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, N.W. 

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 

On behalf of MetLife, I am hereby submitting our response to the Request for Information 

Regarding Lifetime Income Options (“RFI”) issued by the Departments of Labor and Treasury and 

the IRS (the “Agencies”) on February 2, 2010. 

MetLife thanks the Agencies for the opportunity to respond to the RFI. We also commend the 

Agencies for issuing the RFI and initiating this very important discussion. 

The RFI recognizes the changing landscape of the retirement plan system. MetLife’s own 

research recognizes this dynamic, and also identifies a fundamental issue compounding the 

changes. Our Retirement Income IQ Study (conducted in 2003 and again in 2008) tested basic 

retirement income concept knowledge among individuals within five years of retirement. The 

results indicate significant knowledge gaps exist regarding average life expectancy and other 

retirement income issues. For example, 

• Among the most disturbing findings of the 2008 study was that six in ten Americans 

(60%) underestimated their average life expectancy 

• Almost half (49%) underestimated the amount of pre-retirement income they will need 

once they retire 

• Almost seven in ten (69%) pre-retirees overestimated how much they can draw down 

from their savings – with an alarming 43% said they believed they could withdraw 10% or 

more each year while still preserving their principal – even though most retirement 

experts suggest a withdrawal rate of no more than 4% annually. 

1095 Avenue of the Americas 

New York, NY 10036-6795 

William J. Mullaney, CLU, FLMI

President 

U.S. Business 

(212) 578-2984 

(212) 578-6241 FAX 

bmullaney@metlife.com 
Re: RIN 1210-AB33: Request for Information Regarding Lifetime Income Options for 

 Participants and Beneficiaries in Retirement Plans 

- 2 -

This lack of understanding is particularly concerning because it puts consumers at a 

disadvantage from the start. Poor retirement planning assumptions are then compounded after 

retirement by much longer life expectancies. These findings point to the underpinnings for a 

“perfect storm” of unprepared retirees running out of assets. 

The 8th Annual MetLife Study of Employee Benefits Trends Study also highlights some very 

important retirement trends: 

• On the positive side, active employer engagement in their qualified retirement plans is 

increasing and is important to help employees realize adequate income in retirement. 

• There is also emerging interest from employers in automatic enrollment, automatic 

escalation and default annuitization in larger companies to help employees act on their 

intentions to save. 

• That said, despite employee interest, employers have not increased their focus on 

providing financial advice, guidance and retirement education. 

• And to compound the issues, there is still a large disconnect between employers’ and 

employees’ interest in employers providing a way to turn an employee’s 401(k) savings 

into a guaranteed stream of retirement income. Forty-four percent of employees surveyed 

said they would like their employer to offer an annuity option as part of their defined 

contribution plan, whereas only 10% of employers say they are interested in offering an 

annuity option as part of their defined contribution plan. 

These findings all point to the critical role that annuities play in providing retirement plan 

participants with guaranteed income solutions, solutions that today’s workers and tomorrow’s 

retirees need to create a financially secure retirement. At a time when individuals need help in 

making the most of their retirement assets, immediate annuities, for example, produce 

substantially more income per dollar of assets than any other approach. Immediate annuities 

have the unique ability to generate more income now while covering the risk of running out of 

money later. 

MetLife stands ready to assist you in any way possible as you continue this critical national 

dialogue. Please feel free to contact me at 212-578-2984 if you have any questions or need any 

additional information. 

Sincerely, 

William J. Mullaney 

President 

U.S. Business 
Department of Labor and 

the Department of the Treasury RFI 

May 3, 2010 

Request for Information 

Regarding Lifetime Income Options 

for Participants and Beneficiaries in 

Retirement Plans 
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 i 

Executive Summary

Background

The retirement landscape has changed dramatically since the creation of the 401(k) plan in 1978. 

Historically, large numbers of Americans relied on traditional defined benefit plans; today, most 

Americans are relying, in large part, on defined contribution plans as their primary source of retirement 

savings. In most cases, defined contribution plans were designed – and are maintained today – as 

supplemental retirement savings vehicles not generally structured to provide guaranteed lifetime 

income. 

Why is lifetime income so important? One of the greatest risks facing retirees is longevity risk – the 

very real risk of outliving retirement savings. Individuals who spend down their retirement assets based 

on their life expectancy will run out of savings if they live longer than expected, which half the 

population will do. On the other hand, many individuals who spend as if they will live well beyond their 

life expectancy will run the risk of under spending, forcing significant changes in lifestyle for fear of 

running out of money. The only product capable of avoiding these both of these adverse results is an 

annuity. 

Until now, policymakers have focused their attention on coverage and savings rates. However, with 

increased longevity, the continued decline of the defined benefit plan system, and the impending 

retirement of 47 million baby boomers – the first boomer turns 65 in 2011 – the Administration’s focus 

on strengthening lifetime income for Americans is both needed and timely. MetLife commends the 

Agencies for issuing this RFI and for beginning this very important discussion. 

Policy Recommendations

The RFI asks a number of questions regarding the barriers to employers offering and participants 

choosing income annuities in defined contribution plans. The Agencies have requested 

recommendations to overcoming those barriers. Among the public policy changes that should be 

implemented are the following recommendations:

To encourage employers to offer guaranteed lifetime income in defined contribution plan: 

1. The DOL should simplify the defined contribution plan provider selection regulations by providing an 

objective safe harbor for the selection of an annuity provider based on the fact that an annuity 

provider has passed the review of state regulators. 

2. The DOL should consider revising the QDIA regulations to require that QDIAs contain an in-plan 

accumulation annuity component. 

3. The DOL and Treasury Department should issue the following: 

a. Guidance clarifying how joint and survivor spousal rules apply to trial annuitization and 

guaranteed insurance products.

b. Educational information for employers highlighting trial annuitization. 

To encourage individuals to choose lifetime income products:

1. The DOL should take four steps with respect to participant education and advice. The first two 

relate to IB 96-1 and the second two relate to guidance with respect to advice provided through 

computer models. 

a. First, guidance is needed to clarify what education may be provided to participants about the 

distribution phase without that guidance being treated as fiduciary advice. 
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b. The current investment elements of IB 96-1 should be expanded to clarify that education 

regarding investment in in-plan accumulation annuities and guaranteed insurance products

is within the reach of the IB. 

c. The DOL should issue “SunAmerica-like” guidance with respect to the distribution phase. In 

other words, a financial institution would be allowed to contract with an independent expert 

that would develop and apply a computer model for providing distribution advice based on 

generally accepted decumulation principles. 

d. The final step for the DOL to take is to incorporate in-plan accumulation annuities and 

guaranteed insurance products into the SunAmerica and PPA computer models. 

2. The DOL should provide enhanced education to plan sponsors about their ability to offer partial 

annuitization and the benefits that partial annuitization can provide to participants. 

3. Congress should consider requiring plans that offer annuities to offer partial annuitization. 

4. 401(k) plan account balances should be communicated as lifetime income on annual benefit 

statements, in addition to the total account balance. 

5. If annuitization rates do not increase significantly in the next three to five years due to the voluntary 

approaches MetLife suggests that the DOL and Treasury Department should then consider 

mandatory default annuitization. If the voluntary approach does not work, then the mandatory 

option should be structured so that 50% of the individual’s account balance would be defaulted into 

the lifetime income option. This may also be accomplished with a trial annuity which would allow 

retirees to test drive monthly guaranteed income payments with the option to opt out during the trial 

period. This requirement should not apply to employers with fewer than 100 employees or to 

employers offering an active defined benefit plan with only lifetime income benefits (and no lump 

sum options). 

6. MetLife encourages Congress to consider permitting defined benefit plan sponsors to eliminate 

lump sum distribution options.

To further facilitate annuitization, MetLife recommends the following tax law changes: 

1. The Required Minimum Distribution (RMD) laws should be changed to exempt longevity insurance 

from RMDs until the benefit payment begins. 

2. A targeted tax incentive should be provided for the purchase of an immediate income annuity. 

To facilitate the use of in-plan accumulation annuities: 

1. MetLife suggests that the DOL consider revising the QDIA regulations to require that QDIAs contain 

an in-plan accumulation annuity component. 

Conclusion

MetLife thanks you for the opportunity to share our thoughts and experiences with you relative to this very 

important topic. From a societal perspective, the government should enable its citizens to create lifetime 

income security. As a society, we – including the government, employers, and the financial services 

industry – collectively have a role in providing the education and tools to participants so that their efforts to 

save for their retirement are not squandered, but instead are rewarded with retirement security. 
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TABLE OF CONTENTS

Glossary of Terms 

Response to Proposal 

Section 1: Why is the lifetime income issue so important to protect the 

retirement security of Americans? 

• Evolution of the U.S. retirement system 

• Why is lifetime income so important? 

Section 2: Common misperceptions about income annuities 

Section 3: How have lifetime income products evolved to meet the needs of 

today’s retiree? 

• Overview

• Personal Pension Plans 

• Longevity insurance 

• Enhanced benefit features 

• Living Benefits 

• Product innovations pose questions, potential challenges for 

recordkeepers, plan sponsors 

• In-plan accumulation annuity products 

• IRA rollovers 

• Other retirement income management programs 

• The cost impact of adding product features 

Section 4: Why don’t more employers offer annuities under their plans? 

Section 5: Why is it important that employers offer income annuities at 

retirement under their plans? 

• Reasons why plan sponsors should offer in-plan distribution 

annuity options 

• Other considerations 

Section 6: How can employers be encouraged to offer in-plan distribution 

annuity options and IRA rollover annuity options? 

• The defined contribution plan annuity provider selection 

regulation should be simplified 

 In-plan distribution annuity options 

 In-plan accumulation annuities 

• Tax qualification rules should be updated to address the 

changing retirement system 

Section 7: Why do individuals not choose lifetime income products and 

how can those barriers be removed to encourage greater 

annuitization? 

• Lack of awareness points to a perfect storm 

• Obstacles to overcome to encourage annuitization 

• Potential solutions to encourage annuitization as a 
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distribution option 

• 401(k) plan account balances should be communicated as 

lifetime income in addition to the total account balance on 

annual benefit statements 

• The DOL and the Treasury Department should provide 

education on the distribution phase of retirement plans 

• The DOL should expand the participant education and advice 

guidance to include the distribution phase of defined 

contribution plans 

• Employers should offer partial annuitization 

• Default annuitization 

• Trial annuitization 

• Revisiting lump sums under defined benefit plans 

Section 8: What tax law changes would facilitate annuitization? 

• Required Minimum Distribution (“RMD”) Rules for longevity 

insurance 

• 403(b) plans and 457(b) governmental plans 

• Targeted tax incentives for the purchase of annuities should 

be enacted 

• Nondiscrimination testing 

Section 9: Why are in-plan accumulation annuities good from a policy 

perspective and how can their use be facilitated? 

Section 10: Policy recommendations for the IRA market 

Exhibits 

 Exhibit 1: The Rise (of DC) and the Fall (of DB) 

 Exhibit 2: People Underestimate the Time Spent in Retirement 

Appendices 

Appendix 1: The Role of Product Allocation in Sustaining Retirement Income 

Appendix 2: 2008 ERISA Advisory Council Testimony - Contribution Assets at 

Retirement 

 Appendix 3: Financial Engines Longevity Annuity Paper 

 Appendix 4: MetLife Retirement Income Selector 
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Glossary of Terms

There is a wide variation in the terms used in the lifetime income area, in part because of the evolving 

nature of the product offerings. To clarify this discussion, the following glossary of terms are referenced 

throughout this document. 

• Annuity or Income Annuity: Periodic payments that are guaranteed to last for the life of an 

individual and/or the individual’s beneficiary. 

• Immediate Annuity: Periodic payments that begin no later than 12 months after purchase and 

are guaranteed for: 

 the annuitant’s life and/or the beneficiary’s life, or 

 a certain period of time (five to thirty years – “period certain”), or 

 any combination thereof. 

The annuitant may choose fixed payments that do not vary, or variable payments that are based 

on performance of underlying investments. 

• Deferred Annuity: Periodic payments that begin at a future date and are guaranteed for: 

 the annuitant’s life and/or the beneficiary’s life, or 

 a certain period of time (five to thirty years – “period certain”), or 

 or any combination thereof. 

• Fixed Immediate Annuity: The purchase payment is invested in the insurance company’s 

General Account. Benefit payments are fixed at a constant value for the duration of the annuity. 

• Variable Annuity: The purchase payment is invested in a selection of portfolios (sub-accounts) 

and often include investments in fixed accounts (General Account). Each sub-account is tied to 

an investment fund, the performance of which, less expenses, will impact the benefit payments. 

• Guaranteed Lifetime Withdrawal Benefit (“GLWB”): Under a GLWB, the participant’s assets 

that are invested in a target date or balanced fund, move at a specified age (e.g., age 50) into the 

guaranteed fund component. From that point forward, each additional contribution and any positive 

market performance may increase the benefit base from which future withdrawals are calculated. 

The assets are then “wrapped” with a guaranteed percentage withdrawal amount, for example 4% 

or 5% of the benefit base, which is then the amount that is paid out annually. The participant 

retains total control over the assets and may choose to liquidate at any point in time as long as 

there is a market value. If the assets fall to zero, the insurance company steps in and continues to 

pay the guaranteed withdrawal amount; this payment comes from the insurance company’s General 

Account. The underlying asset pool is generally a traditional balanced fund. This approach 

provides the most flexibility in terms of control of assets. 

• Guaranteed Minimum Income Benefit (“GMIB”): Contributions into the annuity establish what is 

known as an “income base” and this amount compounds at a stipulated rate (typically 5%). On 

each contract anniversary, if the actual account value exceeds the compounded income base, the 

contract owner can lock in the gains by stepping up the income base to the higher amount (subject 

to age limits). The income base continues to compound even when markets, and thus the account 

value, decline (the income base is not available as a lump sum). In addition, a contract owner can 

take withdrawals during the accumulation phase. As long as the annual withdrawals do not exceed 

the income base compounding rate, the income base value stays the same even if the withdrawals 

and/or market performance cause the account value to drop to zero. To begin lifetime income 

payments under the rider, the contract must be annuitized. The amount received is the greater of 

the current account value at standard annuity payout rates or the income base at conservative 

GMIB payout rates guaranteed under the rider. 
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• Guaranteed Minimum Withdrawal Benefit (“GMWB”): Under a GMWB, the structure works 

similarly to the GLWB described above. The primary difference is that the withdrawals guaranteed 

in retirement are for a specified period of time and are not necessarily tied to the participant’s 

lifetime. For example, the guaranteed withdrawals will be for a predetermined specified period of 

years. If the participant lives beyond that time, the guaranteed payment ends. The participant 

retains control of any remaining assets. 

• In-plan accumulation annuity: An annuity contract that is offered as an allocation option under a 

defined contribution plan that allows plan participants to allocate a portion of their 401(k) plan 

contributions to a deferred income annuity and thus accumulate guaranteed pieces of future income 

over time. Participants acquire deferred annuity amounts at various interest rates (the interest rate 

analogue to dollar-cost averaging into the market) rather than electing an annuity at the point of 

retirement when interest rates could be low. These in-plan annuities also offer a specific annuity 

payment benefit for every dollar that is invested. 

• In-plan distribution annuity option: An annuity that is offered directly by a defined contribution 

plan as a means of distributing a participant’s account balance under a plan. Under this option, the 

plan sponsor specifies one or more specific insurance companies to provide the annuity benefits as 

specified in the plan.

• IRA rollover annuity option: An option to roll over assets from a defined contribution plan to an 

IRA annuity or to an IRA holding an annuity contract. 

• Trial annuitization: Following accepted default principles, this approach would allocate a portion 

(e.g., 50%) of a retiring participant’s defined contribution plan assets automatically into a lifetime 

income annuity at the point of retirement. These assets would be automatically directed into an 

income program for a trial period (such as one or two years) unless the participant affirmatively 

elects a different form of payout permitted under the retirement plan. The purpose is to give 

retirees an opportunity to “test drive” the benefits of receiving a retirement income “paycheck.” At 

the end of the trial period, participants would again have the ability to opt for alternative forms of 

payment. Those who made no affirmative choice within a specified period would continue to 

receive income annuity payments because the program converts automatically from trial-period 

income annuity to a permanent income annuity, typically at the same income amount. 
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Section 1: Why is the lifetime income issue so important to protect the retirement security of 

Americans? 

[This addresses question 1 in the RFI]

Evolution Of The U.S. Retirement System 

The retirement landscape has changed dramatically since the creation of the 401(k) plan in 1978. 

Historically, large numbers of Americans relied on traditional defined benefit plans; today most 

Americans are relying, in large part, on defined contribution plans as their primary source of retirement 

savings. 

By and large, our parents and grandparents did not need to worry about lifetime income issues. Many 

in the WWII Generation and the Silent Generation worked for corporations that offered defined benefit 

pension plans. When workers retired, their “paychecks” continued for as long as they lived. They felt 

secure knowing that they worked hard throughout their life and, when they retired, they and their 

families would not run the risk of running out of money. 

Unfortunately, over the last two decades, the number of private defined benefit pension plans has 

declined precipitously. In 1986, there were 172,642 defined benefit plans, and 544,985 defined 

contribution plans. By 2000, the number of defined benefit plans had dropped to 48,773 and defined 

contribution plans peaked at 686,878. Since 2000, defined benefit plans have remained roughly level, 

with 48,982 plans in 2007. Although defined contribution plans have dropped slightly each year since 

2000, with 658,805 in place in 2007, they still overshadow the number of defined benefit plans today. 

(See Exhibit 1). 

In most cases, defined contribution plans were designed – and are maintained today – as supplemental 

retirement savings vehicles. As such, they are generally not structured to provide guaranteed lifetime 

income. Early defined contribution plans provided employees with a supplement to their defined benefit 

plans, plans that produced a pension check related to the employee’s final or career average pay. 

However, several factors have changed the paradigm associated with defined contribution plans, 

creating a new problem for plan sponsors and their participants. For example: 

• Employee mobility, especially among younger workers, reduced the perceived need for a defined 

benefit plan to help manage workers into retirement. 

• A significant proportion of defined benefit plans added and encouraged lump sum distributions, 

which were generally less expensive for employers, and more attractive to employees. These 

distributions helped facilitate the early retirement incentive programs that became widespread in the 

1990’s. 

• Increasing numbers of defined benefit plan sponsors have frozen (“soft” or “hard”) their plans or 

converted them to hybrid cash balance defined benefit plans. The soft freeze excludes new 

entrants, while allowing benefit accruals to continue for covered employees. The hard freeze 

eliminates any future accruals for participants covered under the plan The converted cash balance 

plan removes the direct connection between the level of pre-retirement pay and the amount that the 

cash balance plan could produce in income under a systematic withdrawal or annuitization form of 

payout. 

• The complexities associated with establishing and maintaining a defined benefit plan have led 

increasing numbers of companies to utilize defined contribution plans as their only retirement 

programs. This is particularly true with smaller firms and those with less tenured workforces. As 
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such, many Americans will be relying on 401(k) plans or personal IRAs as their only retirement plan 

in the future. 

From a societal perspective, the government should enable its citizens to create lifetime income 

security. As a society, the stakeholders – the government, employers and the financial services 

industry – collectively have a role in providing the education and tools to participants so that their efforts 

to save for their retirement are not squandered, but instead are rewarded with retirement security. 

Until now, policymakers have focused their attention on increasing retirement plan coverage and 

savings rates. However, with increased longevity, the continued decline of the defined benefit plan 

system and the impending retirement of 47 million baby boomers – the first boomer turns 65 in 2011 – 

the Administration’s focus on strengthening lifetime income for Americans is timely. After all, the baby 

boom generation is the first cohort to be meaningfully affected by the shift from defined benefit to 

defined contribution plans. 

Why Is Lifetime Income So Important?

One of the greatest risks facing retirees is longevity risk – the real risk of outliving retirement savings. 

According to the Annuity 2000 Male and Female Mortality Tables, a male age 65 today has a 50% 

chance of living beyond age 85, and a 25% chance of living beyond age 92. Similarly, a female age 65 

today has a 50% chance of living beyond age 88, and a 25% chance of living beyond age 94. For a 

married couple age 65 today, there is a 50% chance of one spouse living beyond age 92, and a 25% 

chance that one will live beyond age 97. (See Exhibit 2). 

Individuals who spend down their retirement assets based on their life expectancy will run out of 

savings if they live longer than expected. And individuals who spend as if they will live well beyond 

their life expectancy will run the risk of underspending, forcing significant changes in lifestyle for fear of 

running out of money. In addition to simply living for more years, the of cost health-related expenses, 

especially in the final few years of life when custodial care is most likely, are expected by many experts 

to be very significant, and would occur when funds are most likely to be scarce. 

The longevity risk faced by an individual retiree is more significant than the investment risk faced at 

retirement. Whereas individuals can decrease the investment risk by changing their investment 

strategy, there is no way that individuals can, on their own, reduce their longevity risk because they 

cannot accurately predict how long they will live nor do they have a way to recreate the pool associated 

with a large group, unless they have a form of guaranteed lifetime income. 

Longevity risk cannot be reasonably addressed through investments alone. The only product capable 

of allowing participants to plan for these uncertainties is an annuity. An income annuity, issued by an 

insurance company, is a guarantee for the lifetime of the annuitant (the person receiving benefits). The 

use of pooled risk is still an individual’s best and most cost-effective defense. When a group is 

assembled and mortality experience is pooled, the individual is relieved of the need to accumulate 

significantly more money than otherwise would be needed to guard against living beyond his/her 

savings. An average retiree, for example, would need to have saved about one-third more to attempt to 

replicate the power of a mortality pool and, even then, could still risk running out of money. With 

mortality pooling, an individual only needs savings sufficient to last over the average lifetime of the 

group. On an unpooled basis, an individual’s savings will need to last significantly longer than that 

average lifetime to provide a comparable chance that he/she will not outlive those savings. 

The pooling concept is a powerful one that is at the heart of all insurance products (as well as the 

mortality element within Social Security and defined benefit plans). Longevity creates a much smaller 
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risk for large defined benefit pension plan sponsors since the “law of large numbers”1 permits them to 

fund for the average life expectancy of the entire group of retirees. When a large group of retirees is 

pooled, the income benefits received by a retiree who lives longer than expected are offset by those 

retirees who die before their life expectancy. 

Another advantage of receiving some or all of one’s retirement savings in the form of guaranteed 

lifetime payments is that it allows one to receive a steady retirement “paycheck.” All their working lives, 

Americans budget and make their spending decisions (e.g., where they live, where they send their 

children to school, how often they can dine out, etc.) based on the amount of their paycheck. An 

income guaranteed to continue for life not only protects against longevity risk, it allows an individual to 

plan their spending, which may help them to not overspend or underspend in retirement. 

On a related note, it is important to distinguish between lifetime income payments and life expectancy 

payments. Lifetime income payments (i.e., income annuities), guaranteed by insurance companies, will 

insure payment for the individual’s lifetime. In the event the participant dies sooner than expected, 

lifetime income payments can also be structured to provide for a spouse or other beneficiary. Life 

expectancy payments (e.g., systematic withdrawals) “assure” payments over life expectancy but may 

decrease over time depending on investment performance or may actually fall to zero prior to the 

individual’s death. While they will pay out the value of the account to the estate or beneficiary upon the 

death of the participant, this is balanced by the greater risk that the funds will be exhausted short of the 

individual’s life in at least half of all cases.

