Milliman Response to DOL RIN 1210–AB33 

71 S. Wacker Dr, Suite 3100 

Chicago, IL 60606 USA 

Tel +1 312 726 0677 Fax +1 312 499 5700 

milliman.com

Response to Request for Information 

Regarding Lifetime Income Options for 

Participants and Beneficiaries in Retirement 

Plans 

May 3, 2010 
Milliman | 2010 Fact Sheet 

Milliman is a firm of consultants and actuaries serving the full spectrum of business, 

governmental, and financial organizations. Founded in 1947, the firm has 52 offices in principal 

cities in the United States and worldwide. 

Milliman’s revenues were $610 million in 2009. 

Practice areas 

• Employee benefits, investment, and compensation consulting services 

• Health consulting services 

• Life and financial consulting services 

• Property/casualty consulting services 

Offices

Albany 

Amsterdam 

Atlanta 

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Boston 

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Columbus 

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Dubai 

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Hong Kong 

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Indianapolis 

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Los Angeles 

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Munich 

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Organization 

Milliman is owned and managed by approximately 300 principals, who have been elected in 

recognition of their technical, professional, and business achievements. 

Leadership 

Patrick J. Grannan, president and CEO 

Bradley M. Smith, chairman 

Employees 

Milliman has approximately 2,400 employees, including a consulting staff of 1,100 qualified 

consultants and actuaries. 

Financial Risk Management 

Milliman pioneered the field of financial risk management and we continue to set industry 

standards for innovation and best practice. Ken Mungan founded Milliman’s Financial Risk 

Management Practice in 1998. Today, this group is the leading provider of risk management 

services to the life insurance industry – providing hedging services for 35 major life insurance 

companies. Globally, our FRM practice is responsible for the risk management of US$500 billion 

of guaranteed retirement income products, representing over 6 million customers. 
Milliman Response to DOL RIN 1210–AB33

Response to Request for Information Regarding Lifetime Income 

Options for Participants and Beneficiaries in Retirement Plans 

RIN 1210–AB33 

May 3, 2010 

3

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 

Re: RIN 1210–AB33: Request for Information Regarding Lifetime Income Options for 

Participants and Beneficiaries in Retirement Plans 

Milliman appreciates the opportunity to respond to the Request for Information (RFI) on lifetime 

income options in retirement plans issued by the Department of Labor (DOL) and the Department 

of the Treasury. We are pleased to hear of your interest in promoting income security in 

retirement. We agree that too many American workers do not have the option to cost-effectively 

convert their accumulated 401(k) savings into guaranteed retirement income. 

The SPARK Institute, Inc. and the Insured Retirement Institute have both filed excellent 

responses to this RFI that are broadly representative of the industry position on the questions 

raised in the RFI. We endorse the suggestions that these entities have made to the DOL. In our 

response here, we have focused on areas where we believe Milliman has a particularly valuable 

point of view to contribute. 

Milliman is wholly owned and managed by approximately 300 Principals, who have been elected 

in recognition of their technical, professional and business achievements. Our sole business is 

providing independent consulting services. We are not affiliated with any public accounting or 

brokerage firms. The consultants of the firm are not permitted to own stock in any insurance or 

reinsurance company, nor are they allowed to own stock in client organizations. In these ways, 

Milliman is able to provide analyses and opinions that are totally independent and objective. 

Milliman's Financial Risk Management (FRM) practice is a leading provider of risk management 

services to financial institutions who provide guaranteed lifetime income products, managing over 

$500 billion of retirement savings in 6 million customer accounts. Our practice is fundamentally 

changing the way people save for retirement. 

As independent experts with many years of experience working with over 35 major life insurance 

companies on their guaranteed retirement income programs, we believe we have valuable 

insights to provide in the retirement savings debate. Specifically, we see there are three features 

that are needed for a successful guaranteed retirement income program for the 401(k) and IRA 

markets: 

1. The guarantee should be backed by multiple insurance companies; 

2. The fair value of the guarantee should be fully funded through a collateralized separate 

account; and 

3. Market risk should be neutralized through industry standard hedging techniques. 

We have been developing industry standards to achieve a solution with these multiple layers of 

protection. We do not represent any particular group or entity. We are simply using our expertise 

to try and bring together an appropriate solution. Our experience puts us in the optimal position to 

coordinate the activities of a multiple insurer backed guarantee program. 
Milliman Response to DOL RIN 1210–AB33

Response to Request for Information Regarding Lifetime Income 

Options for Participants and Beneficiaries in Retirement Plans

RIN 1210–AB33 

May 3, 2010 

We hope that our responses prove valuable to you as you work towards bringing about 

fundamental improvement in retirement security for American workers. 

opportunity to speak with you about how to best create guaranteed retirement income programs 

for the 401(k) and IRA markets. These programs can benefit the tens of millions of workers 

approaching retirement. If you would like to speak with us, please let us know of a date and time 

you are available and we would be happy to call or come to Washington to meet with you.

