is the higher of the contract value or one or more guaranteed values 

designed to protect the individual against market volatility and/or investment 

underperformance. The guaranteed values are described in greater detail 

below. 

These contracts provide protection against market losses and the opportunity to 

participate in market gains. In the last few years, as the market value of deferred 

variable annuities suffered from substantial market downturns, the protected value of 

annuities with guaranteed living benefits continued to rise. Individuals holding such 

contracts did not complain about the so-called ―high fees‖ of the guarantees; rather, 

they were relieved that their guaranteed monthly income in retirement remained steady 

and secure. 

The GMWB not only provides protection against market downturns, it also addresses 

the greatest concern of retirees: having to give up control of their assets. Individuals 

can withdraw the current contract value of their annuity at any time they wish, even after 

they have begun receiving guaranteed monthly lifetime income. 
Prudential’s in-plan GMWB solution

With regard to in-plan solutions, one example is Prudential’s in-plan GMWB solution,

which combines many of the most-attractive aspects of traditional annuities—such as 

certainty, stability and guaranteed lifetime income—with the flexibility and control that 

those offerings typically lack. It does this by integrating a GMWB with the assetallocation and target-date funds already found in many defined contribution plans.

Our in-plan solution is designed to operate on a day-to-day basis just like any other 

defined contribution plan investment option. Participants can invest in the solution by 

directing payroll contributions or by transferring existing balances. They can remove 

money by transferring out of the fund or taking withdrawals from the plan. The fund 

has a unit value or share price that moves up or down daily to reflect the market value 

of the underlying fund. 

Since participants receive income through withdrawals rather than annuity payments, 

there is no irrevocable decision that requires them to surrender control over their 

invested account balance. Withdrawing more than the defined guaranteed amount will 

proportionately reduce future guarantees, but participants are empowered to evaluate 

the trade-offs and determine what is most appropriate for their individual situation. 

Aside from this proportional reduction, there are no transaction fees, surrender charges 

or other financial penalties.

The guaranteed lifetime annual withdrawal amount is defined as a percentage of the 

protected value, when participants begin taking income. The percentage, which is 

disclosed and communicated in advance, will vary depending on the participant’s age. 

It is often five percent at age 65. Participants who take ―early retirement‖ between ages 

55 and 64 will receive a lower annual amount of income. Those who ―defer‖ starting 

their retirement income, those aged 70 or higher, will receive a higher annual amount.

Participants control when to start taking income. They also control whether the income 

guarantee covers just their own life, or also extends to their spouse. The optional 

Spousal Benefit guarantees annual income for as long as either spouse lives. Because 

two lives are protected, there is a nominal reduction in the amount of income provided 

for the same amount of account balance, but there are no additional fees.

Our in-plan solution includes protection against market volatility just before participants 

start taking income by putting a ―floor‖ on the amount that will be used to calculate their 

income. We call this the protected value. This protected value initially begins as the 

amount of total contributions to the product. Once a year on a proscribed date, a 

comparison is made between the protected value (plus any contributions over the year) 

and the market value of the living benefit. If the participant’s market value is higher, the 

protected value increases to that level to incorporate any positive market performance, 

thus establishing a new, higher floor on which guaranteed income payments will be 

made at retirement.
Similarly, positive market performance after income begins can generate an increase or 

―step-up‖ of the participant’s annual guaranteed lifetime income. If market performance 

is not favorable, such increases may not occur, but—more importantly—negative 

market performance will not reduce the participant’s annual guaranteed lifetime income.

Because its guarantees offer participants real economic value, the option does come 

with a stated, disclosed cost. At 1.00% per year for most investments, that cost 

compares quite favorably with comparable guarantees available to retail investors.

When used with target-date funds, the guarantees typically take effect 10 years before a 

given fund’s target date, which reflects the expected retirement date of investors in the 

fund. Thus the guarantees, and the fees required to pay for them, are a cost only when 

they are most likely to have value to participants.

Our in-plan solution is one example of how a guaranteed lifetime-income solution—with 

the flexibility and control offered by any other plan option—can be successfully 

integrated into defined contribution programs, providing plan participants with a 

retirement-income stream that cannot be outlived. 

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