 1

The Law of Large Numbers: A statistical axiom which states that the larger the number of exposure units independently exposed to loss, the 

greater the probability that actual loss experience will equal expected loss experience. 
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Section 2: Common misperceptions about income annuities 

[This addresses question 2 in the RFI]

Income annuities can generate, by far, the highest level of lifetime income per dollar of retirement 

assets put to work. Income annuities are uniquely positioned to address a major challenge that will 

arise in the financial lifetimes of all retirees and those approaching retirement – how to make their 

income last as long as they live. Although income annuities provide exceptional value in terms of 

meeting this longevity challenge, persistent negative perceptions and confusion on the part of the 

media, plan sponsors and their participants regarding annuitization have made acceptance of this 

solution difficult. The conversation needs to shift to educate all parties that retirees must not only invest 

for retirement but also insure for retirement. This RFI is the start of a national dialogue on the value of 

lifetime income solutions and, MetLife expects that, through this process, the misperceptions 

surrounding income annuities will be dispelled. 

The following is a collection of the most common misperceptions – and the associated realities: 

Misperception Reality 

An income annuity is an all-or-nothing 

solution. 

Plans should be designed to provide partial 

annuitization. Effective retirement planning is a 

holistic endeavor. There are many financial 

needs to be addressed in retirement. One 

product cannot possibly meet all these needs. 

Instead of answering whether or not the account 

balance should be fully annuitized, the question 

is how much should be annuitized. 

Income annuities are irrevocable and lack 

liquidity for emergencies or unforeseen 

events. 

It is true that traditional income annuities often 

provided no liquidity. However, an increasing 

number of income annuities in the market today, 

provide for liquidity during all or part of the 

annuitization period and provide a choice of full 

or partial withdrawals. Since it is recommended 

that only a portion of the account balance be 

annuitized the remaining portion of the account 

balance is available to meet liquidity needs. 

Income annuities lead to a loss of control of 

assets.

This is certainly true if annuitization is viewed as 

an all-or-nothing solution. However, when 

income annuities are included as part of the 

overall retirement plan the individual retains full 

control of the portion not allocated to income 

annuities. 

Income annuities are expensive. 

This is an “apples to oranges” comparison. With 

an annuity, an individual is paying for a benefit 

that investments cannot provide: the guarantee 

that you will not outlive your money. Much like 

life insurance provides financial security in the 

event of an early death, income annuities provide 

financial security in anticipation of a long life. 
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Misperception Reality

Income annuities do not keep up with inflation 

because the income payments do not change 

over time.

While most traditional fixed income annuities do 

not provide explicit protection against inflation, 

the development of inflation-indexed income 

annuities does address inflation risk. However, 

this often generates questions about the cost of 

this protection. Inflation-protected income 

annuities have a lower starting income level than 

income annuities without an inflation adjustment. 

It is also possible to purchase cost-of-livingadjustments (“COLAs”) which provide a flat 

percentage increase every year (e.g., 1%, 2% or 

3%). 

Buying in a low interest rate environment is a 

bad investment. 

If you defer purchasing an income annuity until 

interest rates rise, your income during this 

waiting period must come from systematic 

withdrawals out of your retirement savings. 

However, during this time you are not taking 

advantage of the mortality credits that are 

inherent in an income annuity. This causes the 

systematic withdrawals to be more expensive 

than simply buying an annuity, even in a low 

interest rate environment. In addition, while 

waiting for interest rates to rise, you remain 

subject to market risk. 
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Section 3: How have lifetime income products evolved to meet the needs of today’s retiree? 

[This addresses questions 3, 4, 5, 6, and 7 in the RFI] 

Overview 

There is a full spectrum of retirement income options available today that range from maximum 

liquidity/flexibility at one end to maximum guaranteed income at the other, which the chart below 

illustrates. These solutions include fixed payments that never change (regardless of market 

conditions); withdrawal features (full or partial); a full range of income payout options; a return of 

premium guarantee; inflation protection options; and a death benefit. These products may be found in 

the retail market and, increasingly in the defined contribution market. 

MAXIMUM MAXIMUM

LIQUIDITY/FLEXIBILITY LIQUIDITY/FLEXIBILITY

MAXIMUM

INCOME GUARANTEE RETIREMENT INCOME SPECTRUM

Pure

Withdrawal

Solutions

Withdrawal

Solutions 

with

Guarantees

Guaranteed Lifetime

Income with

Withdrawal Options

Pure

Guaranteed

Income

The 4.00%

Solution

Guaranteed

Withdrawal

Benefits

Investments & 

Single

Premium

Income Annuity

Guaranteed

Minimum

Income

Benefits

Immediate

Variable

Annuity

Longevity

Guarantee

Single 

Premium 

Immediate

Annuity

The annuity products in the defined contribution market today have been adapted from products in the 

retail market. In order to work within the distribution channel (primarily web and call centers) some 

features have become simpler to understand, more flexible, and, in some cases, even portable, all 

while retaining the product’s core focus of ensuring guaranteed lifetime income. 

Personal Pension Plans 

Insurers have introduced in-plan accumulation annuities that are designed for workers while they are 

actively saving for retirement. These new products allow employees to create their own “personal 

pension.” Offered as a complement to, or as an option within, a 401(k) plan, this type of product is 

unique in that each contribution an individual makes is immediately converted to a specific future 

income benefit that is guaranteed to last a lifetime. By making contributions within a 401(k) plan, 

workers are able to invest over time and use a dollar-cost averaging approach to purchase a future 

income stream. Some of these programs, such as the Bank of America/Merrill Lynch Retirement 

Group’s Personal Pension Builder,2

 are offered as a standalone accumulation fund inside a 401(k) 

plan. In turn, at retirement participants may elect to receive a guaranteed stream of income. 

In a recent development, deferred fixed income annuities are being added to target date funds as their 

fixed income component. In this situation, the annuity allocation automatically increases as the plan 

participant gets closer to retirement. The annuity allocation within the target date fund, for example, 

might start at 5% at age 25 and grow to more than 50% at the point when the participant plans to retire. 

 2

 MetLife is the deferred fixed income annuity provider. 

MetLife 

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One example of this is BlackRock’s SponsorMatchTM,

3

 which enables a participant’s contribution to be 

allocated to both passively managed equity assets and retirement income. Importantly, BlackRock 

focused on the benefit of the employer match providing guaranteed lifelong income for participants. At 

retirement, participants automatically receive a lifetime income stream with an annual 21⁄2% cost of 

living adjustment unless they choose to opt out of the annuity and receive a lump sum instead. 

Longevity Insurance 

The single biggest challenge that financial advisors have in creating retirement income plans is 

assuming an exact date of death. Therefore they select a date of death too far into the future (for 

example age 100) thereby creating a situation in which most retirees will underspend. One of the 

newer products that the insurance industry has introduced in the last few years is longevity insurance – 

a deferred income annuity – that would be purchased at the point of retirement but would not begin 

payments until the individual reaches average life expectancy (generally age 80 or 85). This product is 

specifically designed to allow individuals to address their longevity risk. They set aside a portion of 

their retirement savings now in order to generate a steady stream of guaranteed income in the later 

years when it may be needed most. It also allows them to manage their other retirement assets to a 

limited time horizon. 

For a typical retiree, allocating 10%-15% of wealth to a longevity annuity creates spending benefits 

comparable to an immediate annuity allocation of 60% or more. Viewed another way, a sample 

calculation using annuity purchase rates found that a 65-year-old male retiree could increase his 

guaranteed spending by more than 21%, during the deferral period of 20 years, by allocating less than 

8% of his portfolio to an age 85 longevity annuity.4

Using today’s interest rates, a longevity insurance product with a one-time purchase of $10,000 by a 

male at age 65 would provide annual lifetime income beginning at age 85 of $4,328 with a death benefit 

or $7,658 without a death benefit. With this product, individuals are not only able to insure against the 

risk of outliving their life expectancy, they can spend more of their remaining assets during the 

intervening years, since they have a set time horizon (e.g., 20 years) during which to spend these 

assets. This allows individuals to maximize their spending capacity prior to the commencement of 

annuity payments. 

Enhanced Benefit Features 

While annuities have always offered the flexibility to provide a benefit for one’s spouse (joint and 

survivor) and term certain periods (ranging from 5 to 30 years), additional features are also available. 

For example, an individual may select either an annual cost-of-living-adjustment (1%, 2% or 3%) or 

inflation-adjusted annuities that track the Consumer Price Index (“CPI”). Additionally, partial 

withdrawals and premium refund features are now available. While these benefits provide enhanced 

flexibility there is also a cost associated with each feature. To address the individual’s unique needs, 

these options enable them to customize their income benefit. 

Living Benefits 

In the retail market, living benefits programs (defined in the glossary of terms as GMIB, GLWB and

GMWB) have been extremely popular. Several insurers have now adapted these programs for the 

 3

 MetLife is the deferred fixed income annuity provider. 

4 The Longevity Annuity: An Annuity for Everyone? Jason A. Scott, Financial Engines, Inc., June 2007. For an electronic copy: 

http://ssrn.com/abstract=992423
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defined contribution marketplace. These products have been primarily offered on a stand-alone basis, 

which means that participants must elect the product and determine the percentage of their ongoing 

contributions that they wish to allocate to this fund. There is ongoing discussion as to whether these 

funds are Qualified Default Investment Alternatives (“QDIA”) eligible. 

Product Innovations Pose Questions, Potential Challenges For Recordkeepers, Plan Sponsors

The downside to innovation is that many sponsors’ recordkeepers are not yet fully prepared to include 

these in-plan options in their fund line-up. At a high level, these enhancements would require indicative 

data transfer to the insurer with file feeds going back to the recordkeeper. While this is not necessarily 

an insurmountable obstacle, recordkeepers would like to see product feature uniformity from insurers. 

Because each insurer’s products vary in design, they have different data requirements. Sponsors view 

this as problematic because it means if they select one product, it may only be offered on one 

recordkeeper’s platform. In turn, this makes their decision to change recordkeepers in the future 

potentially challenging; this is referred to as employer portability. The recordkeeping and insurance 

industries, having heard these concerns from sponsors and from each other, are working together 

under the auspices of an industry association, The SPARK Institute, to come to consensus on standard 

file and data formats. The ultimate goal is to ensure that a plan sponsor would be able to change 

recordkeepers and without having to eliminate an in-plan accumulation annuity option. 

Participant portability has also been perceived as an issue although, as a general rule of thumb, the 

products in market allow for participant to rollover their assets into an IRA. If participant changes jobs, 

they may be able to leave their retirement income assets in their former employer’s plan or they may be 

able to rollover into the companion IRA product; typically this will have higher fees. Participants may 

not understand these options and may just liquidate their fund thereby losing the benefits that they have 

already paid for and accrued. And some products may only allow for liquidation because they do not 

yet provide a companion rollover solution. 

In-Plan Accumulation Annuity Products 

There are several types of in-plan accumulation annuity products that are available in the market today, 

which include deferred fixed income accumulation annuities that are available as stand-alone products 

or integrated into target date funds. There are also living benefits (GMIB, GLWB and GMWB) as an 

in-plan accumulation annuities that are available in either a balanced or a target date fund at a prespecified age. 

When in-plan accumulation options are available there is generally an option that provides the 

participant, at the point they terminate employment or retire, the opportunity to roll over the benefit to an 

IRA that preserves the guarantees they accumulated while employed. However, in most cases, the 

fees will increase since these funds have been moved out of the workplace and into a retail contract. 

IRA Rollovers 

All defined contribution plans allow participants to roll their assets into an IRA at the point of 

termination. Typically, this means that participants can take their money and either purchase an IRA 

that offers an array of mutual funds, or they can purchase an IRA rollover annuity. These are both retail 

products and the participant makes the selection on their own without guidance from the plan. 

Some employers are also making institutional IRA rollover annuity platforms available to their 
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participants, such as the Hueler Income Solutions® platform.5 Under this arrangement, a participant is 

provided with multiple insurers to choose from and these annuities are offered at institutional prices, 

thereby offering a higher benefit at a lower cost. Access to on-line quotes and other relevant 

information is also provided that allows the participant to compare and contrast prices and features 

before purchasing the immediate annuity. 

Other Retirement Income Management Programs 

There are other retail income management programs, for both qualified and non-qualified assets, that 

include: 

• Payout mutual funds, which distribute assets over a selected time period. 

• Managed payout funds, in which the participant receives an income stream until the expiration date, 

at which point the original investment is returned. 

• Systematic Withdrawal Programs (“SWIP”), in which a stream of payments expressed as a fixed 

percentage (generally 4%) of the declining portfolio is paid. 

It is important to note, however, that these products do not guarantee that income streams will be paid 

throughout the lifetime of the payee. While these programs have their place in an overall retirement 

plan, they do not provide guaranteed lifetime income, and as demonstrated over the past 18 months, 

they are not immune to market fluctuations. 

The Cost Impact Of Adding Product Features 

In its simplest form, a life income annuity will provide a fixed periodic payment over the lifetime of a 

single individual, with payments ending upon the death of that individual. This form of income benefit is 

also typically the least expensive and therefore will provide the highest payment level for a specific 

contribution amount. 

The cost of a traditional life income annuity will increase as features are added that either: 

• lengthen the average expected term of the annuity by adding a minimum guaranteed payment 

period, or a second life over which payments are to be made, 

• increase the future guaranteed payment amount by including an annual cost-of-living benefit 

increase, or 

• provide the individual with increased liquidity by adding a feature that permits ad-hoc withdrawals 

over some defined period. 

The following table provides an approximate impact on cost of some of the more common features that 

are typically selected. This example reflects an income annuity purchased at age 65 with monthly 

income payments starting immediately. 

 5

 MetLife is one of nine insurance companies on the platform providing immediate income annuities. 
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Income Annuity Benefit Form 

Income 

Factor* 

Single Life Income 1.000 

Single Life with 10-Year Guarantee Period 0.970 

Single Life with 20-Year Guarantee Period 0.890 

Life Income Payable over Two Lives** 0.860 

Life Income - 50% Payment Continued to Second Life** 0.925 

Single Life with 2% Annual COLA 0.825 

Single Life with 3% Annual COLA 0.745 

Trial Annuity 0.970 

* Income factors calculated based upon the Annuity 2000 Table D (50/50 blend of male and female mortality), a fixed 

interest rate of 5%, and no adjustment for expenses. April 2010. 

** Both lives assumed to be age 65 at time of annuity purchase. 
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Section 4: Why don’t more employers offer annuities under their plans? 

[This addresses questions 14 and 39 in the RFI]

With the decline of the defined benefit plan system, there is more reason than ever to include income 

annuities in defined contribution plan designs in some form. So why do so few plan sponsors offer 

income annuities? Research with employers as well as anecdotal experience indicate five reasons: 

1. There is little employee demand for income annuities, rendering any costs and burdens unjustified. 

2. Offering income annuities requires plan fiduciaries to prudently select one or more annuity 

providers, thereby creating potential liability. Without significant employee demand, companies 

have little reason to expose themselves to such fiduciary liability. 

3. Most defined contribution plan recordkeepers do not have the ability today to administer in-plan 

accumulation annuity options. 

4. Some plan sponsors believe that the defined contribution plan is only a savings vehicle, and that 

participants should be responsible for managing their retirement income without employer 

involvement. 

5. Offering income annuities increases administrative costs, including application of the spousal 

consent rules, the optional survivor annuity rules, and the preparation and administration of more 

complicated participant communications (with the corresponding increase in participant questions). 

The impending retirement of the baby boomer generation, with fewer defined benefit pension plans, will 

bring to light the need for retirement income planning and the importance of having a component of 

guaranteed income in retirement. This is an opportunity to transform the way plan sponsors and 

participants view defined contribution plans. All stakeholders working together need to accomplish four 

things, which are addressed later in this document, to overcome these barriers: 

1. Enhance participant education, which will lead to a “reframing” of defined contribution plans from 

savings plans to retirement income plans, and make it easier for participants to make good choices, 

creating more demand for annuities. 

2. Ease the fiduciary burdens imposed on plan sponsors in selecting an annuity provider. 

3. Facilitate plan administration by simplifying and clarifying compliance requirements. 

4. Address the recordkeeping challenges with respect to in-plan accumulation annuities. 

In-plan accumulation annuities are slowly emerging as an innovative solution to the decline of defined 

benefit plans and the resulting need for guaranteed lifetime income. However, as in-plan accumulation 

annuities are still so new to the marketplace, and, to date, there has been little adoption. Currently, 7% 

of employers report that they offer these programs and 2% say they plan to offer them within the next 

year. Conversely, 91% of sponsors do not offer or plan to offer (in the next year) retirement income 

solutions as in-plan options.6

It is interesting to note that innovations in the defined contribution marketplace often take time to be 

adopted. For example, self-directed brokerage accounts were first introduced in 1993 with less than 

1% of plans utilizing this option. By 2009, 26% of plans offered a self-directed brokerage account, 

although only 1% of all plan assets are allocated to this feature.6

 Likewise, when target date funds 

were introduced in 2001, approximately 5% of plans offered them. By 2009, 71% of plans were offering 

these funds.7

 One can assume that the safe harbor provided for target date funds in the Pension 

Protection Act of 2006 significantly helped the adoption rates given that in 2005, 28% offered target 

date funds and by 2007, 58% did.6

 6 Hewitt Trends and Experience in 401(k) Plans (2009). 7 Hewitt Associates.
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Section 5: Why is it important that employers offer income annuities at retirement under their 

plans? 

[This addresses question 8, 9 and 14 in the RFI]

From a public policy perspective, it is important for plan sponsors to offer lifetime income solutions to 

their participants at the point of retirement. In MetLife’s experience, the most effective way to engage 

employees in the value of creating guaranteed lifetime income is to offer an in-plan distribution annuity 

option as there is an implied “endorsement effect.” Also, when sponsors clearly articulate that partial 

annuitization is available, there is greater utilization. Furthermore, strong education and communication 

programs dramatically impact participant behavior. 

However, it is important to note that only 14% of plans offer in-plan distribution annuity options today8

and a few plan sponsors offer an institutional IRA rollover annuity instead. Therefore, most participants 

have to find a retail IRA rollover annuity provider on their own if they want to secure lifetime income. 

Reasons Why Plan Sponsors Should Offer In-Plan Distribution Annuity Options 

• A plan sponsor may be able to provide their participants with a higher guaranteed income benefit 

and lower cost due to the plan’s ability to negotiate group contract pricing, as they would with any 

other employee benefit offerings (e.g., dental, disability insurance, etc.). 

• Plan sponsors generally have a higher degree of financial acumen than plan participants. They are, 

therefore, more likely to follow a consistent and reasoned due diligence process and are more likely 

to select a suitable high quality insurance company to provide annuity benefits. 

• Employees often look to employers for guidance, and education provided in connection with the 

plan lifetime income option may be helpful. 

• A plan offer is more convenient for the participant because there is a buying process in place. 

• Participants have ERISA protections that include benefit claims and appeal procedures and 

recourse against fiduciaries that do not fulfill their fiduciary responsibilities. 

Other Considerations 

• Some sponsors have chosen to offer institutional IRA rollover annuities to their participants instead 

of in-plan distribution annuity options because they perceive that there is limited fiduciary liability. 

• Longevity insurance products are not easily purchased with defined contribution plan assets due to 

the Required Minimum Distribution rules. 

• The pricing will be different depending on which approach is selected; in-plan distribution options 

are required to be priced on a unisex basis, which is generally advantageous for females and 

disadvantageous for males. The opposite is true under IRA rollover annuities since sex-distinct 

pricing is allowed, whether they are offered on an institutional or retail basis. 

• Qualified Joint & Survivor Annuity rules must be followed for an in-plan distribution annuity but not 

for an IRA rollover annuity. 

MetLife believes that clarifying the fiduciary selection regulations would increase utilization of lifetime 

income options by plan sponsors and participants. 

 8 Hewitt Trends and Experience in 401(k) Plans (2009). 
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Section 6: How can employers be encouraged to offer in-plan distribution annuity options 

and IRA rollover annuity options? 

[This addresses questions 25, 26, 27, 30, 31 and 32 in the RFI]

The RFI asks a number of questions about either encouraging or requiring employers to offer lifetime 

income annuities as distribution options. MetLife believes the first step is to encourage employers to 

offer lifetime income annuities through increased awareness, education and incentives. Mandates 

should only be considered if and when there is evidence that efforts to encourage voluntary action have 

not worked. 

As discussed in Section 4, the following are five reasons that employers do not offer income annuities. 

1. There is little employee demand for income annuities, rendering any costs and burdens unjustified. 

2. Offering income annuities requires plan fiduciaries to prudently select one or more annuity 

providers, thereby creating potential liability. Without significant employee demand, companies 

have little reason to expose themselves to such fiduciary liability. 

3. Most defined contribution plan recordkeepers do not have the ability today to administer in-plan 

accumulation annuity options. 

4. Some plan sponsors believe that the defined contribution plan is only a savings vehicle and that 

participants should be responsible for managing their retirement income without employer 

involvement. 

5. Offering income annuities increases administrative costs, including application of the spousal 

consent rules, the optional survivor annuity rules and the preparation and administration of more 

complicated participant communications (with the corresponding increase in participant questions). 

Below are MetLife’s suggestions to address these reasons: 

The Defined Contribution Plan Annuity Provider Selection Regulation Should Be Simplified 

In-plan distribution annuity options 

With increasing litigation surrounding the administration of defined contribution plans, plan sponsors are 

reluctant to engage in activities that may expose them to additional litigation, including the offering of 

income annuities as distribution options. Congress and the DOL have been sensitive to the changing 

nature of the retirement plan system and the need to provide clarity regarding a fiduciary’s duties. As a 

result of a provision included in the Pension Protection Act of 2006 (the “PPA”), the DOL issued new 

regulations in 2008 on the fiduciary standard to be applied by defined contribution plan sponsors when 

selecting an annuity provider. The new standard, incorporated in DOL’s regulation 29 CFR §

2550.404a-4, contains a fiduciary safe harbor for the selection of annuity providers for the purpose of 

benefit distributions from defined contribution plans. 

The new standard has addressed some of the concerns raised by plan sponsors with the “safest 

available annuity” standard promulgated by the DOL with respect to defined benefit plans, including the 

statements that the fiduciary does not have to choose the “safest” annuity available, and that the 

fiduciary duty generally applies at time of selection (with an ongoing duty to monitor the selection as to 

prudence with regard to future annuities provided). However, in light of our generally litigious society, 

plan sponsors continue to express concerns regarding any plan decisions that may expose them to 

future lawsuits. Thus, even with the simplification of the fiduciary standard that the DOL promulgated, 

plan sponsors are still expressing reservations about their ability to implement the standard without 

exposure to undue risk. 
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From MetLife conversations with plan sponsors, the most daunting aspect of the new guidance 

continues to be the requirement – and their ability – to assess an insurer’s financial stability. With 

employers expressing concerns regarding their ability to satisfy the financial stability 

requirement under 29 CFR 2550.404a-4, MetLife urges the DOL to further simplify that 

requirement by providing an objective safe harbor. MetLife suggests developing of a safe harbor 

based on the following analysis. It is inefficient and unrealistic to structure a system whereby each 

defined contribution plan sponsor must do a thorough review of the financial stability of the same 

annuity providers. With state regulators annually analyzing every insurer's financial stability, there is 

little purpose in plan sponsors performing the same analysis. And it is unrealistic to expect any plan 

sponsor to do a thorough review, or pay an expert for a review, of the financial stability of, for example, 

a Fortune 500 insurer. 