Best regards, 

Kenneth P. Mungan 

Financial Risk Management 

Practice Leader 

Response to Request for Information Regarding Lifetime Income 

Options for Participants and Beneficiaries in Retirement Plans

able to you as you work towards bringing about 

fundamental improvement in retirement security for American workers. We would welcome the 

opportunity to speak with you about how to best create guaranteed retirement income programs 

rkets. These programs can benefit the tens of millions of workers 

approaching retirement. If you would like to speak with us, please let us know of a date and time 

you are available and we would be happy to call or come to Washington to meet with you.

 Tamara A. Burden 

 Retirement Guarantee Network 

 Managing Director 

4

Contact information: 

Milliman 

71 S. Wacker Drive 

Suite 3100 

Chicago, IL 60606 USA 

Tel +1 312 726 0677 

Fax +1 312 499 5700 

milliman.com. 
Response to Request for Information Regarding Lifetime Income 

Options for Participants and Beneficiaries in Retirement Plans 

RIN 1210–AB33 

May 3, 2010 

5

Milliman Response to DOL RIN 1210–AB33

QUESTIONS #3 & #4: Discussion of types of lifetime income products that are being 

added (on an ever-growing scale) inside of defined contribution plans and directly to 

the IRA and retail markets

Today’s lifetime income guarantee products are very different from those available even just 

10 years ago. Understanding that the market is constantly evolving, we focus our 

discussion on the products most likely to be available to current and near term retirees. 

These products fit into two main categories: (1) Income Annuities, and (2) Guaranteed 

Withdrawal Products. 

The main difference between these products is who maintains control over the assets. For 

Income Annuities, the insurance company controls the assets. The participant must 

exchange a lump sum, all or a portion of the retiree’s savings, for a stream of future lifecontingent payments. For Guaranteed Withdrawal Products, the participant maintains 

control of the assets. In exchange for an annual fee, the insurance company guarantees 

the participant a certain minimum withdrawal amount every year for life. 

This issue of who controls the assets manifests itself in a number of ways. If the participant 

controls the assets, as with Guaranteed Withdrawal Products, there are significant 

advantages in terms of flexibility, liquidity and transparency: 

 The investor can take extra retirement income in case of need without disproportionate 

penalty 

 The investor is free to leave and re-enter the program, without surrender charges 

 The investor’s beneficiaries receive the remaining account value if the investor dies 

before it is depleted 

 The fees are explicit, rather than embedded in a life-contingent payment amount 

 The investor’s guarantee can increase with positive stock market performance 

 The investor receives both market and longevity protection 

 The investor’s risk is individualized... his money, his guarantee 

The advantages to the investor of being able to maintain control of his assets have driven 

an explosion in the sales of guaranteed withdrawal products in the US1. 

 86% of 2008 variable annuity sales were in products that offered an optional 

withdrawal guarantee 

 Over 50% of policyholders actually purchased a withdrawal guaranteei

Although income annuities can be the most cost effective type of retirement savings 

guarantee, these options are virtually never the right choice for a person’s entire retirement 

portfolio, because of the loss of liquidity such products create. Experts say that on average, 

60% of a person’s retirement savings should go into income annuitiesii. The positioning of 

an income annuity product in a retirement portfolio is often done in consultation with a 

financial planner. Guaranteed withdrawal products, with their greater flexibility and liquidity, 

are a potential one-size-fits-most solution. 

. 

 

1

For more details on the growth of guaranteed withdrawal products , refer to Appendix I

 

Guaranteed Withdrawal 

Products, with benefits that 

apply for the life of the 

participant, are becoming the 

retirement vehicle of choice 

around the world. 