MetLife’s proposal is to explore the possibility of a safe harbor based on the fact that an annuity 

provider has passed the review of state regulators. For example, under a possible safe harbor, a 

plan fiduciary could, in the absence of extraordinary circumstances justifying further inquiry, 

treat an annuity provider as satisfying the financial stability requirement of the fiduciary 

standard if: (1) the annuity provider or an affiliate is licensed to do annuity business in at least 

26 states, and (2) the annuity provider’s “risk-based capital” (“RBC”) ratio is in excess of the 

Company Action Level, as defined by the National Association of Insurance Commissioners 

(“NAIC”).9

Such a rule has strong policy underpinnings. The business of insurance is regulated by the states. 

Insurance regulators are charged with ascertaining that insurance companies are operating on a 

financially sound basis. They take action if it appears that an insurer will be unable to fulfill the 

promises made to its policyholders. This includes taking over the management of an insurer 

(“Authorized Control Level” of RBC) through a conservation or rehabilitation order to get the insurer 

back into a strong solvency position. Although the primary responsibility for this regulation is the 

domiciliary state of the insurer, in areas where federal oversight is required, logical rules have 

developed. In the area of required reserve valuation assumptions, which may vary across states, the 

Internal Revenue Code Sections 807(d)(4)(B)(i) and (5)(A) demonstrate examples of applying a 26-

state threshold to the insurance industry to develop a single federal standard. 

State solvency standards require insurers to report liabilities at levels that generally exceed the 

expected economic costs of their promises. Additionally, states require a board-appointed actuary to 

take personal responsibility for an Opinion regarding the adequacy of the company’s assets to 

discharge its liabilities. The actuary provides a Memorandum detailing the analyses, primarily the 

testing of future cash flows under multiple scenarios that support the Opinion. These memoranda are 

reviewed annually by the states, and quinquennially in detail by the domiciliary state. 

MetLife recognizes that the fiduciary inquiry regarding investments is analytically different from the 

fiduciary inquiry regarding annuity distribution options. But there is nevertheless an analogy that can be 

drawn to the investment area. The analogy is not a substantive analogy, but rather a process analogy.

Briefly, not every plan sponsor can realistically perform a full fiduciary review of every investment 

option. In reality, no one expects a 50-person company to do, directly or indirectly, a thorough review 

of all the following with respect to every mutual fund that is offered: an examination of the fund’s 

 9

 RBC represents an amount of capital based on an assessment of risks that a company should hold to protect customers against adverse 

developments. Each year the company calculates its capital based on the RBC formula. It also calculates the capital required for risk, the 

“Company Action Level" RBC. The ratio of a company’s capital to it’s “Company Action Level" RBC is generally referred to as its RBC ratio. 

However, the regulator rules use a ratio based on the “Authorized Control Level" RBC, which is 50% of the “Company Action Level" RBC. The 

NAIC system details specific actions to be taken by the company or the state insurance regulator if this ratio declines. 
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portfolio, including an assessment of each industry in which the fund is invested; a study of the fund’s 

managers, including their tenure, their research support, the prospects for their retention, their 

investment style and their risk tolerance; a comparison of the fund’s investment profile with all emerging 

economic and market trends; and an analysis of the investment firm itself and its corporate structure. If 

this were the standard, there would be only a handful of defined contribution plans offering mutual 

funds in existence today. 

In reality, the 50-person company generally asks questions such as: Is the fund family well respected? 

Does the fund have a sufficiently long and good performance history, net of fees? Is the fund chosen 

by other plans? Is there anything in the news that would call into question the fund’s future? 

A similarly realistic standard has not emerged in the annuity provider area simply because the lack of 

employee demand has enabled employers to avoid dealing with the annuity provider issue. But if the 

objective is to facilitate the offering of annuities, it will be necessary to allow employers to effectively 

rely on the analysis of other experts – state regulators – rather than forcing all plans across the country 

to do their own comprehensive analysis. 

Please note that, even with this suggested safe harbor on the financial stability requirement the plan 

fiduciary would still need to do an independent review as required under 29 CFR § 2550.404a-4 that 

would appropriately consider the cost (including fees and commissions) of the annuities and the 

insurer’s experience with respect to the administrative servicing of the annuities. 

In-plan accumulation annuities 

There is confusion regarding the application of the fiduciary rules to in-plan accumulation annuities. 

MetLife believes that under current law, the fiduciary rules apply as follows: in-plan accumulation 

annuities, although insurance products, are treated as investments and are subject to those fiduciary 

standards. However, to the extent that in-plan accumulation annuities are also being offered to 

participants as distribution options, the annuity provider selection fiduciary standards also apply. Under 

the new products, both events occur simultaneously: the in-plan accumulation annuities are offered as 

investments and the same annuities are available as distribution options. In that case, such annuities 

must be analyzed from a fiduciary perspective both as investments and as distribution options. If, on 

the other hand, an in-plan accumulation annuity is only offered as an “investment,” the annuity provider 

rules would have no application. MetLife believes that this is the law today, but a clear articulation of 

this legal framework would be helpful. 

Tax Qualification Rules Should Be Updated To Address The Changing Retirement System 

Since the use of annuities in defined contribution plans is evolving, it would be helpful for the 

government to provide comprehensive guidance clarifying the treatment of annuities. 

• The election to invest in an in-plan accumulation annuity does not trigger the requirement that a 

participant obtain spousal consent to distributions in a form other than a qualified joint and survivor 

annuity (“QJSA”). Investment elections do not trigger the QJSA rules; only distribution elections do. 

This is clearly the law, but a statement to this effect would be helpful. 

• It should be clarified that the distribution of a deferred income annuity to a participant from an inplan accumulation annuity does not trigger the QJSA rules to the extent that the contract preserves 

the participant’s distribution options under the plan. In that case, it is a distribution under the 

contract that can be subject to the QJSA rules. Again, this is clear under the law, but stating it 

would be helpful. 
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The issues become more difficult, and even more in need of clarification, with respect to some of the 

evolving annuity products, such as trial annuities, GLWBs and GMWBs. Under these products, a 

participant makes an election to receive benefits in a specified form. Under that form, the benefits are 

distributed initially in a non-annuity form as a withdrawal benefit, and then later may be distributed in an 

annuity form. 

A participant may elect a trial annuity under which periodic payments are made for a period of time and 

then, unless they opt out of the trial, lifetime annuity payments begin. The QJSA rules may apply in the 

following manner with respect to a trial annuity. Under the initial distribution election, the participant 

elects an annuity even though the annuity distributions are deferred. Therefore, the initial distribution 

election triggers the QJSA spousal consent rules because the participant is electing a deferred life 

annuity. This analysis is consistent with Private Letter Ruling 200951039.

An example illustrates MetLife’s concern with the legal framework. Assume that the value of a 

participant’s account is $100,000 and the participant elects a trial annuity with a two-year trial period. 

Assume that the present value of the trial payments is $10,000 and the present value of the deferred 

annuity is $90,000. Generally, by reason of the election of the deferred annuity, the spousal consent 

rules would apply to 90% of the account as long as there is a separate accounting of such 90%. See 

Treasury Regulations § 1.401(a)-20 Q/A-4. This means, in turn, that during the two-year period, the 

plan must consistently monitor any additional withdrawals by the participant. If any such withdrawals 

would reduce, or further reduce, the value of the deferred annuity, spousal consent would be needed. 

This could be a significant administrative burden.

Accordingly, MetLife suggests that guidance clarify that it is permissible to apply the spousal consent 

rules in the following manner. When the deferred annuity is elected, the plan could deem there to be 

no separate accounting of the 90%, so that spousal consent is needed with respect to the two-year trial 

period (because the trial period payments do not constitute a QJSA). The spouse’s consent to the trial 

period payments could be structured as a general consent under Treasury Regulations § 1.401(a)-20 

Q/A-31(c) whereby the spouse consents to any acceleration or modification of payments during the trial 

period, including an election to receive a lump sum distribution at the end of the trial period. Similarly, 

the spouse’s general consent could apply to whatever pattern of payments the participant chooses after 

the trial period. This would be easier to administer, is consistent with the regulatory structure and gives 

spouses complete control by leaving it to them as to whether to provide a general consent.

Another way to view trial annuities would be to treat both the trial period payments and the deferred 

annuity as part of a single stream of payments with a single annuity starting date, so that the spousal 

consent rules apply upfront at the commencement of the trial. Thus, spousal consent may be obtained 

once upfront and not periodically as distributions are made.

Similarly, with respect to GMWBs and GLWBs in defined contribution plans, MetLife requests that the 

law be clarified to provide that the initial distribution election triggers the QJSA rules. Whichever 

analysis described above is applied regarding trial annuities should also be applied to GMWBs and 

GLWBs. So, the election of a GMWB or a GLWB could be treated as an election of a deferred annuity 

that triggers the application of the QJSA rules with respect to the entire account. In that case, a 

spouse’s general consent could satisfy the spousal consent requirements with respect to any 

subsequent acceleration or modification of payments during the withdrawal period. GMWBs and 

GLWBs could be viewed as providing a single stream of payments with a single annuity starting date, 

so that the spousal consent rules would only apply once upfront and not periodically as distributions are 

made.
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Section 7: Why do individuals not choose lifetime income products and how can those 

barriers be removed to encourage greater annuitization? 

[This addresses questions 2, 10, 11, 12, 13, 17, 18, 19, 20, 21, 22, 23, 24 and 38 in the 

RFI]

Participants who have saved in their company-sponsored defined contribution plans have focused 

almost exclusively on asset accumulation: building the largest nest egg possible. Given that these 

plans were originally designed as supplemental savings plans, this outcome is not surprising given the 

significant education that has been provided. In fact, all stakeholders should be commended for 

encouraging this behavior. However, building a large nest egg is only one part of the retirement 

equation. The other part is the distribution phase – how to spend down that nest egg to ensure one 

doesn’t outlive their assets. There has been little attention paid by individuals to the risks they will face 

in retirement. Many have not considered this challenge, let alone which products and strategies will 

allow them to convert their assets into retirement income. 

Lack Of Awareness Points To A Perfect Storm 

As discussed in Section 1, the greatest risk facing retirees is longevity risk – the real risk of outliving 

their retirement savings. Surprisingly, there is little comprehension by individuals about how long they 

are likely to live and what impact this will have on their retirement assets. 

MetLife conducted two Retirement Income IQ Studies (in 2003 and again in 2008) to test the 

knowledge of basic retirement income concepts for individuals within five years of retirement. The 

results are very troubling as significant knowledge gaps exist regarding average life expectancy and 

other retirement income issues: 

• Among the most disturbing findings of the 2008 study was that six in ten Americans (60%) 

underestimated their average life expectancy. 

• Almost half (49%) underestimated the amount of pre-retirement income they will need once they 

retire. 

• Almost seven in ten (69%) pre-retirees overestimated how much they can draw down from their 

savings – with an alarming 43% believing they could withdraw 10% or more each year while still 

preserving their principal – even though most retirement experts suggest a withdrawal rate of no 

more than 4% annually. 

This lack of understanding is particularly alarming because it results in poor retirement planning 

assumptions, which are compounded after retirement by much longer life expectancies. These findings 

point to the underpinnings for the “perfect storm” of retirees running out of assets. 

Obstacles To Overcome To Encourage Annuitization 

Aside from a lack of understanding about longevity risk, what are the reasons for not selecting lifetime 

income and what are the steps that can be taken to change this situation? 

When it comes to retirement planning, most people, even those close to retirement, have not planned 

at all. As the recently released EBRI/Mathew Greenwald & Associates 2010 Retirement Confidence 

Study highlights, despite the recent economic downturn, 54% of individuals still have not made a 

financial plan for retirement. Among those who have planned, most of them have not been given the 

proper framework to evaluate how an income annuity can be an important component of a retirement 

portfolio. In fact, many financial advisors also need to be educated on the inherent benefits of providing 

some minimum level of guaranteed lifetime income as a necessary component of a financial plan. 
Request for Information May 3, 2010 Lifetime Income Options

It has been well documented in various market and behavioral research surveys that individuals 

overvalue a lump sum of money: this is often referred to as the “wealth illusion”. At the point of 

retirement, individuals see their 401(k) balance and it is often more money than they have ever saved 

in one place. In conjunction with overvaluing this lump sum, individuals often undervalue a future 

income stream. This is primarily because they overestimate the risk of dying too young to realize the 

value of a guaranteed lifetime income. 

Individuals are also concerned about liquidity and the desire to stay in control of their assets. With 

average account balances at retirement of $137,337,10 some may argue that income annuities do not 

make sense for everyone. However, to the extent that a small account balance still represents a 

significant share of the individual’s net worth, it is certainly possible to argue that it is even more 

important for this person to annuitize at least a portion of their balance in order to maximize the income 

from this limited savings.11 At a time when many aspects of retirement are uncertain – everything from 

inflation and lifespan to the solvency of Social Security and corporate pensions – Americans are under 

the impression they need to “invest away” the risks they face in retirement. 

Furthermore, inertia is a powerful force, making it easier for participants to simply take a lump sum or 

roll their balance into an IRA, rather than making an active decision to annuitize a portion of their asset 

pool. After all, studies have shown that inertia is prevalent throughout a participant’s savings years – 

many individuals rarely make changes to their 401(k) investment allocations – so they are not likely to 

overcome that inertia without encouragement. 

Lifetime income, specifically in the form of income annuities, has low market penetration both in the 

retail and workplace settings. While the election rate by participants of in-plan distribution annuity 

options is generally low (decreasing from 3% in 2007 to 1% in 2009 across the 14% of plans that offer 

annuities),12 MetLife has seen higher take-up rates for those plans that offer strong education. 

Employees do listen to their employers and when the sponsor provides educational information, 

participants act accordingly.

The following is an example of an illustration that demonstrates the powerful benefit of income annuities 

as a component of a retirement plan. 

$335K 67% SAVINGS AND

INVESTMENTS

$165K 33% ANNUITIES

4%

4%

About $20,000 a year

$13,000

+ $11,600

= About $25,000 a year

25%

more

$500K SAVINGS AND

INVESTMENTS

RETIREMENT WITH AN INCOME ANNUITY

RETIREMENT WITHOUT AN INCOME ANNUITY

 10 EBRI Tabulations from EBRI/ICI 401(k) Database. 11 Automatic Lifetime Income As A Path to Retirement Security, Jeffrey R. Brown, PH.D., University of Illinois, June 2009. 12 Hewitt Trends and Experience in 401(k) Plans (2009). 

MetLife 

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As a result of the shift from defined benefit to defined contribution plans, employer and employee 

attitudes are also changing with regard to their receptivity to lifetime income options. MetLife’s 8th

Annual Employee Benefits Trend Study (“EBTS”) found that 40% of the 1,300 employees surveyed 

were interested in learning more about how they could use an annuity as part of their 401(k) plan. 

While only 10% of employers say they are interested in offering an annuity option as part of their 

defined contribution plan, 44% of employees would like their employer to offer an annuity as part of 

their retirement plan. 

Potential Solutions To Encourage Annuitization As A Distribution Option 

The most important point is that in-plan distribution annuity options should be a component of every 

retirement plan. As discussed in Lifetime Financial Advice: Human Capital, Asset Allocation, and 

Insurance13 by the leading authorities on asset allocation (Roger Ibbotson, Moshe Milevsky, Peng 

Chen, Kevin Zhu), in a paper released in 2007, fixed annuities can be a crucial part of a well-diversified 

retirement income portfolio. Income annuities should be viewed as a way to cover fixed expenses, in 

addition to the income received from Social Security and, in some cases, a defined benefit pension 

plan. Individuals are more likely to favor annuitizing part of their savings to address a specific purpose 

(e.g., covering vacations, grandchildren’s education, mortgages, etc.). This helps frame the decision by 

creating financial context and also helps to address both the liquidity and control issues. Furthermore, 

the industry should help individuals understand that using income annuities is a way to maximize and 

protect income with benefit forms that can be customized to fit their individual needs. Overall, the focus 

needs to incorporate generating income rather than a continued singular focus on investment return. 

Over the past decade, research in the field of behavioral economics has explored the areas of choice 

and framing. This research provides further insight into how and why individual decisions are made 

and, among other things, the way in which a particular decision is “framed” (the way in which it is 

explained or presented), rather than the facts or attributes of a particular choice, is an overriding 

determinant of the decision. When consumers think in terms of consumption, annuities are viewed as 

valuable insurance, whereas when consumers think in terms of investment risk and return, the annuity 

is a risky asset because payoff depends on an uncertain date of death. People react negatively to the 

possibility that they could lose money and often think of annuities as a “gamble” rather than as 

insurance. When individuals were presented with a “frame” of consumption versus investment, 72% 

selected the life income annuity compared to 21% selecting the investment approach. Note that the 

financial amount was identical in these situations but that it was framed differently.14

401(k) Plan Account Balances Should Be Communicated As Lifetime Income In Addition To The 

Total Account Balance On Annual Benefit Statements

Educational tools are a critical component in realigning participants’ attitudes, knowledge and 

approaches to their retirement assets. Participants have little understanding of how much to save or 

how to invest those savings to achieve an adequate retirement income. They also have little to no 

understanding of how to ensure that their 401(k) savings will last throughout their retirement years. 

Educational tools, which seek to shift the paradigm from assets to income, can help individuals begin to 

understand how to turn that lump sum into an income to last 20, 30 or even 40 years. 

ERISA section 105 currently requires defined contribution plans to furnish to each participant an 

 13 Research Foundation of CFA Institute, 2007. 14 Why Don’t People Choose Annuities? A Framing Explanation. The Retirement Security Project, March 2008. Brown, Kling, Mullainathan 

and Wrobel. 
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individual benefit statement, at least annually, that includes the participant’s “accrued and vested 

benefits.” The DOL should require that annual benefit statements for 401(k) plans show an 

equivalent monthly lifetime stream of income, in addition to the total account balance.

This income amount should be based on conversion factors published by the DOL unless the plan 

includes an annuity, in which case the annuity factors in the plan may be used to convert the account 

balance. 

The Pension Benefit Guaranty Corporation annually surveys commercial annuity providers and 

aggregates those rates to determine an average rate that is then used to calculate the annuity values 

that they use to pay plan participants under their control. Those rates are an accurate reflection of 

current annuity rates in the market. MetLife recommends that the DOL use those rates (or a similar 

market survey) in developing their conversion tables. 

The annuity amount should be shown as both a single life and a QJSA; QJSA disclosures would need 

to be based on one or more assumptions regarding the age of the spouse. The DOL should also issue 

model notices that plan sponsors could use to communicate this information to plan participants. 

Plan sponsors that rely on the DOL’s tables and notices should be relieved of fiduciary liability for the 

income amounts displayed on the benefit statements. Finally, to the extent that recordkeepers 

currently provide modeling tools that go further than what the DOL may require or provide, plan 

sponsors should be exempt from the conversion requirement. For example, some 

recordkeepers/service providers provide participants with on-line tools that enable them to make 

personalized projections regarding the income they can expect during retirement based on certain 

variables. Where such tools are available, it would only serve to confuse participants to have a 

different projection set forth on their benefit statements. 

MetLife does not recommend that projections be made regarding future contributions in this calculation. 

Since these conversions are educational in nature and not intended to imply any guarantees of future 

employment, a static number at a point in time should be sufficient to meet the educational intent. The 

calculation should be made based on projecting the current account balance to age sixty-five (or 

whatever the normal retirement age is under the plan), so that participants are able to see what their 

current account balance would translate into on a monthly income basis. 

Please note in this regard that on December 3, 2009, Senators Jeff Bingaman (D-NM), Johnny Isakson 

(R-GA) and Herb Kohl (D-WI) introduced the Lifetime Income Disclosure Act of 2009. The bill 

incorporates substantially all of the enhancements to the benefit statement described above. It strikes 

an appropriate balance between providing this much needed education for plan participants with plan 

sponsor fiduciary protections. 

Finally, MetLife believes that this conversion will serve a twofold educational purpose, as Senators 

Bingaman, Isakson and Kohl noted in their press release introducing the bill: not only will it show what 

income amounts are possible from the current account balance (thereby reorienting participants’ views 

of their 401(k) plans as a retirement plan), it could prompt them to increase their savings level within the 

plan in order to achieve greater income levels at retirement. MetLife believes that this conversion 

amount will ultimately educate participants of all ages to increase their savings to more appropriate 

levels. A T. Rowe Price study in 2007 found that when participants are shown their account balances 

as a monthly annuity amount, individuals were motivated to increase their savings levels.15

 15 Retire With Confidence Series, November 2007. 
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The DOL And The Treasury Department Should Provide Education On The Distribution Phase Of 

Retirement Plans 

The DOL and the Treasury Department have done an excellent job since the enactment of ERISA in 

issuing not only regulatory guidance interpreting ERISA and the retirement laws that have been 

enacted since, but numerous educational materials that explain, in lay terms, some of the retirement 

savings issues facing individuals. Many of these materials have focused on critical issues of saving 

and investing and on reaching “at-risk” populations. In the last decade the DOL also issued a brochure 

to help individuals in assessing the risks they face in retirement. MetLife strongly urges the DOL to 

reissue that brochure, updated to reflect some of the important risks and decisions that individuals will 

face when approaching retirement and to address some of the distribution options available to them. 

Wherever possible, quantitative examples should be used. Since the government is an objective 

source of information, plan sponsors could use these materials to educate their employees about 

retirement distribution options without increasing their fiduciary liability. 

In addition, since plan sponsors can also benefit from education in this area, MetLife encourages the 

Agencies to publish educational material specifically directed to plan sponsors regarding lifetime 

income options. Income annuities are an important tool in helping retirees meet their income needs. It 

is imperative to educate all parties that retirees must not only invest for retirement but also insure for 

retirement. 

The DOL Should Expand The Participant Education And Advice Guidance To Include The 

Distribution Phase Of Defined Contribution Plans 

The DOL has done excellent work in providing guidance on how plan sponsors can effectively provide 

participants with education and advice regarding the savings phase of defined contribution plans. 

Interpretive Bulletin 96-1 (“IB 96-1”) sets forth guidelines regarding how employers can provide 

participant education with respect to the allocation of retirement savings among classes of investments. 

IB 96-1 has been used extensively by employers that want to help their employees without taking on 

fiduciary liability for the provision of investment advice. 

The DOL has also issued critical guidance with respect to the provision of investment advice. The 

SunAmerica Advisory Opinion has led to a great expansion of advice based on computer models using 

generally accepted investment theories. Moreover, much of this advice is provided through managed 

accounts, where the advice is implemented automatically and thus is more effective than advice that 

participants must implement on their own. The DOL has an opportunity to build on the important 

success that it has achieved in the savings phase by applying the same framework to the distribution 

phase. 

MetLife recommends four additional steps that can be taken with respect to participant education and 

advice. The first two relate to IB 96-1 and the second two relate to guidance with respect to advice 

provided through computer models. 

1. As stated in the 2007 report of the ERISA Advisory Council’s Working Group on Financial Literacy 

of Plan Participants and the Role of the Employer, “96-1 needs to address information, education 

and advice in the decumulation stage as well as the savings phase.” MetLife recommends 

expanding IB 96-1 to clarify what education may be provided to participants about the 

distribution phase without that guidance being treated as fiduciary advice. Such guidance 

should be as detailed as IB 96-1. For example, the guidance should clarify that computer models 

that generate generic distribution approaches should be treated as education, not advice. Under 

the IB 96-1 expansion that MetLife is recommending, a participant could provide his/her own 
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information, such as other assets, other sources of income (such as Social Security or a pension or 

spousal pension), age, risk tolerance and annual living expenses. The computer model could then 

generate a generic distribution model regarding the portion of the participant’s account that should 

be annuitized, the portion that should be rolled over, the portion that should be taken in the form of 

installment payments, etc. This type of modeling should be permissible for providing distribution 

education. Finally, as with the DOL’s investment guidance, the DOL’s distribution phase guidance 

should permit such guidance to be paid for with plan assets.

2. MetLife recommends the current investment elements of IB 96-1 should be expanded to 

clarify that education regarding investment into in-plan accumulation annuities is within the 

reach of IB 96-1’s existing framework and would not be treated as fiduciary advice. 

3. MetLife recommends that DOL issue “SunAmerica-like” guidance with respect to the 

distribution phase. In other words, a financial institution would be allowed to contract with 

an independent expert that would develop and apply a computer model for providing 

distribution advice based on generally accepted decumulation principles. The computer 

model would receive the same type of participant data described above regarding assets, 

expenses, etc. It would generate specific recommendations based on the plan’s distribution options. 

For example, the computer model might recommend receiving a specific portion of the account in 

the form of a particular annuity available under the plan, and receiving another portion in the form of 

a specific installment option. The computer model would also make recommendations regarding 

how undistributed assets should be applied. 

4. MetLife recommends that the DOL incorporate in-plan accumulation annuities and 

guaranteed insurance products into the SunAmerica and PPA computer models. In-plan 

accumulation annuities provide the distribution analogue to dollar-cost averaging into the market by 

permitting participants to buy guaranteed pieces of future income at then prevailing interest rates 

with each contribution. This avoids the risk that interest rates will potentially be low at the point of 

retirement when a large annuity purchase is made. In-plan accumulation annuity education 

material would also help participants by framing retirement needs in terms of future income, rather 

than asset accumulation. Finally, in-plan accumulation annuities allow participants to buy annuities 

in small increments, thereby avoiding the intimidating “big purchase” at retirement. Guaranteed 

insurance products such as GLWBs and GMWBs assist participants in meeting their retirement 

needs in a similar manner. 

If defined contribution plans are to be successful as the primary retirement income plan for today’s 

workforce, it is essential that in-plan accumulation annuities and guaranteed insurance products 

become a prominent feature. DOL can help achieve this by providing that neither a SunAmerica 

computer model nor a PPA computer model will be treated as valid unless it takes into account any 

in-plan accumulation annuity and/or guaranteed insurance product available under the plan. To 

allow computer models to disregard these types of products is to relegate them to second-tier 

status and effectively ensure that these products will not be utilized by participants. 

Employers Should Offer Partial Annuitization 

Offering partial annuitization is critical to the success of creating guaranteed income in retirement. 

People will need liquid assets for unexpected expenses as well as guaranteed income and, as a result, 

the insurance industry does not generally recommend that a participant annuitize all of their savings at 

retirement. MetLife experience indicates that, if participants do not have the ability to partially annuitize 

their balances, there will be very little annuitization.
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MetLife has been the exclusive annuity provider for the Federal Thrift Savings Plan (“TSP”) since the 

plan’s inception more than 20 years ago. When the plan first began, the annuity was an “all or nothing” 

offer – the participant had to either annuitize their entire TSP balance at retirement or none of it. In 

2004, the TSP amended the plan to include partial annuitization. As a result, the TSP saw an 

immediate and dramatic result – a 60% increase in the number of participants annuitizing some of their 

balances. In addition, there was a significant increase in the average purchase amount of the 

annuities. MetLife believes this is due to the fact that participants with larger balances, who also need 

guaranteed income in retirement, felt more comfortable annuitizing their TSP balance because they 

were not restricted to the entire amount. 

From the individual’s perspective, purchasing an annuity with a portion of their assets to cover a 

specific need is more palatable and helps to minimize the negative aspects of a large one-time 

purchase. Partial annuitization directly addresses the “all-or-nothing” concern. Although only 14% 

of defined contribution plans16 offer annuities at distribution, many of those companies offer income 

annuities on an “all-or-nothing” basis. 

MetLife recommends that the DOL provide enhanced education to plan sponsors about their 

ability to offer partial annuitization to participants. Many plan sponsors have never thought about 

partial annuitization. Plans have traditionally offered distribution options that apply to participants’ 

entire account balance and the concept of partial annuitization has likely been considered by only a 

small percentage of plan sponsors. 

MetLife also recommends that Congress consider requiring plans that offer in-plan distribution 

annuities to specifically offer partial annuitization. For example, a plan could be required to offer 

participants a choice to annuitize 100%, 75%, 50%, 25%, or none of the account balance. As 

proposed, this would be a mandate but one with minimal cost or burden. 

Default Annuitization 

MetLife suggests that policymakers consider additional steps if these proposals do not increase 

annuitization rates significantly in the coming years, because just as individuals purchase life insurance 

to provide financial security in the event of an early death, they should purchase income annuities to 

provide financial security in anticipation of a long life. 

The statutory and regulatory support for automatic enrollment and automatic escalation has ensured 

that many more individuals will have some retirement savings. The issuance of the Qualified Default 

Investment Alternatives (“QDIA”) regulations encouraged plan sponsors to include professionally 

managed investments, such as target date funds, in their plans. These have been positive 

developments for employees. 

Through this RFI, the government recognizes that, just as with enrolling in these plans, individuals may 

also need help in making their savings last throughout retirement. As with auto enrollment and QDIAs, 

there is a need to bring other positive attributes of the defined benefit plan system into the defined 

contribution plan system. Much like defined benefit plans make an annuity payment the “normal” form 

of payout from a defined benefit plan, defined contribution plans should also make an annuity payment 

the “normal” form of payout. This would point participants in the right direction without forcing them into 

an annuity. In other words, the participant would always have the right to opt out of this default (since 

that may not be the best distribution option for all participants, such as those in poor health or with 

outside resources). It will be incumbent upon all providers and sponsors in the industry to provide 

 16 Hewitt Trends and Experience in 401(k) Plans (2009). 
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appropriate education – as previously discussed – so that the participant understands the powerful and 

positive impact of converting a portion of their account balance into a retirement paycheck. 

If annuitization rates do not increase significantly in the next three to five years, from today’s 

1% annuitization election rate to 20%, MetLife recommends that the DOL and Treasury 

Department consider mandatory default annuitization, which would require that at least a 

portion of a participant’s defined contribution plan balance be defaulted into an income annuity 

at the point of retirement.

A guaranteed lifetime income option could be required for all defined contribution plans, as it is 

for defined benefit plans. However, as discussed earlier, MetLife does not generally believe that 

all of a retiree’s plan assets should be annuitized. Therefore, under this approach, the option 

would be structured so that 50% of the individual’s account balance is defaulted into the lifetime 

income option. The employee would be given the same notice and opt-out rights as defined 

benefit plan participants receive. This requirement should not apply to employers with fewer 

than 100 employees or to employers offering an active defined benefit plan with only lifetime 

income benefits (and no lump sum options). 

The default mechanism would require employers to include an in-plan distribution annuity option in their 

401(k) plan as the default form of distribution with respect to individuals who have attained a specified 

age, such as 55 or a later age. Finally, the default would not apply unless the amount defaulted was at 

least $25,000 to prevent the defaulting of small amounts. 

With regard to having annuities provided as a default option in the plan, more than four in ten 

employers surveyed in the 8th Annual Employee Benefit Trends Study (“EBTS”) (43%) expressed an 

interest in a default option for converting a percentage of 401(k) balances into a guaranteed stream of 

income. Also, the EBTS found that those employers that sponsored both a defined benefit plan and a 

defined contribution plan had a greater interest in the default option, perhaps because they already 

offer a lifetime income option in their defined benefit plan and as a result are more familiar with the 

concept. Interestingly, MetLife’s client experiences have demonstrated that participants who have a 

defined benefit plan are more likely to annuitize a component of their defined contribution plan because 

they understand the value of the retirement income paycheck. 

Finally, if annuities become the default form of distribution in defined contribution plans, MetLife does 

not believe this will negatively affect contribution rates. Since participants would be permitted to opt out 

of the default form of distribution, there is no reason for the default to affect contribution rates.

Trial Annuitization

The general idea of trial annuitization is to allocate a portion of a retiring employee’s defined 

contribution plan assets automatically into a lifetime income annuity at the point of retirement, thereby 

giving retirees an opportunity to “test drive” the benefits of receiving a retirement income “paycheck.” 

This concept is predicated upon the belief that Americans depend on their paychecks to meet their 

financial obligation. Furthermore, retirees with income from a pension and an annuity were three times 

as likely to say that retirement is much better than they expected.17 

A paper released in 2008 by The Retirement Security Project entitled “Increasing Annuitization in 

401(k) Plans with Automatic Trial Income,” set forth a proposal that would increase the role of lifetime 

income products in an effort to help retirees enjoy a secure retirement. The authors explained that 

 17 The Silent Generation Speaks, MetLife Mature Market Institute, Mathew Greenwald & Associates, 2005 
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automatic features in 401(k) plans have shown that the power of inertia can be used to significantly 

improve outcomes without restricting retirees' choices. 

Specifically, the paper proposes the following: 

• A substantial portion of assets in 401(k)-type accounts (generally considered to be no more than 

50% of the account balance) would be automatically directed into an income program for a two-year 

trial period (the default trial arrangement), unless workers affirmatively elect a different form of 

payout permitted under the retirement plan. 

• There would be trial income of 24 consecutive monthly payments. 

• After the trial period, participants would again have the ability to opt for alternative forms of 

payment. 

• Those who made no affirmative choice within a specified period would continue to receive income 

payments because the program converts automatically from trial-period income to permanent 

income. 

A similar proposal by Professor Jeffrey Brown of the University of Illinois, entitled “Automatic Lifetime 

Income as a Path to Retirement Income Security,” suggests that employers be encouraged to adopt an 

automatic annuitization plan under which, when an employee makes an initial request for a nonhardship withdrawal from a defined contribution plan, the employee would be notified that he/she is 

being automatically enrolled into a partial annuitization program. The program would convert half of the 

participant’s total 401(k) account balance into a joint-and-100%-survivor annuity for married couples, or 

a single life annuity for unmarried individuals. These automatic annuities could be immediate annuities 

subject to a trial period, a series of laddered annuities with payouts that commence over a several-year 

period after the initial distribution decisions, or various integrated, in-plan accumulation annuity options 

that allow participants to invest in deferred annuity contracts during the accumulation phase. 

MetLife believes that the use of trial annuities would be a compelling method that could prove helpful in 

encouraging annuitization. Accordingly, MetLife recommends that the DOL and Treasury 

Department issue (1) guidance clarifying how the law applies to trial annuitization (see, e.g., 

Section 6 above), and (2) educational information for employers highlighting trial annuitization.

Revisiting Lump Sums Under Defined Benefit Plans

MetLife supports protecting individuals from longevity risk. This support includes proposals that do not 

involve commercial annuities (e.g., defined benefit income payments), as long as income is guaranteed 

for life. In this regard, MetLife is quite concerned about the trend toward lump sum distributions in 

defined benefit plans. Defined benefit plans were intended to provide guaranteed income throughout 

retirement, not to provide lump sum distributions that can be fully consumed before the end of one’s 

retirement. Lump sum payout options were widely introduced relatively recently when the economics of 

prevailing interest rates made lump sum forms of payout significantly less expensive for employers than 

standard lifetime income forms. This development coincided with the waves of early retirement 

programs that occurred in the same time frame, with the result that lump sum payouts financed not 

lifetime security but transition to early retirement. 

Accordingly, MetLife would encourage Congress to consider permitting defined benefit plan 

sponsors to eliminate lump sum distribution options and that this change would not violate the 

anti-cutback rules. Of course, any such legislation would need to have a delayed effective date to 

avoid affecting employees near retirement. Such a proposal might also need to be slowly phased in to 

avoid encouraging a rush to retire before the effective date. But in the long term, such a rule would 

significantly improve the retirement security provided by the defined benefit plans that are still in 
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existence. Participants would receive guaranteed income for life. Also, defined benefit plans 

themselves would be strengthened since lump sums can undermine a plan’s funded status. 
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Section 8: What tax law changes would facilitate annuitization? 

[This addresses questions 25 and 28 in the RFI] 

Educational initiatives will improve individuals’ appreciation of longevity risk and improve financial 

literacy generally regarding the distribution phase of retirement. However, as stated earlier in this 

submission, inertia is a strong force, and individuals will need additional public policy guidance to 

ensure that they do in fact act in their economic interests. One possible approach to achieving this 

desired behavior is through the Internal Revenue Code, specifically through helpful tax law changes. 

Required Minimum Distribution (“RMD”) Rules for Longevity Insurance 

The advanced age when longevity insurance payments commence generally exceeds the age 701⁄2 

required beginning date for the RMD rules. Therefore, to comply with RMD requirements, longevity 

insurance offered under a retirement plan or IRA must currently address the possibility of being 

required to distribute RMD amounts prematurely. In the event that the RMD amounts deplete nonlongevity insurance assets, either the RMD rules would be violated or the longevity insurance contract

will have to permit distributions (which would have an adverse impact on future income payments). 

Because neither of these results is workable, longevity insurance generally is not offered to plans and 

IRAs today. The offering and use of longevity insurance would increase significantly by 

changing the RMD rules to exempt longevity insurance acquired within qualified retirement 

plans or IRAs from the RMD requirement until distributions from the longevity insurance 

product begin (which could be required by a certain age, such as 85). This proposal, which could 

be adopted either legislatively or administratively, has been introduced in several legislative bills, 

including the Retirement Security Needs Lifetime Pay Act of 2009 (H.R. 2748) originally introduced by 

Representatives Earl Pomeroy and Ginny Brown-Waite. 

403(b) Plans And 457(b) Governmental Plans 

Any lifetime income payment guidance issued with respect to 401(k) and other qualified retirement 

plans should encompass rules regarding 403(b) and 457(b) governmental plans. This is because 

403(b) and 457(b) governmental plans are similar to 401(k) plans and the participants in 403(b) and 

457(b) governmental plans would benefit from enhanced opportunities to annuitize.

Targeted Tax Incentives For The Purchase Of Annuities Should Be Enacted 

In order to further advance the education process for participants, a targeted tax incentive 

should be provided for the election of annuity distributions. Over the past few years, several bills 

have been introduced that would provide a limited tax exclusion for individuals who purchase an 

annuity with pre-tax (qualified) money from a defined contribution plan. The Pomeroy/Brown-Waite bill 

referenced above would provide such an exclusion. MetLife believes this legislation provides an 

appropriate incentive for individuals to ensure that they receive lifetime income with respect to at least a 

portion of their retirement assets. 

The point of any such tax incentive is not to change the basic economics of an employee’s choice. On 

the contrary, the objective is to create a small tax incentive that will cause participants to pause and 

consider annuitization. The concern is that many participants will not read educational material, will not 

think about the longevity risk and will simply opt out of any annuity that is offered. This is one way to 

encourage individuals to slow down and focus on the choice that they are making. A small tax 

incentive is another tool that could result in large numbers of participants considering the substantive 

merits of annuitization. 
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 28 

Nondiscrimination Testing

It is expensive and ineffective to annuitize small amounts (such as a purchase price of $25,000 or less). 

Accordingly, if employers decide to offer in-plan distribution annuity options or IRA rollover annuity 

options, they will likely establish minimum amounts on such distributions (expressed as either a 

minimum purchase amount or a minimum monthly annuity). Such minimums could raise concerns 

under the section 401(a)(4) nondiscrimination regulations regarding plan benefits, rights and features. 

This is because a plan that limits annuity distributions to participants with large accounts may run afoul 

of the nondiscrimination rules since participants with large accounts are more likely to be classified as 

highly compensated employees and, therefore, may cause the plan to fail nondiscrimination 

requirements. Such concerns could discourage employers from offering in-plan distribution annuity 

options or IRA rollover annuity options. Accordingly, MetLife recommends that the section 401(a)(4) 

regulations be amended to deem certain minimums required for annuity distributions to be 

nondiscriminatory. See Treasury Regulation § 1.401(a)(4)-4(b)(2)(ii)(E) for a similar rule regarding plan 

loans. 
Request for Information May 3, 2010 Lifetime Income Options

MetLife 

 29 

Section 9: Why are in-plan accumulation annuities good from a policy perspective and how 

can their use be facilitated? 

[This addresses questions 33 and 34 in the RFI]

In recent years, new products have been developed that permit plan participants to purchase 

guaranteed future income in the form of deferred income annuities. One key advantage of such 

products is that they enable participants to allocate a portion of their contributions to a future income 

stream, allowing them to make smaller contributions over time, rather than one large lump sum 

purchase at retirement when interest rates could be low. Furthermore, such products help educate the 

participant over the course of their working career that the defined contribution plan is likely to be their 

only form of retirement income from their employer. In essence, the focus is on helping to “change the 

conversation” and thus the mindset of the participant. Finally, these in-plan accumulation annuities are 

purchased incrementally, thus avoiding the intimidating “big” purchase at retirement. 

Since there are so many advantages to these products, MetLife believes that the law should support 

inclusion of such products in plans; one way to do so relates to the qualified default investment 

alternative rules. ERISA section 404(c)(5) provides that, for purposes of ERISA section 404(c)(1), a 

participant in a defined contribution plan will be treated as exercising control over the assets in his/her 

account with respect to the amount of contributions and earnings if, in the absence of an investment 

election by the participant, such assets are invested by the plan in accordance with DOL regulations. 

The DOL’s regulation 29 CFR § 2550.404c-5 describes the types of investment products that are 

Qualified Default Investment Alternatives (“QDIAs”) under ERISA section 404(c)(5). 

As has been well documented in a variety of studies, the overwhelming response to the initial DOL 

QDIA regulations has been the selection of target date funds as the default option for individuals who 

do not affirmatively elect to participate in the plan on their own. The vast majority of these funds do not 

contain any type of guaranteed income feature. 

The DOL could help stimulate this market by addressing the fiduciary issues related to in-plan 

accumulation annuities in the manner discussed in Section 6 above. The DOL could also revise 

the QDIA regulations to require that QDIAs contain an in-plan accumulation annuity component. 

The theory underlying target date funds and managed accounts is that they are aimed at preparing an 

individual for retirement. The deficiency is that most target date funds focus exclusively on the 

accumulation phase and do not prepare individuals for the equally challenging distribution phase. The 

DOL has an opportunity to remedy this deficiency. This change alone would have a dramatic effect on 

participants’ readiness for the distribution phase of retirement. 

In-plan accumulation annuities would also benefit from the clarification discussed in Section 6 regarding 

when and how the QJSA rules apply to such products. 
Request for Information May 3, 2010 Lifetime Income Options

MetLife 

 30 

Section 10: Policy recommendations for the IRA market 

Unfortunately, despite whatever policymakers, employers and financial services providers are able to 

do within the context of defined contribution plans to help ensure that individuals are prepared to 

manage those assets effectively, the reality is that most employees do not remain at one job for their 

entire career. The pattern over the past few decades has been that many workers will have numerous 

jobs during their career. In fact, according to the Bureau of Labor Statistics between the ages of 18 and 

42 an individual will hold, on average, 11 jobs. While no one knows what future workforce patterns will 

be, it is reasonable to expect that many workers approaching retirement age will have access to more 

than one defined contribution plan in their working lives. Many of those workers will choose to take the 

money from their former employer’s plan. A 2009 Hewitt Associates report titled Survey Findings: The 

Erosion of Retirement Security from Cash-outs: Analysis and Recommendations states in part: 

“...Among all workers who terminated from employment in 2008, 46% took a cash distribution, 29% left 

their assets in the plan, and 25% rolled assets over to another qualified plan or IRA.” According to a 

new report, 2010 Investor Assets in Motion: IRA & Retirement Marketplace Opportunities by Cogent 

Research, Americans now hold more assets in IRAs than workplace-based retirement accounts. Total 

defined contribution assets are $3.9 trillion whereas IRAs are $4.1 trillion, this outpacing is expected to 

continue into the future. 

With IRA assets becoming such a large portion of an individual’s retirement asset base, the 

stakeholders need to develop solutions that address these sources of retirement income in addition to 

the assets held in defined contribution plans. Among the proposals that policymakers should consider 

in this area are the following: 

1. Require IRA providers to annually disclose the annuity equivalent amount on the IRA statement, 

similar to the annuity illustration recommendation made for 401(k) plans in Section 7. 

2. Facilitate IRA rollover annuity options by clarifying and simplifying the fiduciary duties involved, as 

discussed in Section 6. 

3. Facilitate the purchase of longevity insurance through the RMD reforms discussed in Section 8. 

4. Encourage distribution-phase education and advice in the manner addressed in Section 7. 

5. Adopt tax incentives for annuitization, as discussed in Section 8. 
RETIREMENT

INCOME

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

By: Moshe A. Milevsky, Ph.D. and Anna Abaimova

For: MetLife

The Role of Product Allocation in

Sustaining Retirement Income

{

Introduction Pg 1

The Challenges Pg 2

Insure Against Risks Pg 5

Deciding on Product Allocation For Your Client Pg 12

Case Studies Pg 15

 This report was commissioned by MetLife, and The IFID Centre was paid fees by MetLife to prepare this report.

Moshe A. Milevsky is an Associate Professor of Finance at the Schulich School of Business at York University and Executive Director of The IFID Centre 

and CEO of The QWeMA Group, Inc., in Toronto, Canada. He is also the author of the recently published books, The Calculus of Retirement Income 

(2006), and Are You a Stock or a Bond?: Create Your Own Pension Plan for a Secure Financial Future (2008), upon which some of this material is based 

and which contains additional information and case studies on the topic of product allocation. Anna Abaimova is a research associate and manager of 

special projects at The QWeMA Group Inc.