Withdrawal 

guarantee, 

57% Other 

guarantee, 

24%

No 

guarantee, 

19%

Guarantees purchased on 

variable annuity products: 2008
6 Response to Request for Information Regarding Lifetime Income 

Options for Participants and Beneficiaries in Retirement Plans 

RIN 1210–AB33 

May 3, 2010 

Milliman Response to DOL RIN 1210–AB33

QUESTIONS #2 & #14: What explains the low usage rate of lifetime income arrangements, 

and what are the impediments to plan sponsors’ including lifetime income options in their 

plans

For the 401(k) participant who was planning to retire at the end of 2008, a guaranteed retirement 

income product would have been wonderful. Say at the beginning of 2008, a participant had $1 

million in his retirement account, which would support a lifetime of income at $60,000 a year. At 

the end of 2008, his retirement account had fallen to $600,000. Suddenly, the income that money 

would support was only $36,000 a year. If he had a guarantee on his account, the guarantee 

would have allowed him to withdraw the $60,000 a year he was planning on, and if he ran out of 

money before he and his spouse died – no problem, the insurance company would just pick up 

the $60,000 a year payments. 

Retirement income guarantees are terrific, but every dollar that a participant doesn’t lose has to 

come from somewhere. In practice, they come from the insurance company that provides the 

guarantee, but the insurance companies themselves get the money from the marketplace. They 

do this by investing in derivatives – not the complex, illiquid kind that helped cause the financial 

crisis, but rather the simplest, most liquid and transparent hedge assets available. This emphasis 

on simplicity has helped the life insurance industry to avoid the pitfalls found in the banking 

industry. In general, life insurers have avoided the complex financial instruments favored by 

banks, and they have emphasized redundancy and reliability in their operational processes. 

In fact, in 2009, Milliman completed a study of insurance companies offering guaranteed 

retirement income products and determined that the hedging programs had been about 94% 

effective in achieving their designed goals during the period from September 2008 through March 

2009iii. In September and October alone, these hedging programs saved the life insurance 

industry an estimated $40 billioniv. 

To understand just what might have happened to the industry without these hedging programs to 

support the guarantees they had sold, the table below takes seven large companies and shows 

the value of the guarantees at the beginning and end of 2008, as reported in their annual filings 

with the Securities and Exchange Commission (SEC). It isn’t simply the sheer size of the 

guarantee value at the end of 2008 that is remarkable, but also the relative increase in the value. 

What started out as a small liability at the beginning of the year exploded – ending up as much as 

eighteen times higher at the end of the year. Without hedging programs, these initially small 

liabilities could have brought down the biggest company. 

 INCREASE IN VALUE OF GUARANTEES 

Company 2007 Reserve

(millions)

2008 Reserve

(millions)

relative 

increase

Prudential 168 3,229 18x 

Nationwide 92 1,700 17x 

Pacific Life 222 2,775 12x 

Met Life 284 3,134 10x 

John Hancock 500 4,715 8x 

Sun Life 378 2,374 5x 

TOTAL 1.6 billion 17.9 billion 9x 

 Source: 10K filings with SEC

Retirement income 

guarantees are terrific, but 

every dollar that a participant 

doesn’t lose has to come 

from somewhere. 

To pay the guarantees, 

insurance companies 

purchase derivatives via 

their hedging programs. 

These derivatives earn 

money in the marketplace 

when equity markets or 

interest rates fall. 

. 

Hedging programs were 94% 

effective during the financial 

crisis, saving the life 

insurance industry an 

estimated $40 billion. 
7 Response to Request for Information Regarding Lifetime Income 

Options for Participants and Beneficiaries in Retirement Plans 

RIN 1210–AB33 

May 3, 2010 

Milliman Response to DOL RIN 1210–AB33

It is industry standard practice to hedge liabilities. Rating agencies ask for information on the 

hedge programs being managed by companies and evaluate them for their effectiveness. US 

reserve and capital requirements for insurance companies have recently been revamped to 

specifically address retirement income guarantees and hedging programs that back them. 

However, take this highly leveraged exposure to market movements and add to this the reality of 

AIG and Lehman Brothers failing, and it becomes obvious just why many large plan sponsors are 

concerned about the credit risk inherent in any guarantee program backed by a single insurance 

company. 

One approach that has been proposed is to extend the safe harbor under 29 CFR 2550.404a-4 to 

cover other lifetime income products, a recommendation we agree with. However, it is important 

to realize that this is a last-resort protection for the plan sponsor. The first thing the plan sponsor 

cares about is that even if the company gets into financial trouble, the guarantees can continue to 

be provided. 

Now consider the size of the annuity market, which is almost exclusively where retirement income 

guarantees are being sold now, and compare this to the defined contribution (“DC”) and IRA 

market. These markets, five times the size of the annuity market, are where the DOL is looking to 

expand the uptake of guaranteed retirement income products. 