TABLE OF CONTENTS

The Role of Product Allocation in Sustaining 

Retirement Income

• Not A Deposit • Not FDIC-Insured • Not Insured By Any Federal Government Agency

• Not Guaranteed By Any Bank Or Credit Union • May Go Down In Value

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
THE ROLE OF PRODUCT ALLOCATION IN 

SUSTAINING RETIREMENT INCOME

While the Baby Boomers have been accumulating wealth during the last 30 years, financial 

advisors have been preaching the benefits and importance of a diversified portfolio using the 

principles of asset allocation. This established philosophy is largely attributed to the well-cited 

studies and scholars who have documented that asset allocation is the single most important 

investment decision that a long-term “retirement saver” makes, outweighing the importance 

of individual security selection. At its essence the message has been that if investors own 

a diversified asset allocation portfolio as part of their retirement plan, then their financial 

futures are secure. More importantly, under this mantra, individual investors have been 

actively discouraged from trying to time the market or picking so-called hot sectors and flashy 

industries. The strategy preached has continuously been to buy, using an asset allocation 

strategy, then hold for the long run. 

But once it comes time to retire and start withdrawing income from their accumulated assets, 

the famed role of asset allocation is diminished in importance and a new concept emerges as 

the core ingredient of a healthy retirement portfolio; that is product allocation. 

While a diversified portfolio of stocks and bonds will forever be important regardless of 

age and lifecycle stage, the product allocation — or combination of actual products and 

instruments in which you keep your asset allocation — will have an even greater impact 

on the amount of retirement income you receive and the sustainability of that income 

throughout your lifetime. Utilizing only one product or category may not allow you to 

maximize your periodic income payments, maintain liquidity for emergencies, satisfy your 

legacy needs AND sustain payments for a lifetime. Rather, we believe that a mix or portfolio 

of product types can help accomplish retirement income goals, just like a mix of asset types 

can help accomplish asset accumulation goals. With the availability of traditional pension 

plans diminishing and the responsibility of retirement income financing shifting from 

corporations to individuals, the proper practice of product allocation becomes even more 

important. 

In this report we will explain exactly what is meant by product allocation and how to apply 

this new approach to 21st century retirement income thinking. 

During retirement, product allocation surpasses asset 

allocation in importance, when success is properly 

measured in terms of lifetime income sustainability.

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

 [ 1 ]

INTRODUCTION
THE CHALLENGES

Most readers will understand that as individuals transition into retirement they face unique and different challenges, or risks 

that simply do not arise in the earlier wealth accumulation stage of the lifecycle. These risks can have a dramatic effect on 

retirement income sustainability. We will now briefly review these risks before we introduce our main thesis regarding product 

allocation.

Longevity Risk

The National Center of Heath Statistics reports that American life expectancy at birth has increased by about 15 years in 

the last 50 years alone. Life expectancy is now estimated to be 75.2 years for males and 80.4 years for females. Of course, 

averages alone don’t tell the entire story since once we reach our retirement years, the chances of surviving for another 20 

1 Source: Society of Actuaries RP-2000 table (Healthy Annuitant). 

Sources: Are You a Stock or a Bond?: Create Your Own Pension Plan for a Secure Financial Future, (Pearson/FT Press, 2008); Society of 

Actuaries RP-2000 Table with full projection.

EXHIBIT #1

Probability of Survival at Age 65

to 30 years are substantial. In fact, as we survive each stage of life and the associated risks, the odds of us surviving to higher 

ages increase. For example, a 50 year-old female has a 49% chance of surviving to age 85; however, once she makes it to age 

70, her chances increase to 56%.1

 That is 7 more percentage points. Indeed, we increase life expectancy as we age.

Exhibit #1 provides some additional values. From our perspective, the most compelling and relevant of longevity statistics is the 

probability of survival for at least one member of a couple. The chance that at least one member of a couple survives to age 

85 is 76%; the probability that one spouse or even both are alive at age 90 is one in two. 

While individual lifestyle factors, behavioral habits and family history will further impact any survival estimates, our main point 

is to remind the reader that the human lifespan is random and a retirement strategy must — more so than ever before — 

account for this longevity risk. 

To Age Female Male

At Least One Member of a

Male-Female Couple

70 93.9% 92.2% 99.5%

75 85.0% 81.3% 97.2%

80 72.3% 65.9% 90.6%

85 55.8% 45.5% 75.9%

90 34.8% 23.7% 50.3%

95 15.6% 7.7% 22.1%

100 5.0% 1.4% 6.3%

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

 [ 2 ]

THE CHALLENGES
Inflation Risk

Part of the U.S. Federal Reserve mandate is to ensure that macro-economic inflation is kept at acceptable levels. They do this by fine 

tuning monetary policy so that the change in the Consumer Price Index (CPI) stays within a certain range. However, they don’t target 

and will never accept a zero percent inflation rate. Thus, what many retirees fail to realize is that a small inflation rate is an economic 

given and that even a very low inflation rate can have a detrimental effect on their purchasing power several years into retirement. 

Exhibit #2 illustrates how even an inflation rate as low as 2% can reduce the purchasing power of $1,000 by more than a third after 

20 years of erosion. After 25 years, the initial $1,000 is only worth about 60% of its original value in real terms under the same 2% 

inflation rate. Here is another way to think about it. Recall there is a 50% chance that at least one member of a newly retired couple 

(at age 65) will live to age 90. Thus, if a retiree starts receiving a pension check of $1,000 per month, for example, and this payment 

is never adjusted for price inflation, then at age 90 the same $1,000 will only buy less than $380 worth of goods and services, under 

a 4% inflation rate. 

More importantly, the mathematics of purchasing power erosion is even more pronounced for retirees. Aside from the Consumer 

Price Index (CPI) mentioned above, the U.S. Bureau of Labor Statistics recently inaugurated a new unique (experimental) inflation 

index for the elderly, which they call CPI-E. The impetus for this new index arises because as we age, our spending habits change. 

Any inflation index, after all, is a reflection of a given basket of goods and the CPI-E aims to capture retirees’ spending patterns. 

EXHIBIT #2

$1,200

$1,000

$800

$600

$400

$200

$0

0 1

0%

2%

1%

4%

5 10 15 20 25 30 35

Year

After Inflation Value of $1,000

$1,000

$706

$500

$253

Annual inflation rate

Inflation: What Does a $1,000 Payment Really Buy You?

For example, as we age, we tend to buy less clothing and more 

medicine. Over the past 25 years, the average CPI-E inflation rate 

has been 3.33%, whereas the average broad population inflation, 

measured by the CPI-U has been 3.12%. The average inflation 

for wage earners for the same period, measured by the CPI-W 

was 3.02%. Now, these differences might seem small, but over 

time they compound the effect, as you can see from Exhibit #2. 

Either way, the data certainly implies that inflation is 

different and is higher for retirees. Also, it is important 

to note that even in periods of deflation, retirees can 

still experience inflation. Whether this will continue in 

the future is unclear at this point, but we certainly must 

consider it a risk-factor. 

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

 [ 3 ]

THE CHALLENGES
EXHIBIT #3

Sequence of Returns Risk

In a recent white paper commissioned by MetLife entitled Retirement Income and the Sensitive Sequence of Returns, we (the same 

authors) demonstrated how in the years just before and just after retirement — a.k.a. a region we coined the fragile risk zone — a 

retiree’s accumulated assets are most sensitive to losses from poor market returns. This is primarily because the greatest amount of 

money is at stake. Thus, if portfolio investment returns are sequenced so that negative or poor returns are experienced early on in 

retirement, the sustainability of the income strategy will be threatened.2

 This is illustrated in the example below.

Hypothetical example

Two clients. Same average investment return. Very different retirement outcomes.

• Both clients start out with a $1 million investment

• Upon retiring, they begin to withdraw $50,000 per year (in inflation-adjusted terms)

• The average compounded 10-year return for both accounts is 3.7%

Negative Returns Early On Can Reduce the Retirement Sustainability Quotient

CLIENT 1:

Negative Returns Early On

CLIENT 2:

Negative Returns Later On

End of 

Year

Rate of Return Withdrawal Account value at 

end of year

End of 

Year

Rate of Return Withdrawal Account value at 

end of year

$1,000,000 $1,000,000

1 -20% $50,000 $760,000 1 24% $50,000 $1,178,000

2 -10% $50,000 $639,000 2 20% $50,000 $1,353,600

3 -8% $50,000 $541,880 3 16% $50,000 $1,512,176

4 0% $50,000 $491,880 4 12% $50,000 $1,637,637

5 4% $50,000 $459,555 5 8% $50,000 $1,714,648

6 8% $50,000 $442,320 6 4% $50,000 $1,731,234

7 12% $50,000 $439,398 7 0% $50,000 $1,681,234

8 16% $50,000 $451,702 8 -8% $50,000 $1,500,735

9 20% $50,000 $482,042 9 -10% $50,000 $1,305,652

10 24% $50,000 $535,732 10 -20% $50,000 $1,004,529

Average annual rate of return 3.7% Average annual rate of return 3.7%

Both clients average a 3.7% rate of return. But at the end of year 10, Client 2 has over $468,000 more than Client 1.

2 For more information on the sequence of returns effect, see Chapter 6 of Are You a Stock or a Bond?: Create Your Own Pension Plan for a Secure Financial 

Future (Milevsky, 2008).

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

 [ 4 ]

THE CHALLENGES

These examples are hypothetical and are for illustrative purposes only. It is not meant to represent performance of any particular investment. These examples are 

meant to demonstrate the impact of the sequence of returns, assuming annual withdrawals of $50,000 (initially 5% of the account value). Withdrawal charges 

would apply if withdrawals exceed the contract’s annual free withdrawal amount. If the taxpayer has not attained age 591⁄2 at the time of the distribution, the 

portion of the withdrawals that is subject to income tax may also be subject to a 10% Federal income tax penalty. These hypothetical illustrations do not take 

into account premium taxes. These examples do not take into account any fees or charges that may be associated with a particular product.
INSURE AGAINST THE RISKS

One cannot control the timing of an inevitable bear market, just as we 

have no control over the precise length and cost of our golden years or 

the rate of inflation throughout our retirement. Thus — and this is one of 

our main points that motivate the need for a product allocation strategy 

— rather than trying to predict the outcome of any of these random 

events, we believe one should insure against adverse outcomes using a 

product allocation strategy. In a sense the objective is to hedge against 

these retirement risks in the context of one’s retirement income goals. 

The Products to Help Manage Retirement Income Risks 

Given the growing importance of managing retirement income risks, 

it is not surprising that the financial services industry is continuously 

expanding its repertoire of insurance and investment products. The 

resulting challenge from these ever expanding innovations is determining 

which should be recommended for allocating a client’s wealth, as well as 

in what proportions. 

As a starting point, we assert that there are three major financial and 

insurance categories that should be considered in some combination 

within a comprehensive retirement income product allocation strategy. 

These categories are:

(1) systematic withdrawals from traditional investments, 

(2) variable annuities with guaranteed living benefits and 

(3) income annuities with pure longevity insurance. 

Systematic Withdrawals from Traditional 

Investments 

The systematic withdrawal plan, or SWP, is a category/

strategy in which money is systematically withdrawn 

from an account (such as a separately managed 

account or mutual fund) in order to generate a stream 

of retirement income. The assets within the account 

are allocated among various traditional asset classes, 

including mutual funds, stocks, bonds and cash. 

Conceptually these withdrawals from the SWP account 

continue until the account value hits zero, or until the 

end of the retiree’s lifecycle. 

Variable Annuities With Guaranteed 

Living Benefits

The latest generation of variable annuities (VAs) offers 

the option to elect a number of riders or features 

with embedded guarantees that address retirement 

income risks. The two most popular are the GMWB 

for life (guaranteed minimum withdrawal benefit in 

which withdrawals are available for life) and the GMIB 

(guaranteed minimum income benefit). An analysis 

and understanding of the role and mechanics of these 

optional riders is critical for proper retirement income 

planning, and going forward we will refer to them as 

VAs with Guaranteed Living Benefits.

Fixed and Variable Income Annuities

Income Annuities can be either immediate or deferred, 

depending on when the income begins (immediately 

or at some point in the future), and either fixed or 

variable, depending on whether the income amount 

is the same for each payment or varies with market 

conditions. Once income begins, it is guaranteed to 

last as long as the annuitant lives, regardless of how 

long that is. Thus, the primary risk-management benefit 

of these products is that they provide the buyer with 

longevity insurance. The embedded longevity insurance 

protects the annuitant against the risk of outliving their 

planning horizon.

EXHIBIT #4

Systematic Withdrawals From Traditional Investments

• Mutual Funds 

• Stocks, Bonds, Cash Within Separately Managed Accounts

VAs with Guaranteed Living Benefi ts

• Guaranteed Minimum Withdrawal Benefi t for life rider

• Guaranteed Minimum Income Benefi t rider 

Income Annuities

• Single Premium Immediate Annuity,

• Deferred Income Annuity

Which Products Are Available?

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

 [ 5 ]

INSURE AGAINST RISKS
The Effectiveness of Retirement Income Products

Since each product category has certain benefits, combining all three product types within one 

product allocation strategy may help clients to better accomplish their retirement income goals. 

Before determining how much of each product type would be appropriate for a particular client, it is 

important to gauge their relative strengths.

We will compare products based on these criteria: 

• How well they help manage the three primary risks of longevity, inflation and sequence of returns.

• How well they help clients achieve certain retirement income goals. The three goals we’ll compare 

are liquidity, staying the course and legacy planning.

• How the insurance and guarantee fees for the products compare, relative to their features and 

benefits.

The product features are stated in general terms and categories and do not necessarily reflect a 

particular company’s design. 

Systematic Withdrawals From Traditional Investments

Focusing first at the top of the chart, we start by evaluating the systematic withdrawal plan 

(SWP) category which is typically funded by stocks, bonds and cash within a Separately 

Managed Account or similar investment account. 

For its effectiveness as a longevity hedging tool, the SWP account receives a low score in 

comparison to the other products. There are no associated guarantees and the investor is solely 

responsible for monitoring and adjusting the spending and investment policy in order to make 

the account last for the duration of retirement. 

EXHIBIT #5

SWP

VAs with Guaranteed

Living Benefits

Income

Annuities

Least Effective Most Effective

Longevity

Inflation

Sequence of returns

Effectiveness in Managing Risks

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

 [ 6 ]

INSURE AGAINST RISKS
On the other hand, the SWP receives the highest grade for the inflation 

hedging attribute. That’s because the investment choices within a 

basic investment account are virtually endless and the underlying asset 

allocation is under the control of the investor and/or the advisor. This 

allows the investor to select a variety of investments including equities, 

which tend to outperform other investments and outpace the rate 

of inflation over the long run. More importantly, one can purchase 

inflation-linked bonds, such as TIPS or iBonds which can help hedge 

and protect against inflation risk. The flexibility of this account and the 

virtually unlimited number of options available within a SWP imply that 

an investor that is primarily concerned about inflation is best served 

with a substantial allocation to this category.

The SWP scores low for the sequence of returns risk attribute. It offers 

no protection against potential market drops in the fragile risk zone if 

the asset allocation involves a substantial exposure to stock investments. 

This shortfall may result in a damaging and lasting financial effect on 

retirement income sustainability. And while a SWP allocation heavily 

weighted in fixed income investments may overcome market volatility, 

it may also result in low growth. As a result, allocations in fixed 

investments may not keep up with the rate of inflation which can cause 

retirees to “outlive” their funds. The bottom line is that SWP accounts 

don’t provide any insurance, guarantees or protection. 

VAs With Guaranteed Living Benefits3

Unlike SWPs, VAs with Guaranteed Living Benefits offer the option or 

ability to guarantee an income stream for life. They therefore score well 

on managing longevity risk. However, they do not provide the pure 

form of longevity insurance offered by Income Annuities, which we’ll 

discuss later. 

VAs with Guaranteed Living Benefits also score higher than income 

annuities with regard to inflation risk because many offer systematic 

payment step-ups or minimum percentage increases that could in 

certain cases potentially offset the impact of inflation in the long run. 

They also offer investors access to a diversified variety of investment 

options that include stocks and bonds and let investors stay in the 

market, even while taking withdrawals, which can give them the 

SWPs OFFER FLEXIBILITY AND 

GROWTH BUT NO GUARANTEES

• Total investment choice.

• Ability to select investments that outpace 

inflation in the short and long run.

• Potential for income volatility due to 

market fluctuations.

• No guarantee that money will last a lifetime.

• Generally less costly than other products.

3 Guaranteed living benefit riders are optional and available for an additional fee. The fee also has the potential to increase upon step-up (locking in 

account value gains). Withdrawals will impact the ability to take a step up. Also, there are usually investment allocation restrictions associated with these 

types of riders. 

KEY ATTRIBUTES OF GMIBs 

AND GMWBs FOR LIFE*

• The ability to take immediate withdrawals 

and also guarantee lifetime income later, 

regardless of market conditions.

• Income for life (or for the lives of the 

investors and their spouses).

• Larger withdrawals if the market performs 

well or if the investor doesn’t need 

withdrawals immediately.

• Ability to stay invested in the market even 

while taking withdrawals.

* There are important differences between 

GMIBs and GMWBs for life. Please see the 

applicable product prospectus for specifi c 

information about the features, costs and 

restrictions associated with each type of rider. 

Fees and costs are generally higher than a SWP.

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

 [ 7 ]

INSURE AGAINST RISKS
4 Source: Are You a Stock or a Bond?: Create Your Own Pension Plan for a Secure Financial Future (Milevsky, 2008).

confidence to “ride out” any market declines. They can even offer 

protection from market declines by locking in account value gains and 

guaranteeing continued growth from high points for the purposes of 

calculating income under the benefit.

VAs with Guaranteed Living Benefits are ideal instruments for helping 

to hedge a retirement against the so-called sequence of returns risk. As 

we mentioned earlier, implicit guarantees and promises are the core of 

these products. They promise at least the return of the initial investment, 

despite the performance of the market in the fragile risk zone. VAs with 

Guaranteed Living Benefits are analogous to long-term equity put options 

that can be purchased in the open market to provide downside protection 

on a portfolio. To sum up, their embedded guarantees earn them high 

scores for this attribute. 

It is because of the fused combination of insurance against a collection of 

financial risks that we consider VAs with Guaranteed Living Benefits to be 

a unique risk management category product worthy of its own allocation. 

Fixed and Variable Income Annuities

The strength of an Income Annuity lies in its promise to pay out a steady, 

fixed (and in the case of an immediate variable annuity — marketcontingent) payment for as long as the policyholder lives. The retiree 

cannot outlive the guaranteed income that the Income Annuity provides 

and hence the longevity risk concern is directly addressed and hedged. 

This product category should be viewed as a close substitute for the 

(disappearing) traditional defined benefit pension, which has been prized 

by previous generations of retirees. 

Insurance companies are able to provide this guaranteed income by 

pooling the mortality risk of their policyholders. The idea is that some 

individuals will live longer than the normal life expectancy and some will 

not. Those who live longer are, in effect, subsidized by those who don’t. 

The longevity insurance provided by these products is even more valuable 

when the Income Annuity is purchased early in life (e.g. prior to age 50) in 

small increments with payments that commence late in life (e.g. after age 

80) — such as with a deferred income annuity. In fact, the greater the gap 

between the purchase date and the commencement date, the larger the 

payout. This is because of mortality pooling as well as something we refer 

to as “extreme risk pooling” which is essentially insurance on a less likely 

event, such as living beyond age 85. Because of these benefits the Income 

Annuity receives high marks for the longevity risk attribute. 

When certain guaranteed living 

benefits are elected, policyholders 

are inclined to allocate more 

wealth to riskier asset classes such 

as equities. 

This is according to a recent empirical 

study of asset allocations within 

variable annuity policies, published 

in the Financial Analysts Journal in 

the Spring of 2008. This behavior 

is observed at all ages and with 

variable annuity policies from a wide 

swath of issuers.4

 We interpret these 

results as evidence that long-term 

guarantees provide policyholders with 

a comfort level that allows them to 

accept greater short-term financial 

risk. This is the behavioral impact 

of guaranteed living benefits.

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

 [ 8 ]

INSURE AGAINST RISKS
Conversely, the most common design of this product — the fixed income 

annuity — scores low on its ability to tackle inflation. So the most widely 

purchased version of the product does not avoid the erosion of purchasing 

power effect illustrated in Exhibit #2. Now, while some versions of this product 

do offer payments that vary with market performance (like the immediate 

variable annuity) and others offer income payments that are adjusted for 

changes in the CPI index or by a fixed annual cost of living adjustment (COLA) 

rate, this protection comes at a price. As a result, initial payments would 

be significantly lower, and would be expected to rise gradually over time. 

Moreover, since the retiree would no longer be benefiting to the same extent 

from the mortality credits and “extreme risk pooling” associated with pure 

longevity insurance, a rise in the inflation attribute score might be accompanied 

by a fall in the longevity attribute score. 

Finally, we assign a somewhat neutral score to the Income Annuity for its ability 

to hedge against the sequence of returns. While the product does not explicitly 

provide insurance against an early bear market, it indirectly overcomes the risk, 

since payments are fixed and guaranteed regardless of market fluctuations. 

There certainly are downside or “bear market” guarantees.

EXHIBIT #6

SWP

VAs with Guaranteed

 Living Benefits

Income

Annuities

Least Effective Most Effective

Liquidity

Staying the course

Legacy planning

Effectiveness In Achieving Goals

KEY ATTRIBUTES OF THE 

INCOME ANNUITY:

• Provides a guaranteed fixed income 

stream for life.

• Provides a high level of income for 

the investment.

• Possible deferral period establishes a 

lifetime income start date which allows 

you to better manage other assets.

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

 [ 9 ]

INSURE AGAINST RISKS
Retirement Income Goals 

• Liquidity: Refers to investors’ desire to have easy access to money that is not tied 

up in an investment.

• Staying the Course: Refers to the product’s ability to keep investors on the right 

track or correct their innate urge to try and time the market.

• Legacy Planning: Refers to investors’ desire to leave money behind for loved ones 

once they die.

Systematic Withdrawals From Traditional Investments

With a SWP, the investor can meet liquidity needs and legacy planning goals with the 

greatest ease since he or she retains control over their asset allocation and withdrawal 

rate. But it is this exact same reason that leads to a low ranking for the SWP’s 

effectiveness in helping the investor stay on course and avoid behavioral mistakes.

VAs With Guaranteed Living Benefits5

VAs with Guaranteed Living Benefits are effective in addressing behavioral weaknesses, 

hence their solid ranking for Staying the Course. When purchasing this product, 

investors know they are protected against poor market performance in the fragile risk 

zone. As a result, they need not make any (possibly detrimental) moves to try and adjust 

their retirement investment and income strategy. 

This product’s legacy planning goal is somewhat interconnected with the goal of staying 

the course; hence it receives a similar ranking. As mentioned, analysis of extensive 

industry data suggests that since the investor is protected against a market downturn 

during sensitive years, they are more likely to opt for a riskier asset allocation within the 

variable annuity. This allocation could potentially result in higher growth over the longterm which could be passed on to loved ones at death. 

The liquidity of a VA with a Guaranteed Living Benefit is somewhat restricted because of 

withdrawal limits imposed by the riders and surrender charges that remain in effect for 

a number of years after the initial purchase. However, with many riders, the policyholder 

is allowed a minimum level of income with the possibility of additional income if the 

market performs well. The percentage allowed each year is similar to the percentage an 

advisor would typically recommend, so taking more than what is allowable under the 

product each year many not be in the investors’ best interest anyway. 

5 Guaranteed living benefit riders are optional and available for an additional fee. The fee also has the potential to increase upon step-up (locking in 

account value gains). Withdrawals will impact the ability to take a step-up. Also, there are usually investment allocation restrictions associated with 

these types of riders.

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

 [ 10 ]

INSURE AGAINST RISKS
Income Annuities

We assigned a very high ranking for the product’s ability 

to help clients stay the course. In the absence of productimposed restrictions, many investors are susceptible to 

making irrational decisions and errors with their investments 

which can decrease the chances of meeting their income 

goals in retirement. When the initial irreversible payment is 

made to the insurance company issuing the Income Annuity, 

the control over the investment management decisions is 

also transferred away from the investor. This leaves virtually 

no room for behavioral biases and blunders.

A total allocation to an Income Annuity would be 

inappropriate if the retiree’s retirement goal was to leave 

a relatively large legacy as opposed to meeting personal 

consumption and spending needs. Likewise, the product’s 

inherent design does not allow for a fluctuating spending 

rate or large lump sum withdrawals for unexpected cash 

needs. After all, the reason these products are able to offer 

such effective longevity insurance is the irreversibility (for 

the most part) of the initial lump sum payment. Thus, for 

the Income Annuity’s ability to address liquidity and legacy 

planning goals, the product receives a low ranking.

Fees May Be Worth It 

In comparing costs, the basic Income Annuity tends to be 

the least expensive product option from the perspective 

of fees because it is the simplest product and offers basic 

longevity insurance and nothing more. On the other hand, 

VAs with Guaranteed Living Benefits will have higher fees 

relative to the other products because they offer the most 

benefits and guarantees. Note, however, that the market 

cost of stand-alone products that help protect and insure 

against market declines, called put options, are often much 

higher. 

The account owner maintains some control over the fees 

charged by a SWP since these vary with the selection of the 

underlying investments. As a result, its fees and expenses 

would fall somewhere between that of the other two 

income products. 

WHICH PRODUCT IS BEST? ALL THREE.

When we look at all three products side-by-side, comparing all 

of their relative attributes, we find that they are economically 

equivalent. Each product offers a valuable benefit that is 

“paid for” via a tradeoff in another risk management or goal 

achievement attribute. That is, one product may hedge against 

longevity risk but at the expense of a legacy planning or liquidity 

goal; another product may offer more guarantees for a higher 

product fee, etc. 

Therefore — and this is our main thesis — 

we suggest a combination of all three 

products, namely a product allocation mix.

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

 [ 11 ]

INSURE AGAINST RISKS
SAMPLE

SAMPLE QUESTIONS: Ranking Retirement Risks And Priorities

Instructions: Develop a list of questions or statements similar to those shown below. Ask your clients how strongly they 

agree or disagree with each statement and score their response on a scale from zero to five points. The catch: the total 

number of points for the entire questionnaire must add up to exactly 10. This restriction will highlight the clients’ top 

priorities and the tradeoff they must face when selecting a product allocation strategy. 

1) Inflation Risk

I am worried and concerned that during my retirement years the rate of increase for my desired goods and services — i.e. my 

personal inflation rate — will be even higher than the officially reported Consumer Price Index (CPI) rates and the historical 3% 

figure. 

Disagree (0 1 2 3 4 5) Agree

2) Longevity Risk

For a typical 65 year-old retiree, life expectancy is approximately age 82 according to insurance actuaries and demographic experts. 

I actually feel much healthier than my peer group and am blessed with very good genes in my family history. In fact, I have some 

direct relatives who lived well-into their nineties. So, I personally believe there is a better than 50% chance I will survive to 82 and 

beyond, and I think I stand a good chance of living to age 90.

Disagree (0 1 2 3 4 5) Agree

3) Sequence of Returns Risk

If financial markets follow a prolonged downward and bearish trend — especially during the early years of my retirement — I’m afraid 

I’ll have to reduce withdrawals from my investment portfolio and standard of living. After all, I don’t have much of a guaranteed 

pension and am relying primarily on my accumulated assets to generate the necessary cash flows which will replace my paycheck.

Disagree (0 1 2 3 4 5) Agree

4) Liquidity and Flexibility

Some investors don’t anticipate any sudden expenses in retirement and are thus willing to restrict access to their funds in order to 

obtain long-term guarantees and benefits. However, I prefer to keep my financial assets fully liquid and accessible for emergencies 

and unplanned expenses since I don’t have many other sources of regular cash flow in retirement. I certainly don’t want to invest 

or buy into anything that is irreversible.

Disagree (0 1 2 3 4 5) Agree

5) Behavioral and Psychological

In retirement, I don’t see myself taking a very active role in my ongoing asset allocation, especially at an advance age. I’m also 

worried about the impact of medical conditions that might impact my financial judgment as I age. Personally, I would rather place 

my investments and retirement income on autopilot and let somebody else worry about things.

Disagree (0 1 2 3 4 5) Agree

6) Legacy Planning

I would like to leave a substantial and meaningful financial bequest to my loved ones and favorite charities. In fact, I stand ready 

to reduce my standard of living in retirement in order to achieve this goal. I don’t have much in the way of life insurance and I am 

therefore hoping that part of my accumulated assets will be available toward this objective. 

Disagree (0 1 2 3 4 5) Agree

DECIDING ON A PRODUCT ALLOCATION FOR YOUR CLIENTS

How much your clients should allocate to each product type will obviously depend on their personal and financial goals and 

situation. You can start by assessing the degree to which each of the factors we’ve used applies to your particular client. 

Asking questions like those shown below will allow you to determine how important the goal of liquidity, legacy planning 

or being able to stay the course is to your clients, and how concerned they are about longevity, inflation or the sequence of 

returns risk.

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

 [ 12 ]

DECIDING ON A PRODUCT ALLOCATION FOR YOUR CLIENTS
Exhibit #7 is an example of scores for a client that lacks a legacy planning goal but is particularly 

concerned with inflation and outliving his retirement accumulated assets.

Next, you’ll need to consider what percentage of your clients’ assets they’ll need to withdraw each year and balance that with 

how much they’d like to leave for a legacy, if any. There is an economic tradeoff, shown in Exhibit #8 on the next page. For 

example, your client may decide they need to take income at a rate of 5.2% of their assets per year. The larger the amount 

of their legacy, the lower the probability their income will last a lifetime. The last step in the process is a product allocation 

recommendation that addresses the client’s unique ranking of retirement priorities. 

Client

Priorities

Longevity

Inflation

Sequence of returns

Liquidity

Staying the course

Legacy planning

0 1 2 3 4 5

EXHIBIT #7

Establishing Client Priorities

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

 [ 13 ]

DECIDING ON A PRODUCT ALLOCATION FOR YOUR CLIENTS
75%

$40

$35

$30

$25

$20

$15

$10

$5

$0

80% 85% 90% 95% 100%

Withdraw 4.8%

Withdraw 5.2%

Withdraw 5.5%

Withdraw 5.8%

Retirement Sustainability Quotient

Expected Discount Bequest (per$100)

EXHIBIT #8

Economic Tradeoffs at Retirement

The more money your client 

desires to leave as a legacy, 

the lower their Retirement 

Sustainability Quotient.

The Retirement Sustainability Quotient (RSQ)

measures the ability to receive periodic and stable 

income consistently throughout a lifetime, despite 

fluctuating market conditions or the effects of 

other risks such as inflation or longevity. In these 

illustrations, the RSQ is measured on a scale of 

0% to 100%.

6 The QWeMA Group is not providing any investment or other financial advice of any kind or nature and results produced by its analytic software program are merely provided to be used in the support of the marketing, sale and promotion of products and services. In no event shall QWeMA Group, 

or any officer, director, principle, employee, agent or other representative of QWeMA Group, be liable for any damages, liabilities, expenses or losses 

in any connection with the provision of any investment advice or recommendations made by the user of this analytic software program or its representatives whether in reliance on or use of the program or any ancillary materials or otherwise. 

7 PrARI is a registered trademark of the QWeMA Group Inc.

8 The precise statistical parameter assumptions used for the calculations are as follows: retirement age = 62, excellent health, inflation adjusted 

risk-free rate = 3%; inflation adjusted expected equity returns = 7%, market volatility = 18%; annual GLB insurance fee = 1.3%, inflation adjusted 

guaranteed GLB payout rate = 4.5%.

The expected legacy and RSQ values in Exhibit #8 were determined 

using a novel and proprietary methodology developed by the 

QWeMA Group Inc.6

 The algorithm is called PrARI®, an acronym for 

Product Allocation for Retirement Income7

 and it considers several 

individual and economic variables such as retiree age, gender, 

health and the uncertain remaining lifetime; wealth, spending 

rate, pension and capital market projections.8

 The program then 

analytically determines a unique optimal product allocation to the 

three retirement income products that maximizes retirement income 

sustainability (measured by the RSQ) while leaving a minimum 

specified legacy. Each point along the four tradeoff frontiers in 

Exhibit #8 is associated with a PrARI-generated optimal product mix.

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

 [ 14 ]

DECIDING ON A PRODUCT ALLOCATION FOR YOUR CLIENTS
PRODUCT ALLOCATION: CASE STUDIES

Meet two hypothetical clients named Denise and Ava both of whom are seeking retirement product allocation advice. Let’s briefly 

examine their retirement income priorities and see how those priorities can translate into a product allocation mix. We will also look 

at their anticipated income percentage and bequest amount. These hypothetical case studies do not take into account any fees or 

charges that may be associated with a particular product. 

MEET DENISE:

• 62 years old.

• Ready to retire from her job.

• Plans to travel with her husband, who is already retired.

• Will receive inflation-adjusted defined benefit pension.

• Additional $1 million to invest.

• Needs an annual income of $55,000 (5.5%) and wants to leave a portion 

to her beneficiaries.

The tradeoff that Denise faces is represented in the Exhibit #8 by the green 

line. She is presented with a choice of several strategies that would result 

in an expected discounted bequest ranging from $19 per initial $100 (or 

$190,000) to $25 per initial $100 (or $250,000). The corresponding retirement 

sustainability ranges from 89% to 79%.

To determine which strategy is appropriate for Denise, she completes the Ranking Retirement 

Risks and Priorities Questionnaire and her scores are summarized in Exhibit #9.

0 1 2 3 4 5

Longevity

Inflation

Sequence of returns

Liquidity

Staying the course

Legacy planning

EXHIBIT #9

Denise’s Retirement Priorities

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

 [ 15 ]

PRODUCT ALLOCATION: CASE STUDIES
Denise feels that both goals — achieving a steady and sustainable spending rate of $55,000 per year, as well as leaving a 

bequest are equally important. She is less concerned about the other retirement risks. Generally, she feels that she can risk 

falling somewhat short of her target income since the couple can also rely on her pension and the husband’s retirement 

income to meet their spending needs. As a result, she decides to compromise between her two goals and selects the 

allocation summarized in Exhibit #10. This allocation takes into account 1) Denise’s ranked priorities and 2) each product’s 

effectiveness at addressing retirement risks and goals, which we assessed in a previous section. The largest proportion is to be 

allocated to a SWP account to address Denise’s liquidity and legacy planning goals, while the lesser allocations to the Income 

Annuity and VAs with Guaranteed Living Benefit rider categories will help address longevity and sequence of returns risk to 

achieve a reasonable Retirement Sustainability Quotient. 

Desired income of $55,000 per year (5.5%)

Legacy Planning goal of $22 per $100 

Probability of retirement income sustained 

throughout lifetime: 84%

SWP

Income Annuity

VA with Guaranteed 

Living Benefit Rider

31%

12%

57%

EXHIBIT #10

Denise’s Product Allocation

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

 [ 16 ]

PRODUCT ALLOCATION: CASE STUDIES
MEET AVA:

• 62 years old.

• Has an IRA account of $750,000 plus modest Social Security payments.

• Would like an inflation-adjusted income of $39,000 per year upon 

retirement.

• Hopes to leave a portion of her assets to her son.

The tradeoff frontier for Ava, who plans on spending 5.2% of her accumulated 

retirement assets, is represented by the orange line in Exhibit #8. With her 

advisor she assesses the two ends of the sustainability spectrum. While on one 

hand she could leave as much as $210,000 (or $28 per initial $100 investment) 

to her son as a bequest, she would have to settle for a lower probability of 

spending sustainability. 

EXHIBIT #11

Ava’s Retirement Priorities

0 1 2 3 4 5

Longevity

Inflation

Sequence of returns

Liquidity

Staying the course

Legacy planning

Ava completes the Ranking Retirement Risks and Priorities Questionnaire, and based her 

scores on the six questions, the ranking of her priorities is illustrated in Exhibit #11.

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

 [ 17 ]

PRODUCT ALLOCATION: CASE STUDIES
Given the low guaranteed income that she will receive from Social Security, she is quite concerned that an early bear market, 

inflation or a longer than expected life span may jeopardize her ability to finance a comfortable retirement. At the same time, 

she assigns a high score to her legacy planning goal. Upon consideration of her goals and the tradeoff she faces, Ava selects 

the strategy summarized in Exhibit #12, which allocates 35% to the SWP, 52% to the VA with Guaranteed Living Benefit 

rider and 13% to the Income Annuity. This product allocation will allow her to manage her retirement risks so that she can 

achieve her annual spending goal of $39,000 with a probability of 90%. At the same time, her bequest sum, in present value 

terms, is expected to be a quarter of her accumulated assets or $187,500. 

You can see that a small portion of her accumulated assets is allocated to an Income Annuity to help manage her longevity 

risk and improve her odds of success, while a significant portion of her accumulated assets — 35% — is allocated to the SWP 

category to help Ava meet her estate goal. The largest percentage of the account is allotted to the VA with Guaranteed Living 

Benefit rider, which is the most effective at protecting investments against the adverse effects of the sequence of returns risk 

(one of Ava’s top concerns), while also contributing to her longevity and legacy planning goals.

SWP

52%

13%

35%

Income Annuity

VA with Guaranteed

Living Benefit Rider

EXHIBIT #12

Ava’s Product Allocation

Desired income of $39,000 per year (5.2%)

Legacy planning goal of $25 per $100

Probability of sustaining retirement income 

throughout lifetime: 90%

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

 [ 18 ]

PRODUCT ALLOCATION: CASE STUDIES
CONCLUSION

The hypothetical case studies we have just illustrated, obviously should not be taken literarily as actual 

investment and/or insurance recommendations for real live people regardless of how ‘close’ the reader 

feels to Denise or Ava. Rather, the above mentioned case studies should be viewed as analogies for 

thinking about the economic tradeoffs in retirement. At the very least they should illustrate how you might 

translate goals and risk tolerance into a product allocation mix. It is the beginning of a discussion rather 

than the end of a process.

Indeed, there are a number of other financial and insurance products that may play a role in a client’s 

overall retirement plan. They include life insurance, long-term care insurance and debt instruments such as 

reverse mortgages and home equity loans. 

To sum up, the main practical takeaway from what we have discussed is as follows. We strongly believe 

that in most cases retirees will not be able to finance a sustainable retirement income with only one or 

two traditional product classes. Indeed, all three product categories — SWPs from Traditional Investments, 

Variable Annuities with Guaranteed Living Benefits and Income Annuities — mixed and matched in various 

combinations are required in order to maximize the sustainability of one’s retirement income. 

We leave it in the hands of individuals and their advisors to determine the exact product allocation strategy 

that will balance the clients’ retirement risks and legacy planning goals. Working through a retirement 

needs analysis or retirement priority questionnaire with your clients may be a good place to start, as such 

tools may make initial conversations productive and easy. Once you know how much your clients will need 

in retirement and how much they have available from guaranteed sources, you can determine if there is a 

gap of guaranteed income needed, which will help you design an appropriate product allocation strategy 

for that individual’s retirement income needs.

FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

 [ 19 ]

PRODUCT ALLOCATION: CASE STUDIES

1 } FOR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

Investment Performance Is Not Guaranteed.

Prospectuses for variable annuities issued by MetLife Investors Insurance Company, MetLife Investors USA Insurance 

Company, First MetLife Investors Insurance Company, Metropolitan Life Insurance Company, and for the investment 

portfolios offered thereunder, are available from MetLife. The contract prospectus contains information about the 

contract’s features, risks, charges and expenses. The investment objectives, risks and policies of the investment 

options, as well as other information about the investment options, are described in their respective prospectuses. 

Clients should read the prospectuses and consider this information carefully before investing. Product availability 

and features may vary by state. Please refer to the contract prospectus for more complete details regarding living 

and death benefits.

Variable annuities are long-term investments designed for retirement purposes. MetLife variable annuities have limitations, exclusions, 

charges, termination provisions and terms for keeping them in force. There is no guarantee that any of the variable investment options 

in this product will ever meet their stated goals or objectives. The account value is subject to market fluctuations so that, when 

withdrawn or annuitized, it may be worth more or less than its original value. All product guarantees are based on the claims-paying 

ability and financial strength of the issuing insurance company.

Withdrawals of taxable amounts are subject to ordinary income tax and if made before age 591⁄2 may be subject 

to a 10% Federal income tax penalty. Withdrawals will reduce the living and death benefits and account value. 

Withdrawals may be subject to withdrawal charges. 

Variable annuities other than Preference PremierSM are issued by MetLife Investors Insurance Company, MetLife Investors USA 

Insurance Company and in New York, only by First MetLife Investors Insurance Company. The Preference Premier variable annuity is 

issued by Metropolitan Life Insurance Company, New York, NY and offered though MetLife Securities, Inc., New York, NY and New 

England Securities Corporation, Boston, MA. All products are distributed by MetLife Investors Distribution Company, Irvine, CA. All 

are MetLife companies. March 2009

PEANUTS © United Feature Syndicate, Inc.

BDVA5423

L0410104326[0411]

SBA09-0311

• Not A Deposit • Not FDIC-Insured • Not Insured By Any Federal Government Agency

• Not Guaranteed By Any Bank Or Credit Union • May Go Down In Value
2008 ERISA Advisory Council 

Contribution Assets at Retirement 

Good morning Madame Chairwoman, Mr. Vice Chair and members of the 

Working Group. My name is Jody Strakosch. I am National Director for 

Institutional Income Annuities at MetLife and am here today to testify on 

behalf of my company. MetLife is the nation’s largest life insurance 

company, a leading provider of employee benefits and a retirement income 

innovator. MetLife has over 11,000 group annuity contracts in force and 

guarantees income payments to more than 1 million people. The company 

has been ranked #1 by the Life Insurance Market Research Association 

(LIMRA) for the last four years in annuity assets under management, 

surpassing the #2 provider by approximately $8 billion. In 1921, MetLife 

was the first insurer to issue a group annuity contract. In the past several 

years, the company has also introduced a new generation of income 

annuities aimed at providing guaranteed lifelong income. 

MetLife was the first company to introduce a deferred fixed income annuity 

as an allocation option within a 401(k) plan (“Personal Pension Builder,” 

distributed by the Merrill Lynch Retirement Group), thereby allowing plan 

participants to create their own personal pension by buying guaranteed 

pieces of future income. We also introduced a product called “Retirement 

Income Insurance” or longevity insurance, which is a fixed, deferred income 

annuity for either qualified or non-qualified assets that is designed to 

generate guaranteed lifetime income starting at a later age, for example, an 

individual’s 85th birthday (the average life expectancy for Americans who 

have reached age 65). Earlier this year, MetLife was selected by Barclays 

Global Investors, N.A. (BGI), one of the world's largest asset managers, as 

the income annuity provider to retirement plans investing in the firm’s 

innovative SponsorMatchTM program. Introduced last fall, BGI’s 

SponsorMatch is a new investment category for defined contribution (DC) 

plans that seeks to enhance the employer’s matching contribution, in part by 

providing annuity income to the participant when in retirement. 

We commend you for holding this hearing today and thank you for inviting 

MetLife to testify. We believe the hearing today, and the work of this 

Working Group generally, is critical to the future retirement security of the 

Baby Boom generation and the generations of workers to follow. 
As we all know, the demographics and shifting retirement landscape present 

American workers, public policymakers, employers and future generations 

with significant challenges. We are all aware of the continuing shift from 

traditional defined benefit pension plans that provided workers with a steady 

stream of income that could not be outlived to defined contribution plans 

that typically provide a lump sum payment with no guarantee of lifetime 

income. This change in benefit structure has placed the burden for funding 

and investing assets, as well as ensuring that those assets last throughout 

retirement, squarely on the shoulders of today’s workers. This shift, coupled 

with the increased pressure on the Social Security system, has raised 

significant policy concerns, many of which Congress and regulatory 

agencies, including the Department of Labor, have been wrestling with for 

many years. Chief among these concerns to date has been the issue of 

retirement savings adequacy. Most individuals who have access to defined 

contribution plans either do not take advantage of those savings 

opportunities or do not save enough. We believe that Congress and the 

regulatory agencies have taken important steps forward to ensure that 

individuals increase their savings levels, including automatic enrollment and 

automatic escalation of deferral amounts. 

Now policymakers need to shift their focus to the equally important 

challenge of ensuring that the money that is saved in these plans is managed 

so that individuals do not outlive those savings. This focus is critical 

because, as MetLife’s Chairman and CEO, C. Robert Henrikson, who has 

had the pleasure of testifying before Congress on the future of retirement 

security several times over the last five years, often says, “401(k) plans are 

extremely popular. But no one knows yet for sure if they are successful, if 

success is measured in terms of ensuring that those savings last a lifetime.” I 

think we would all agree that we do not want to wait 30 or 40 more years to 

learn the answer when we have the ability to act now to make significant 

changes to ensure that these plans will be successful in providing lifelong 

income. 

Education is Critical

Unfortunately, the road to retirement security does not end once one 

accumulates sufficient assets to retire. Actually, in many ways, the 

challenges are at least equal, if not greater, once one retires. Although one 

can make good estimates of asset sufficiency, there are so many unknowns 

in retirement that it is almost impossible for most people to be fully 

2
comfortable in knowing that they will be able to meet their income and 

health needs in retirement. Questions regarding how long one will live, the 

rates of inflation during retirement, how investments will fare due to the 

impact of market volatility, and what types of unexpected health and longterm care needs one will have are just a few of the many issues that 

individuals will face once they retire. Education is critical in this area. 

MetLife believes that education concerning the ultimate distribution of a 

worker’s retirement assets should begin at the time of enrollment in the 

company’s investment savings plan, if not earlier. While specific details of 

the distribution options need not be provided at this point, participants 

should be informed that the very purpose of the plan is to provide for their 

long-term financial security in retirement. It should be explained that the 

accumulation of assets is not the end game of the plan, but the basis for 

helping provide long-term security. Shortly after enrollment and once 

appropriate contribution and asset allocation education is provided, the 

process of educating participants on income replacement should begin. As 

early as possible in their plan tenure, participants should be made aware of 

the impacts of longevity risk, inflation, and investment performance in 

retirement, and how they might wish to protect spouses or partners. 