 2008 U.S. RETIREMENT ASSETS BY PRODUCT 

Retirement Savings Vehicle Assets in trillions % of total retirement 

assets 

Annuities 1.4 10% 

Federal Pension Plans 1.2 9% 

State and Local Pension Plans 2.3 16% 

Private DB plans 2.0 14% 

DC Plans 3.5 25% 

IRAs 3.6 26% 

TOTAL 14.0 trillion 100% 

Source: Investment Company Institutev

The potential impact of an insurer failing to fulfill their obligations is enormous, particularly given 

the potential scale of this business, when these liabilities are part of the general account 

obligations of the insurance company. Even though the insurance companies have significant 

regulation controlling the reserves and capital that must be held to support each of their lines of 

business, including these products, the failure of an insurance company means that in some area 

of their business, these reserves and capital proved to be insufficient. Once an insurance 

company is in receivership, the participants in such a plan just end up in a line of creditors. To 

make matters worse, the circumstances that would lead to a failure of a large, highly-rated 

insurance company would be just the circumstances that create huge guarantee liabilities. And 

these are the same times when participants need most to be able to rely on those guarantees. 

We saw exactly this perfect storm of events in the recent financial crisis. 

So what is the solution? It is simple, obvious, and easily implemented. Put the assets backing 

these guarantees (including the hedge instruments) in a separate collateralized trust account. 

Segregating the assets is no hardship to insurers, who all manage hedging programs to fund their 

guarantee liabilities anyway. Companies are already holding those reserves. They are already 

holding those hedge assets. This simply draws the line in the sand clarifying that the assets are 

specifically earmarked for the guarantee and thereby clarifies the place where the participants sit 

in the creditor chain in the event of a default. Make this trust account an asset of the plan, and 

The defined contribution and 

IRA markets are 5 times the 

size of the current 

guaranteed retirement 

income market. 

Extending the safe harbor 

clause is a protection of lastresort for plan sponsors. 

What sponsors really want is 

assurance that the 

guarantees will be paid. 

The potential impact of an 

insurer failure is enormous 

when the guarantees are just 

another part of the general 

account obligation of the 

insurance company. 
8 Response to Request for Information Regarding Lifetime Income 

Options for Participants and Beneficiaries in Retirement Plans 

RIN 1210–AB33 

May 3, 2010 

Milliman Response to DOL RIN 1210–AB33

plan sponsors have a viable option for replacing defaulting insurers, or simply continuing to 

manage the risk on their own (which at least provides market protection, even if it doesn’t provide 

longevity insurance). 

As an extra layer of protection, the trust account should be jointly backed by a consortium of 

insurers with joint and several liability. This provides the greatest protection to the plan, because

all of the insurers would have to fail before the guarantee was in jeopardy. The reason that 

insurers would enter into such an agreement is because of the existence of the trust account. 

They would not need to set up any extra reserves in the case of an insurer failure, as that 

collateral would already be in the trust account. In the event of a failure of a pension plan 

guarantee provider, the Pension Benefit Guarantee Corporation (“PBGC”) would backstop the 

plan. A fully collateralized trust account would be a particularly valuable structure were the PBGC 

brought in to unwind a failed pension plan, as the existence of the trust account would mean no 

large cash inflows to the pension plan would be required. 

The Department of Labor should promote and encourage structures that reduce credit exposure 

to any single life insurance company. This should be done by application of the following threepronged approach: 

 The guarantee is backed by multiple, highly-rated insurance companies; 

 The insurers collateralize the guarantee on a monthly basis in a separate account; and 

 Market risk is neutralized through industry standard hedging techniques. 

Only in this way can participants and plan sponsors begin to enjoy true retirement security. 

GENERAL COMMENT: Onerous reporting requirements under the securities laws with 

respect to certain types of annuities create restrictions on what companies can provide 

guarantees on retirement plans

Some types of annuity contracts are considered securities and must be registered with the 

Securities and Exchange Commission (SEC) under the Securities Act of 1933 (the “Securities 

Act”). Generally, in registering under the Securities Act, the entity becomes subject to all of the 

reporting requirements of the Securities and Exchange Act of 1934 (the “Exchange Act”) as well 

as liability under Sarbanes-Oxley. For insurance companies that are already SEC reporting 

companies, this is a moot point. However, an insurance company that is not already a reporting 

company would not want to take on this increased obligation and are thus effectively prohibited 

from participating in the offering of certain annuities. In many cases, the insurers that fall into this 

category are highly rated, highly capitalized mutual companies that would otherwise be ideal to 

provide retirement income guarantees. 

A new SEC rule (Rule 12h-7) which took effect last year provides an exemption for an issuer of 

certain annuities (such as index annuities, market value adjusted annuities, and synthetic 

annuities) from the Exchange Act reporting requirements. However, if the insurer breaches any 

of the conditions to the Rule, the whole exemption is rescinded and the company must meet all 

reporting requirements. Thus relying on the Rule as written today may prove very risky for an 

insurer, and in practice the Rule may not prove an effective form of relief for non-reporting 

companies. We recommend the DOL consult with insurance companies and with the SEC 

regarding this issue, with the goal of making the lifetime income guarantee market more 

accessible for industry participants. 

 

The solution? 

Simple, obvious, easily 

implemented. 

1. Neutralize market 

risk through 

industry-standard 

hedging techniques.

2. Collateralize the 

guarantee on a 

monthly basis in a 

separate account. 

3. Use a pool of highlyrated insurance 

companies to back 

the guarantee. 
9 Response to Request for Information Regarding Lifetime Income 

Options for Participants and Beneficiaries in Retirement Plans 

RIN 1210–AB33 

May 3, 2010 

Milliman Response to DOL RIN 1210–AB33

APPENDIX 1: Overview of Guaranteed Retirement Income Products

Current Guaranteed Withdrawal Products are sold as optional benefits on variable annuity (VA) 

policies. The VA market in the United States has experienced rapid growth in recent years. 

According to the Insured Retirement Institute (IRI), the total VA industry net assets were $1.1 

trillion as of year end 2008, as compared to the 2008 U.S. GDP of $14.3 trillion (see Figure 1). As 

illustrated in Figure 2, variable annuities have surpassed fixed annuities (which include Income 

Annuities) as the dominant savings vehicle for Baby Boomers to save for their retirement. 

VA sales were particularly robust with the introduction of guarantees on the VA assets. The 

embedded guarantees in VAs are attractive to consumers because they provide a minimal floor of 

benefits when VA assets perform poorly, and yet leave upside potential for good VA asset 

performance. This feature makes VAs compare favorably to alternatives such as fixed annuities, 

bank certificates of deposit (CDs), or mutual funds. While fixed annuities and bank CDs are 

guaranteed, they do not offer participation in the capital markets. Conversely, mutual funds offer 

participation in the capital markets, but the investor could suffer significant losses. 

0

200

400

600

800

1000

1200

1400

1600

2000 2001 2002 2003 2004 2005 2006 2007 2008

$(billions)

Annuity Market - Net Assets

Variable Fixed

0

50

100

150

200

2000 2001 2002 2003 2004 2005 2006 2007 2008

$(billions)

Annuity Market - Sales Volumes

Variable Fixed

 FIGURE 1: VARIABLE AND FIXED ANNUITIES TOTAL ASSETS 

 FIGURE 2: VARIABLE AND FIXED ANNUITIES TOTAL SALES VOLUMES As illustrated in Figure 2, 

variable annuities have 

surpassed fixed annuities as 

the dominant savings vehicle 

for Baby Boomers to save 

for their retirement. 
10 Response to Request for Information Regarding Lifetime Income 

Options for Participants and Beneficiaries in Retirement Plans 

RIN 1210–AB33 

May 3, 2010 

Milliman Response to DOL RIN 1210–AB33

REFERENCES 

 

i Milliman’s Fourth Annual Guaranteed Living Benefits Survey 

ii Milliman research report: Immediate Annuities and Retirement Income Portfolios, by Timothy E. 

Hill, Susan J. Saip. 

www.milliman.com/expertise/life-financial/publications/rr/pdfs/Immediate-Annuities-RetirementIncome-RR05-19-08.pdf

iii Milliman research report: The VA Industry: An Analysis of Recent Activities, by Peter Sun 

http://www.milliman.com/expertise/life-financial/publications/rr/pdfs/va-industry-analysis-recentrr.pdf

iv Milliman research report: Performance of Insurance Company Hedging Programs During the 

Recent Capital Market Crisis, by Peter Sun, Ken Mungan 

http://www.milliman.com/expertise/life-financial/publications/rr/pdfs/performance-insurancecompany-hedging-rr12-01-08.pdf

v

 Investment Company Institute, Research Fundamentals, Vol. 18, No.5, June 2009 

www.ici.org/pdf/fm-v18n5.pdf