Tools, education and periodic reports to help participants determine target 

levels of income in retirement would be helpful. The impact of such tools 

would be significant if participants had access to appropriately trained and 

compensated financial advisors. In this regard, we commend Congress and 

the Department of Labor on their work in making investment education and 

advice more accessible to defined contribution plan participants. We 

appreciate the guidance that the Department issued in 2007 and look forward 

to seeing the further guidance that the Department will soon be issuing on 

investment advice. 

In addition, we know the Department has taken many steps and provided 

much guidance over the years to participants and plan sponsors on various 

retirement security topics. Most recently, the Department released an 

educational booklet entitled “Taking the Mystery Out of Retirement 

Planning,” which we believe is a helpful tool for individuals to compare 

their projected income and expenses in retirement and, importantly, start to 

think about how they can make their retirement savings last throughout their 

lifetime. However, we believe the Department can go further in this regard. 

Specifically, we suggest that the Department release educational brochures 

3
on the “decumulation” phase of retirement that focuses on the issues retirees 

may face (including increasing health care costs, potential long-term care 

costs, and the impacts of longevity, investment, and inflation risks on their 

retirement savings). The guidance should also include information on ways 

to address these issues and risks, including the establishment of a diversified 

“decumulation” portfolio that would include the use of income annuities. 

MetLife Retirement Income IQ Study

To underscore the above-mentioned points and the strong need for 

education, MetLife conducted a Retirement Income IQ Study in 2003 to test 

the knowledge of basic retirement income concepts for individuals within 5 

years of retirement. The results from that study were very troubling. On 

average, respondents answered just five of the 15 questions in the 

Retirement Income IQ Test correctly – an average score of 33 on a grading 

scale of 100 points – clearly a failing grade. MetLife refielded this study 

earlier this year and the results were released publicly in late June. Although 

the scores are somewhat better with pre-retirees scoring an average of 43, 

which is a ten percentage point increase, it is still a failing grade. 

We were very disappointed to learn that in the last five years, we have not 

seen a dramatic improvement in individuals’ literacy around retirement 

income concepts that are critical to their management of assets in retirement. 

Among the most disturbing findings, MetLife’s 2008 Retirement Income IQ 

Test reveals that almost seven in ten (69%) pre-retirees overestimate how 

much they can draw down from their savings – with an alarming 43% saying 

they believe they can withdraw 10% or more each year while still preserving 

their principal – even though most retirement experts suggest a withdrawal 

rate of no more than 4% annually. 

MetLife’s 2008 Retirement Income IQ Test also reveals that significant gaps 

exist around average life expectancy and other retirement income issues. Six 

in ten Americans (60%) underestimate their average life expectancy and 

almost half (49%) underestimate the amount of pre-retirement income they 

will need once they retire. This lack of understanding is particularly 

concerning because poor retirement planning assumptions are compounded 

after retirement by today’s much longer life expectancy. However, in this 

year’s Retirement Income IQ Test findings, more than half (56%) of 

respondents did note that longevity risk is the greatest risk in retirement, up 

significantly from 23% in 2003. 

4
In addition to the 15 multiple choice questions, five new attitudinal 

questions were added to the 2008 study to ascertain which actions preretirees are taking to prepare for retirement. These questions also sought to 

gauge how comfortable pre-retirees are with the outlook for their retirement 

future. The findings underscore what one would expect: those who take 

action to ensure that they have adequate retirement income are better 

informed and more confident that they will have a comfortable retirement. 

The findings of MetLife’s latest Retirement Income IQ clearly point to the 

need for more education in this area. Indeed, we believe that education can 

never be delivered too early or too often. To play our part in communicating 

this need to the employer community, MetLife will be hosting a web 

seminar for plan sponsors in partnership with Dallas Salisbury, President 

and CEO of the Employee Benefits Research Institute. In addition to 

discussing the implications of the IQ findings, the presenters will underscore 

why it’s incumbent upon employers to offer greater education and guidance 

as individuals approach retirement, and also to allow their employees to 

secure guaranteed lifelong income. 

 

Maximizing and Guaranteeing Streams of Income is Critical to 

Retirement Security

As I mentioned earlier, it is essential that policymakers turn their attention to 

the “decumulation” phase of retirement savings. And that is why the work 

of the Advisory Council, and the Department of Labor, is critical. The 

recommendations you make to the Department, and that hopefully they will 

implement, can help workers understand and secure a stable retirement 

income that they cannot outlive. The work of the Council is very important, 

indeed, especially when you consider that less than one in five (19 percent) 

of today’s workers are on track to meet 100 percent of their estimated needs 

in retirement, according to a recent study by Hewitt Associates released 

earlier this month, which examined the projected retirement levels of nearly 

2 million employees at 72 large U.S. companies using actual employee 

balances and behaviors. 

In your mission statement for this group, you posed a number of important 

questions about what types of income streams should be available to plan 

5
participants today, and the barriers and challenges faced by plan sponsors 

and participants in using those vehicles. 

There are a variety of vehicles available today that provides for an income 

stream, some guaranteed, some not, but unfortunately, most participants 

continue to take the “lump sum” option thereby eliminating the opportunity 

to convert a portion of their nest egg into a lifetime income stream, unless 

they roll their assets into a retail IRA Annuity. 

In order to appropriately address needs across the varying demographic and 

economic profiles of the American workforce, MetLife believes that an 

annuitization feature that makes available income streams would be helpful 

for today’s 401(k) participants, both as accumulation and distribution 

options. These annuities could be offered singly or in combination in 

addition to the options that today many plans make available to participants 

(lump sums and periodic installment payouts): 

• Immediate income annuities, both fixed and variable, either as a 

distribution option from the plan, or through a rollover from the 

plan. These guaranteed lifetime income annuities could be 

available in their simplest form without death benefits, or with a 

death benefit and/or inflation protection 

• This approach is an employee choice 

• Fixed and variable deferred annuities within the plan that provide 

for accumulation of a future guaranteed lifetime income stream on 

a dollar-cost averaging basis 

• This approach can be an employee choice as a standalone 

accumulation option, or 

• This may be an employer-directed matching contribution to 

a standalone option or as an income option embedded in a 

target date fund 

• Longevity insurance, which defers guaranteed lifetime income 

annuity payments until age 80 or later (the efficient use of 

longevity insurance within a defined contribution plan requires 

relief from the Minimum Required Distribution rules since the 

defined contribution plan must retain other assets to pay the RMD 

until the longevity policy begins to pay income benefits) 

6
There are other retail programs, for both qualified and non-qualified assets, 

which have been recently introduced in the market, that include: 

• Payout mutual funds, which distribute assets over a selected time 

period 

• Managed payout funds. in which the participant receives an 

income stream until the expiry date, at which point the original 

investment is returned 

• Systematic Withdrawal Programs [SWIP], in which a stream of 

payments expressed as a fixed percentage [generally 4%] of the 

declining portfolio is paid. 

These provisions, however, do not guarantee that income streams will be 

paid throughout the lifetime of the payee. 

It is important to offer the participant some flexibility in determining how 

they would like to create their own income stream, and a combination of 

these approaches is likely to provide a participant with an optimal strategy to 

create lifetime income. 

MetLife strongly supports the use of income annuities as part of a welldiversified decumulation strategy. A distinct advantage of annuities is that 

they are the only financial products specifically designed to generate a 

guaranteed lifelong stream of retirement income and the payment streams 

can be customized to meet the specific income needs of the individual at 

his/her point of retirement. Additionally, another key advantage of income 

annuities is that they generally have the ability to produce the highest level 

of guaranteed income per dollar of assets, which then provides the 

participant with the ability to maximize income. Putting these advantages 

together means that income annuities can perform the double task of 

maximizing current income now while also avoiding the risk of running out 

of money later. 

These advantages cannot be overemphasized, especially as Americans 

continue to underestimate how long they will live, underestimate how much 

they need to save for retirement and overestimate how much they can safely 

withdraw from their retirement savings in order to make their savings last 

their lifetime, as our Retirement Income IQ Study underscores. 

7
In terms of the disadvantages of immediate fixed income annuities, from an 

individual’s point of view, there is a perceived loss of control of all or part 

of the lump sum (people are just now beginning to understand that one 

should pay for liquidity where it is needed). Income products may be 

perceived to be complex because of the choices that are offered (cost of 

living adjustment, inflation protection, what percentage to select for a joint 

and survivor). Finally, fixed income annuities are typically quoted on a net 

income basis meaning that the fees are embedded, which may make it 

difficult to compare to other products. 

Although we acknowledge that these are real concerns, we believe that the 

industry has listened to these concerns and has taken significant steps to 

address these concerns through product innovation and education. However, 

we know that more needs to be done and we will continue to improve and 

simplify our products and our communication about them. 

Annuities as Distribution Options

In terms of current practices with respect to plan distribution design, the 

most commonly offered options are lump sum and periodic installment 

payments; the most utilized is the lump sum distribution. In order to reach 

participants, it is important and necessary to work with the plan sponsor. 

However, to date, few employers offer annuities as a distribution option (and 

in fact, many plans have eliminated annuity distribution options) for a 

number of reasons. Chief among those reasons are fiduciary liability 

concerns and the additional administrative burdens that are attendant to 

offering annuities.

As we are all aware, we live in an increasingly litigious society. Plan 

sponsors have been facing an increasing number of lawsuits over the years 

involving their provision of retirement plans. With the latest rash of 

lawsuits involving defined contribution plans, employers are becoming 

increasingly (and understandably) wary of offering benefits to their 

employees. The end result: far too many workers may be on their own to 

replicate the retirement security that was previously provided to them. In 

short, they will -- on their own -- need to ensure that their retirement savings 

– provided that they have saved enough in the first place – lasts as long as 

they do. 

8
With specific regard to offering annuities as a distribution option from 

defined contribution plans, we have heard repeatedly over the years from our 

customers that the uncertainty of their precise fiduciary duties attendant to 

offering annuities to their workers is a chief deterrent to them including 

annuities as a distribution option. We applaud Congress for including a 

directive to the Department of Labor in the Pension Protection Act to clarify 

that the DOL guidance included in Interpretive Bulletin 95-1 does not apply 

to defined contribution plans. And the Department of Labor has taken a step 

forward with its proposed regulation clarifying what the fiduciary’s duty is 

vis-à-vis the offering of annuities as distribution options within defined 

contribution plans. However, we believe that the Department can and 

should go further in clarifying and simplifying the plan sponsor’s obligations 

when offering annuities to provide adequate litigation protection for plan 

sponsors. In informal discussions with some of our customers, they believe 

that the Department should simplify its guidance in this area. 

In addition to the fiduciary liability concerns, plan sponsors have voiced 

concerns regarding the administrative burdens associated with offering 

annuities as a distribution option from defined contribution plans, most 

notably through the imposition of the joint and survivor annuity 

requirements that would require a written spousal waiver if another form of 

distribution were chosen. We believe that there have been significant 

technological advances (e.g., electronic pins, eye scans) that have been 

introduced in this area that would lessen the administrative burdens on 

employers if such practices were to be implemented. We suggest that the 

Department explore these alternatives and perhaps issue guidance to plan 

sponsors on the appropriate use of such technologies. 

How Plan Sponsors May Help Participants

Plan sponsors have a unique opportunity to help their employees because 

they are the first line of information. If plan sponsors stress the importance 

of, and provide the appropriate vehicles for converting a component of the 

accumulated account balance into a lifetime guaranteed income stream, we 

believe this is one essential element to having participants take action. It 

will require a coordinated effort from many parties, including the 

government, recordkeepers, insurers, and investment advice providers to 

recognize the importance of guaranteed income. Further product 

simplification and tax incentives may also be required. 

9
Plan sponsors can also bring their sophisticated knowledge and institutional 

purchasing power to the table, thereby ensuring that participants receive 

well-constructed options commensurate with a reasonable fee structure. 

We also encourage the plan sponsor community to consider adopting a 

“Retirement Income Policy Statement” which would outline the retirement 

income alternatives available to their participants. This could be similar to 

the now widely used “Investment Policy Statement” which most plan 

sponsors use as a guideline for their investments. 

We further encourage plan sponsors to ask their recordkeepers to provide 

participants with a simple estimated conversion of their 401(k) balances into 

a lifetime payment stream so that they are not continually distracted by the 

“lump sum” balance availability and begin to view their 401(k) plan as a 

source of reliable monthly retirement income. General guidelines should be 

established for the recordkeepers so that there is a consistent basis used 

across the industry. 

In addition to continuing their efforts to educate participants about the need 

to accumulate assets, plan sponsors may want to consider incorporating the 

importance of ensuring that participants have a guaranteed income stream as 

a component of a successful lifetime financial plan. 

Non-Insurance Vehicles Do Not Maximize or Guarantee Lifetime 

Income

As previously mentioned, there are a number of other types of income 

stream vehicles that exist today that can help plan participants ensure that 

they have a steady stream of income—at least for a period of time. We 

believe that there are certain advantages to incorporating such vehicles into a 

diversified “decumulation” strategy. But we strongly caution policymakers 

not to assume that these non-insurance vehicles can substitute for an 

annuity—an insurance product that will maximize and provide a guaranteed 

stream of income for as long as the individual lives. And, as a side note, I 

would add that the marketing around these products may have created 

confusion and a false sense of security for individuals purchasing those 

products, as there may now be a belief that these products will provide 

flexibility and control over one’s assets while guaranteeing that they will 

have income throughout life. 

10
Having addressed these issues, other stream of income products do provide 

certain advantages, among which are the following: 

• They can be “overridden” by participants; in other words, they can 

change their mind; 

• Participants retain control over the assets; 

• They may be easy to understand. 

The disadvantages of such income streams are that they are always 

vulnerable to: 

• Poor investment performance, especially in the early years of 

retirement; 

• Greater than anticipated rates of inflation; and 

• Their inability to address longevity risk.

While the availability of a variety of income streams is essential, plan 

sponsors and their consultants, as well as participants and their financial 

advisors, must be educated on the use of such streams in varying 

combinations to meet the specific needs of a given retiree. 

Structuring Default Income Stream Distributions

Among the questions your working group posed to panelists was how to 

structure a default periodic distribution option and what barriers exist to 

offering such a default. Significantly, under such an offering, plan sponsors 

will still have fiduciary liability concerns. The probability of participants 

“opting out” of an arrangement that affects what are generally thought to be 

their life savings may be greater than the probability of their opting out of 

auto enrollment, which is viewed as affecting only a small percentage of 

their current paycheck. 

 

Plan sponsor fiduciary concerns regarding the provision of a default annuity 

distribution option may be alleviated by the safe harbor provided by the final 

regulation regarding the selection of annuity providers. However, as stated 

earlier, we urge the Department to simplify the safe harbor significantly so 

that the requirements are not viewed as overly burdensome, which will be 

the view particularly for smaller employers. Also, it would be important to 

simplify the QJSA notice and disclosure rules. And, consideration may be 

11
given to targeted tax incentives that have been included in various bills 

submitted to Congress. 

We know that retirement income planning is daunting for many individuals. 

One potential way to create a lifetime income would be to establish an 

income distribution option from a defined contribution plan. If it is decided 

that a default periodic income distribution option should be included in 

defined contribution, a relatively simple approach would have the default 

apply to a minimum percentage of the participant’s account balance, or 

alternatively, purchase a minimum guaranteed lifetime income stream. Of 

course, following with current auto-enrollment practices, the participant 

should have the ability to “opt-out” of the guaranteed lifetime income 

stream. 

Objections to such a default option can be addressed through comprehensive 

education on the significance of longevity risk, the importance of which we 

know from our research consumers are starting to understand, and the 

potential negative impacts of inflation and poor investment performance, 

particularly in the early years of retirement. Also, the impact of such an 

option can be lessened by making it a trial experience for a pre-determined 

time period, such as 24 months. 

Conclusion

In conclusion, MetLife believes that the Council should recommend the 

following steps be taken by the Department, employers, and Congress in 

order to ensure that individuals do not outlive their retirement savings: 

• Further education on the issues and potential solutions affecting 

individuals in retirement. This education should be done by the 

Department in educational brochures and by employers soon after the 

employee joins the employer’s plan. 

• Investment education on both the accumulation and “decumulation” 

aspects of retirement savings should be facilitated and encouraged by 

policymakers. 

• Employers should develop a Retirement Income Policy Statement that 

they adhere to in administering their retirement plans. 

• Annual 401(k) plan statements should contain a monthly income 

equivalent to the lump sum amount contained on the statement. 

12
• Employer fiduciary concerns in selecting annuity providers need to be 

addressed. The Department needs to simplify the annuity selection 

regulation it released last year. 

• Spousal consent rules need to be addressed and modernized. 

• There should be preferential tax treatment of annuity income streams 

so that there is an incentive for individuals to secure lifelong income 

• A default annuity model should be considered and possibly 

implemented so that individuals will be ensured of receiving at least a 

portion of their money as an annuity. 

• The required minimum distribution rules should be revised to exclude 

longevity insurance from the RMD calculation. 

I want to thank the Council for establishing this important Working Group 

and for inviting me to testify today. I would be happy to answer any 

questions you may have. 

 

13
Electronic copy available at: http://ssrn.com/abstract=992423

1

The Longevity Annuity: An Annuity for Everyone? 

Jason S. Scott* 

June, 2007 

*I would like to thank John Watson, Wei Hu, David Ramirez and Andrea Scott for many 

excellent comments and suggestions. Any remaining errors or omissions are my 

responsibility alone. The views expressed herein are those of the author and not 

necessarily those of Financial Engines. 

Jason S. Scott 

Financial Engines, Inc. 

1804 Embarcadero Rd. 

Palo Alto, CA 94303 

T: 650-565-4925 ● F:650-565-4905 

E-mail: jscott@financialengines.com
Electronic copy available at: http://ssrn.com/abstract=992423

2

The Longevity Annuity: An Annuity for Everyone? 

Abstract 

As of 2005, individuals had an estimated $7.4 trillion invested in IRAs and employersponsored retirement accounts. Given these investments, many retirees will face the 

difficult problem of turning a pool of assets into a stream of retirement income. 

Purchasing an immediate annuity is a common recommendation for retirees looking to 

maximize retirement spending. However, the vast majority of retirees are unwilling to 

annuitize all of their assets. This paper demonstrates that a new type of annuity, a 

longevity annuity, is optimal for retirees unwilling to fully annuitize. For a typical 

retiree, allocating 10%-15% of wealth to a longevity annuity creates spending benefits 

comparable to an immediate annuity allocation of 60% or more. 

Keywords: Annuity, annuitization, pensions, longevity risk, insurance, Social Security 

JEL Classifications: D11, D91, E21, H55, J14, J26 
3

The Longevity Annuity: An Annuity for Everyone? 

1 Introduction 

The aging of the US population and the demise of the defined benefit plan are two 

major trends reshaping the retirement landscape. As of this writing, the oldest of the 

Baby Boomers has already turned sixty. The aging of the Baby Boomers will create an 

unprecedented explosion in the retiree population. The assets available to these new 

retirees are also undergoing substantial change. The last two decades have seen a 

substantial shift from defined benefit plans towards a reliance on individual accounts to 

fund retirement. As of 2005, individuals had approximately $7.4 trillion dollars invested 

in IRAs and employer-sponsored defined contribution plans compared to $1.9 trillion 

contained in employer-sponsored defined benefit plans.1 This shift has raised a critical 

question for many newly-minted retirees: “How can I convert accumulated assets into 

retirement income?” 

 An immediate annuity is a common recommendation from practitioners and 

academics alike to maximize retirement income from a given pool of assets. In a typical 

immediate annuity contract, an insurance company promises to make regular monthly or 

annual payments for the life of the individual in exchange for a one-time premium 

payment. It has been over four decades since economic theory first concluded that 

individuals looking to maximize guaranteed spending in retirement should convert all 

available assets to an immediate annuity.2 However, in stark contrast to the predictions 

of economic theory, very few retirees allocate any dollars to an immediate annuity, much 

less fully annuitize.3 Given retirees’ reluctance to make large annuity purchases, this 

paper extends the theory by answering the question: “Which annuity should I buy with a 

minority of my assets?” 

 

1

 Investment Company Institute [2006] 

2

 See Yaari [1965] 

3

 For example, LIMRA [2006] estimated fixed immediate annuity sales of $5.9 billion for 2006. 
4

The gulf between prediction and behavior is so wide that numerous academic 

studies have analyzed this “annuity puzzle.”4 Importantly, virtually all of the previous 

analysis assumes the fundamental annuity contract available is an immediate annuity. 

Recently, a new type of annuity contract, referred to here as a “longevity annuity,” has 

been introduced.5 Longevity annuities are essentially immediate annuity contracts 

without the initial payouts. That is, a longevity annuity involves an upfront premium 

with payouts that begin in the future. For example, an age 85 longevity annuity can be 

purchased at age 65, but payouts only commence when and if the purchaser reaches age 

85. As we will see, longevity annuities are an extremely efficient form of longevity 

insurance. In fact, the spending benefit a retiree could achieve with a ten percent 

allocation to a longevity annuity typically exceeds the benefit from a fifty percent 

allocation to an immediate annuity. Enticing a retiree to annuitize half their portfolio 

could prove very challenging. However, a ten percent longevity annuity allocation which 

provides a similar benefit level may look much more attractive. Given their large 

benefits per premium dollar, longevity annuities, especially those that start payouts late in 

life, likely qualify as an annuity for everyone. 

The intuition behind and the arguments for the desirability of longevity annuities 

are developed over the next four sections of this paper. Section 2 asks “what makes 

insurance valuable?” and develops a useful metric for evaluating potential insurance 

purchases. Section 3 examines various strategies retirees can utilize to turn assets into 

income. Section 4 builds on the analysis in Section 3 to demonstrate that longevity 

annuities deliver higher levels of spending increases per premium dollar compared to 

immediate annuities. Section 5 conducts a robustness analysis to confirm that the 

longevity annuity advantage is robust to various pricing, mortality and interest rate 

assumptions. Importantly, Section 5 also confirms the longevity annuity advantage using 

actual bond investments and annuity contracts available in the marketplace. 

 

4

 See Brown and Warshawsky [2004] for a summary of explanations for the “annuity puzzle” including: a 

bequest motive, the influence of Social Security, annuity pricing, irreversibility of the annuity purchase, 

etc. However, the full annuitization prediction is robust to most of these explanations. Hu and Scott [2007] 

explore behavioral barriers to annuitization. 

5

 Longevity annuities are alternatively referred to as “delayed payout” annuities owing to the fact that 

annuity payments are delayed relative to an immediate annuity. 
5

2 What makes insurance valuable? The Spending Improvement Quotient (Q)

Before diving into the issue of longevity risk and annuities, we start with a basic 

question: “What makes insurance valuable?” We begin by answering this question in a 

simplified setting. Consider a driving enthusiast who absolutely must have a car. 

Further, suppose our driver has no access to insurance to replace the car if an accident 

occurs. Without insurance, our driver will set aside enough money for a replacement car 

if an accident were to happen. This is money our driver can not spend. Access to car 

insurance completely changes the situation. Now our motorist only has to set aside the 

cost of insurance. Any remaining dollars can now be safely spent on other things. The 

size of this windfall depends crucially on the insurance cost relative to the replacement 

cost. 

 For example, assume the car has a replacement cost of $20,000. Suppose our 

driver has an excellent driving record, and only has a five percent chance of making an 

insurance claim. If insurance were sold at cost, then the car insurance price would be 

only $1,000.6 In this case, purchasing insurance allows $19,000 in additional spending 

relative to self-insurance. At this price, car insurance provides nineteen dollars of 

additional spending per insurance premium dollar. 

What happens if our driver has a history of wrecking cars? The chance of totaling 

the car is now much higher, so the price for car insurance would also be much higher. 

Suppose the chance of an accident has increased five-fold to twenty-five percent. The 

cost of insurance would likewise rise five-fold to $5,000. Now purchasing insurance 

only allows $15,000 in additional spending. The spending improvement per premium 

dollar has been reduced to just three dollars. While insurance still makes sense, the 

benefit relative to self-insurance is less compelling. In an extreme case, a reckless driver 

with a ninety-five percent chance of totaling the car may find insurance costs have risen 

to a staggering $19,000. The spending benefit per premium dollar has shrunk to a paltry 

five cents. If insurance prices are cost plus a profit premium, insurance costs could 

actually exceed replacement costs for this type of driver. 

 

6

 Assuming the insurance company sold a similar policy to numerous drivers with comparable risk profiles, 

the average cost of a policy would equal $20,000 * 0.05 or $1,000. 
6

Analyzing the spending improvement per premium dollar helps individuals select 

from competing insurance contracts. Suppose an individual had an additional dollar she 

was willing to allocate to insurance. What insurance contract should she select? When 

the alternative is self-insurance, the answer is simple. She should allocate the extra 

insurance dollar to the insurance contract that frees up the most spending. In other 

words, she should select the insurance product with the highest spending improvement 

per premium dollar. To simplify the exposition, this quantity will be referred to as the 

Spending Improvement Quotient and be abbreviated by Q. More specifically: 

 Q = Spending Improvement Quotient 

 = [Self-Insurance Costs – Insurance Costs] / [Insurance Costs] 

In the car insurance examples, the insurance cost was simply the car replacement 

cost reduced to reflect the chance of an insurance payout. If we denote the probability of 

an insurance payout by P, then the Spending Improvement Quotient simplifies to: 

Q = [Self-Insurance Costs – Insurance Costs] / [Insurance Costs] 

 = [Self-Insurance Costs – P* Self-Insurance Costs] / [P* Self-Insurance Costs] 

 = [1 – P] / P 

This result is intuitive. To evaluate the potential insurance benefit, simply 

consider the likelihood of a payout. If an insurance payout is very unlikely, generally 

insurance is cheap relative to self-insurance, and insurance can provide substantial 

benefits. Alternatively, when insurance payouts are highly likely, insurance cannot be 

provided at much of a discount to self-insurance. Under these conditions, insurance 

provides little benefit. These fundamental concepts apply to all insurance contracts 

including longevity insurance. Focusing on high value, or high Q, insurance will be the 

key to maximizing the benefit per premium dollar. 
7

3 The New Retirement Problem: Turning IRAs into Income 

With the dramatic increases in IRA and 401(k) plan balances, a common problem 

facing retirees will be turning those assets into income. To illustrate how insurance 

concepts apply to the retirement income problem, we will analyze the problem faced by a 

newly-retired individual. Our retiree is 65 years old, and has a sizeable $1 million IRA 

available to fund retirement spending. Before tackling the full retirement problem, 

consider a simpler problem of funding spending for a single year 20 years in the future. 

For our retiree, this would correspond to funding spending at age 85. If our retiree wants 

a guaranteed payout in 20 years time, an obvious investment choice would be a zerocoupon bond. The price today for $1 in 20 years would depend on the prevailing interest 

rates. Assuming prevailing interest rates are 2.5% at all maturities7, spending in 20 years 

would cost: 

B20 = Price today of a zero-coupon bond which pays out $1 in 20 years. 

= 1 / (1.025)20 

= $0.61 

Each dollar our retiree wants to spend at age 85 could be initially secured for a sixty-one 

cent investment in a 20 year zero-coupon bond. 

Securing spending with bonds is analogous to setting aside the full replacement 

cost of the car. With self insurance, the money is set aside whether or not the insurance 

event occurs. Similarly, the dollar from the zero-coupon bond is available whether or not 

our retiree actually lives to spend it. An alternative to bonds is an annuity contract. 

Suppose there was an annuity contract that could be purchased today that had a one-time 

payout in twenty years. The annuity contract differs from the bond in that the payout is 

contingent on survival. Given the similarities in payout structure, we denote this single 

payment annuity as a zero-coupon annuity. 

How much does a one dollar payout in twenty years cost using a zero-coupon 

annuity? Just as in the car insurance example, the price for longevity insurance depends 

on the probability of a payout. For longevity insurance the payout probability is the 

 

7

 This roughly corresponds to the real rate of interest as of this writing. 
8

chance our retiree survives twenty years to qualify for the payout. If we let S20 be this 

twenty year survival probability, then the zero-coupon annuity price would be: 

A20 = Price today of a zero-coupon annuity which pays out $1 in 20 years, if alive. 

 = S20 * B20 

Assuming our retiree is male, the twenty year survival probability appropriate for 

annuity pricing would be about fifty-one percent.8 Even with some insurance market 

related frictions, a zero-coupon annuity is offering spending in twenty years at nearly a 

fifty percent discount to self-insurance in the bond market. Just as in the car insurance 

example, we can calculate a spending improvement quotient for the twenty year zerocoupon annuity. In this case, the improvement would be: 

Q20 = [Self-Insurance Costs – Insurance Costs] / [Insurance Costs] 

 = [B20 - A20] / A20 = [1 - S20] / S20

 = 0.94 

The spending that costs $1.94 to secure in the bond market only cost $1.00 in the annuity 

market. Thus, every annuity dollar allocated to fund spending at age 85 frees up $0.94 

cents for additional spending. 

The above analysis indicates that annuity-based spending at age 85 can be secured 

at a substantial discount to bond-based spending. There is nothing particularly special 

about age 85 spending. In fact, we can repeat the analysis to calculate the potential 

insurance benefit for each age between 65 and 100. The Q analysis for each year from 65 

to 100 is displayed in Figure 1. The range of spending improvements is surprising. The 

potential insurance benefit for spending at age 66 is a paltry one cent per dollar invested. 

Given the previous examples, the reason for this result is obvious. People that purchase 

annuities at age 65 almost always live to collect the payment at age 66. In this situation, 

potential insurance benefits are extremely limited. In contrast, the age 100 payment has a 

Q value of 31.79. Funding spending at age 100 costs just pennies on the dollar using the 

 

8

 Social Security population average mortality tables indicate a 40% survival probability. The 51% is based 

on GAR-94 mortality tables (with generational adjustments). The annuity pricing survival rate is higher for 

two reasons. First, annuity purchasers are generally healthier than average. Second, insurance companies 

have to cover the cost of doing business. Given the reserves and adjustments built into the GAR-94 table, it 

should be a reasonable choice for estimating annuity prices. 
9

annuity market compared to the bond market. For this individual, the insurance benefit 

of the age 100 zero-coupon annuity is approximately twenty-five hundred times the 

insurance benefit provided by the age 66 zero-coupon annuity. 

Abstracting from the details of Figure 1, the message is clear. Longevity 

insurance provides substantial benefits for late-life spending, but much smaller benefits 

for near-term spending. This observation explains both the problem with immediate 

annuities and the potential of longevity annuities. Both immediate and longevity 

annuities can be thought of as bundles of zero-coupon annuities. An age 85 longevity 

annuity, for example, bundles together each of the zero-coupon annuities from age 85 

onward. Similarly, immediate annuities represent a bundle of all the zero-coupon 

annuities. While longevity annuities concentrate more dollars on high value insurance, 

immediate annuities add near-term, low-value annuity payments to the bundle. The 

resulting blended average Q-value for the immediate annuity is 0.56.9 In contrast, the Qvalue for the age 85 longevity annuity is more than five times higher at 2.93. 

4 Longevity Annuities: Optimal Insurance to Maximize Spending 

For each dollar our retiree shifts from bonds to immediate annuities, $0.56 is 

available for additional spending. If all assets were shifted to an immediate annuity, 

spending would increase by 56% relative to a bond-based spending program. But what if 

our retiree is uncomfortable with a 100% allocation to annuities? How should they 

allocate the dollars they are willing to annuitize? Figure 1 provides the basis for an 

answer. For the very first dollar annuitized, the best spending improvement can be had 

by purchasing the age 100 zero-coupon annuity. It is tempting to put all annuity wealth 

into the age 100 annuity. After all, look at the spending boost! However, our retiree 

needs spending in every year, not just at age 100. Even though our retiree cannot 

exclusively focus all spending on age 100 annuities, the first bonds that should be 

substituted with annuities should be bonds earmarked for age 100 spending. Assuming 

 

9

 The Q value for immediate annuities can be calculated by comparing a bundle of zero-coupon bonds to a 

bundle of zero-coupon annuities. Purchasing $1 of spending each year in retirement using bonds costs B0 + 

B1 + ... + B35 = $1 + $0.976 + ... + $0.421 = $24.15. Purchasing $1 of spending each year in retirement 

using annuities costs A0 + A1 + ... + A35 = $1 + $0.9636 + ... + $0.0129 = $15.47. The spending 

improvement achieved by shifting bond-based to annuity-based spending is thus 0.56. 
10

our retiree wishes to allocate more dollars to annuities, the next highest surplus producing 

annuity will be the age 99 annuity followed by the age 98 annuity. 

The optimal bundle of zero-coupon annuities to purchase thus depends on the 

amount of assets our retiree is willing to annuitize. However, since optimal strategies 

entail sequentially adding earlier and earlier zero-coupon annuities, all optimal bundles 

are longevity annuities. If our retiree were only willing to annuitize a few dollars, then 

the longevity annuity that begins payments at age 100 would be optimal. If more dollars 

are available for annuitization, a longevity annuity that begins payouts at age 99 would be 

in order. The start date for the longevity annuity would continue to be reduced until the 

annuity allocation is exhausted. Surprisingly, only retirees interested in fully annuitizing 

their assets should select an immediate annuity. All other retirees should opt for the 

longevity annuity that exhausts their willingness to annuitize.10

Figure 2 illustrates the difference between allocating dollars to immediate 

annuities versus longevity annuities. Allocations to immediate annuities result in a 

constant $0.56 additional spending per dollar annuitized. Thus, the available spending 

using an immediate annuity increases linearly from a base of $41,416 with a pure bond 

portfolio to a maximum of $64,645 with a 100% annuity allocation. The curve 

corresponds to the spending achievable with longevity annuities. The longevity annuity 

curvature stems from the fact that the initial dollars are spent on high-Q, age-100 

payments. Additional dollars are then spent on successively lower-Q payments. 

Diminishing returns causes the slope of the longevity annuity curve to gradually flatten as 

the annuity allocation increases. 

The longevity annuity spending curve shares both the beginning and ending 

points with the immediate annuity spending line. The two strategies emanate from the 

same point, since 0% annuitized corresponds to bond-only income for both. With 100% 

annuitized, a longevity annuity has a payment start date that is immediate. Thus, the two 

annuity options share the 100% annuitized point as well. However, at every point 

between 0% and 100% annuitized, the longevity annuity provides higher spending levels 

per dollar annuitized. 

 

10 Interested readers can refer to Scott, Watson and Hu [2006] for more details on optimal annuitization. 
11

To illustrate the leverage available from longevity annuities, consider the age 85 

longevity annuity (i.e. the longevity annuity that begins to make payments at age 85).11 

Suppose our retiree optimally funds spending prior to age 85 with bonds, and funds 

spending after age 85 with a longevity annuity. Using the bond and annuity prices 

derived above, our retiree would find that an 11.5% allocation to an age 85 longevity 

annuity would generate annual payouts of $55,385 starting at age 85. Allocating the 

balance of the portfolio to zero-coupon bonds generates $55,385 in annual income prior 

to age 85. Thus, annual spending throughout retirement has increased 33% relative to a 

bond-only portfolio. If an immediate annuity was used instead, the same 11.5% annuity 

allocation would only increase spending by 6.5%. To achieve a comparable spending 

increase with immediate annuities, our retiree would have to allocate more than 60% of 

their portfolio to annuity purchases. Convincing a retiree to annuitize 60% of assets 

could be extremely challenging irrespective of the potential benefit. However, 

annuitizing 11.5% of assets may prove much more palatable, especially if this modest 

allocation allows guaranteed spending to increase by over a third. The ability of 

longevity annuities to deliver a majority of the annuitization benefits for a relatively 

small portfolio allocation makes them a powerful tool to help retirees effectively turn 

assets into income. 

5 Robustness Analysis: Mortality, Interest Rates and Real World Pricing 

The preceding analysis made three key assumptions in order to evaluate the 

relative efficiency of longevity annuities. Those assumptions were the mortality rates for 

our retiree, the prevailing interest rates for bond investments, and the formula by which 

insurance companies turn mortality and interest rates into annuity prices. This section 

explores the impact of altering these key assumptions. 

The robustness analysis consists of analyzing six cases each with a different set of 

core assumptions. The results for each case are reported in Table 1. Case 1 assumes the 

retiree is male, prevailing interest rates are 2.5%, and annuity prices are determined using 

the theoretical model described in the preceding paragraphs. Thus, Case 1 corresponds to 

the situation previously explored in detail. Given those assumptions, we determined that 

 

11 This longevity annuity is highlighted since it is the latest starting readily available longevity annuity. 
12

an 11.5% allocation to an age 85 longevity annuity provided more than five times the 

spending improvement compared to the immediate annuity (33.7% vs. 6.5%). All of this 

information is reported in first column of Table 1. 

Case 1 assumed our retiree was male. However, women have very different 

mortality rates compared to men. Given mortality plays a critical role in annuity pricing, 

Case 2 repeats the analysis assuming our retiree is female. Improved mortality has 

increased the annuity costs in general. However, longevity annuities still provide 

substantial benefits relative to immediate annuities. For this situation, the spending 

increase for our retiree is 4.35 times as big with a longevity annuity compared to an 

immediate annuity. 

Case 1 and Case 2 assume an interest rate of 2.50%. As of this writing, this 

interest rate corresponds to the real rate of interest available from government inflationindexed bonds. If the dollars our retiree is trying to secure each year in retirement are 

inflation-indexed dollars, then this real interest rate is appropriate for the calculations. 

Some retirees may prefer fixed spending that does not increase with inflation. For this 

situation, nominal interest rates would be appropriate. As of this writing, nominal 

interest rates are approximately 5.00%. Case 3 and Case 4 repeat the analysis using the 

nominal rate of interest. While the specific numbers have changed,12 the relative strength 

of longevity annuities remains. For these cases, the spending improvement for the 

longevity annuity relative to the immediate annuity increased by a factor of 6.61 and 

5.52, respectively. 

The analysis up to this point has been somewhat theoretical to help pinpoint the 

key reasons why longevity annuities provide substantial advantages. However, it is 

important to realize that benefits from longevity annuities can be readily achieved by 

current retirees. As of this writing, there are at least two insurance companies that offer 

longevity annuities. MetLife introduced longevity annuities in 2004 under the product 

name Retirement Income Insurance. In March of 2006, The Hartford also introduced a 

longevity annuity product called The Hartford Income Security. 

 

12 Fixed nominal payments imply our retiree is spending more during early retirement and less during late 

retirement. The initial spending level is higher, but is eroded by inflation over time. Since less wealth is 

used to fund spending after age 85, the amount optimally allocated to an age 85 annuity decreases. 
13

Actual bond and annuity prices can be obtained to assess the validity of the 

preceding analysis in the real world. In July of 2006, MetLife provided a longevity 

annuity price quote for a 65 year old wishing to purchase an age 85 longevity annuity.13 

In addition to annuity prices, bond yields are required to perform the analysis. Treasury 

yield data were obtained on July 13, 2006. At that time, the yield curve for government 

securities ranged from 5.00% to 5.27%. 

Case 5 and Case 6 report the results when using actual bond and annuity prices. 

For a male retiree, a modest 7.9% longevity annuity allocation allows spending to 

increase by 21.5%. A comparable allocation to an immediate annuity only increases 

spending by 3.1%. For this real world case, the spending improvement from longevity 

annuities was 6.91 times the spending improvement achieved with immediate annuities. 

The results using actual prices are very comparable to those achieved with theoretical 

pricing assumptions (Case 3 and Case 4). If anything, actual prices suggest the size of 

the longevity annuity advantage is slightly underestimated with the theoretical pricing 

model.14 

The robustness analysis considered the influence of three critical assumptions: 

mortality rates, interest rates and annuity pricing formulas. While the particulars of the 

analysis do indeed depend on these three factors, the advantage of longevity annuities 

was robust across all of these permutations. In some sense, the robustness is not 

surprising. The key to longevity annuity benefits is the realization that purchasing 

income conditional on survival must get cheaper as the chance of survival declines. 

Since cheaper insurance corresponds to more valuable insurance, longevity annuities 

allow retirees to concentrate their annuity dollars on high-value insurance. This 

fundamental advantage of longevity annuities should be robust across virtually all 

scenarios. 

 

13 For a male retiree, a $100,000 premium purchased monthly payments of $7,730. Given this price quote, 

each dollar of annual income starting at age 85 costs approximately $1.10 (assuming no within-year 

mortality and 5% interest rates). An age 67 longevity annuity price quote implied a per dollar annuity cost 

of $10.24. The price per dollar spending using an immediate annuity was estimated by taking the age 67 

longevity annuity and adding $1 and $0.94 to account for the age 65 and age 66 payments, respectively. 

14 Higher levels of adverse selection with immediate annuities is consistent with the increased longevity 

annuity benefit multiple. 
14

6 Conclusion

Trillions of dollars have accumulated in IRA and employer-sponsored retirement 

accounts with trillions more expected over the ensuing decades. Millions of retirees will 

face the problem of translating their accumulated assets into retirement income. 

Immediate annuities are a typical recommendation from academics and practitioners alike 

to increase guaranteed spending from a given pool of assets. Unfortunately, the 

theoretical foundation for immediate annuities relies on the willingness of retirees to fully 

annuitize their assets. In practice, virtually no retiree will voluntarily annuitize their 

entire portfolio. This paper extends the theory by answering the key question: “Which 

annuity should I buy with a minority of my assets?” 

The answer to this question is somewhat surprising. By focusing on the 

fundamental properties that make insurance valuable, we demonstrate that longevity 

annuities maximize guaranteed retirement spending per dollar annuitized. Only retirees 

willing to fully annuitize will find an immediate annuity optimal. All other retirees 

should prefer some form of longevity annuity. In fact, the first few dollars annuitized 

with a longevity annuity provide such substantial benefits that the vast majority of 

retirees should find these annuities desirable. A sample calculation, using actual annuity 

prices, found that a 65 year old male retiree could increase his guaranteed spending by 

over twenty-one percent by allocating less than eight percent of his portfolio to an age 85 

longevity annuity. This spending improvement was almost seven times the spending 

improvement from a comparable immediate annuity allocation. 

This paper’s title asks “is the longevity annuity an annuity for everyone?” The 

answer is a qualified “yes.” Many individual-specific considerations are important to the 

annuitization decision. The desire to leave behind a large estate could motivate some 

retirees to avoid annuities. Likewise, some retirees may have such uncertain future 

spending needs that locking in a spending level with an annuity is undesirable. However, 

at some point the benefit per premium dollar grows so large that this form of insurance 

makes sense for most people. Since longevity annuities, especially those that start 

payouts late in life, offer substantial benefits per premium dollar, almost every retiree 

would likely benefit from at least a modest allocation of assets to a longevity annuity.
15

References

Brown, J.R. and M.J. Warshawsky. 2004. Longevity-Insured Retirement Distributions 

From Pension Plans: Market and Regulatory Issues. In Gale, W.G., Shoven, J.B., 

Warshawsky, M.J. (Eds.), Public Policies and Private Pensions. Brookings Institution 

Press, Washington, DC. 

Hu, W. and J.S. Scott. 2007. Behavioral Obstacles to the Annuity Market. SSRN: 

http://ssrn.com/abstract=978246 

Investment Company Institute. 2006. Research Fundamentals. 15(5). 

http://www.ici.org/stats/res/fm-v15n5.pdf

LIMRA. 2006. Annuity Sales – 4th Quarter 2006. 

http://www.limra.com/pressroom/databank/AnnuityEstimates4Q06.pdf

Scott, J.S., J.G. Watson, and W. Hu. 2006. Efficient Annuitization with Delayed Payout 

Annuities. SSRN: http://ssrn.com/abstract=932145. 

Yaari, M.E. 1965. Uncertain Lifetime, Life Insurance, and the Theory of the Consumer. 

Review of Economic Studies 32: 137-150. 
16

Appendix A: Longevity Annuity Policy Considerations 

A straightforward economic analysis demonstrates the desirability of longevity 

annuities. However, large scale adoption of longevity annuities may depend critically on 

public policy decisions. This appendix highlights two important policy decisions that 

could increase longevity annuity utilization rates. First, the current rules regarding 

required minimum distributions (RMDs) create a barrier to the adoption of longevity 

annuities. Longevity annuities that began payouts after age 70 currently run afoul of the 

RMD rules. One example of the issue would be an age 65 retiree that uses their IRA to 

purchase an age 85 longevity annuity. This retiree cannot make the RMD at age 70 since 

no annuity payments are scheduled until age 85. Even if only a portion of the IRA was 

used to make the longevity annuity purchase, future market declines or withdrawals could 

still result in insufficient funds to make the RMDs. Recognizing this issue, insurance 

companies do not currently accept qualified dollars to purchase longevity annuities with 

late life start dates. IRA assets currently must first be withdrawn and taxed prior to a late 

dated longevity annuity purchase. This is a substantial barrier to adoption of a very 

valuation annuitization option. 

The second policy issue relates to the role inertia currently plays in the utilization 

of employer sponsored pension plan features. With the recent Pension Protection Act 

(PPA), Congress signaled a willingness to be more proactive in helping individuals 

effectively use their employer-sponsored retirement plans. The underlying principle was 

to encourage employers to create plan defaults that were in the best interest of 

participants. Assuming inertia causes many employees to retain the defaults, overall 

retirement outcomes should be improved. Examples of newly defaulted decisions 

include: automatic enrollment, automatic savings escalations, and automatic investment 

or management. However, the PPA was silent on ways to automate the income phase of 

the 401(k). It is not surprising that the PPA was silent given the lack of consensus around 

an income solution that is appropriate as a default for all participants. Longevity 

annuities offer an intriguing possibility. Since the benefit per dollar annuitized is 

dramatic, at least for the later dated longevity annuities, a longevity annuity with a 

sufficiently late start date may be an ideal default candidate. The cost would only be 5%-

15% of assets, but the longevity protection benefit would be substantial. 
17

Figure 1

Spending Improvement Quotient (Q)

Zero-Coupon Annuity Payments

65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 83 84 85 86 87 88 89 90 91 92

93

94

95

96

97

98

99

100

82

0

5

10

15

20

25

30

35

Spending Improvement Quotient (Q)

Age 66 Payment

$0.012 Benefit per $1 Invested

Age 75 Payment

$0.201 Benefit per $1 Invested

Age 95 Payment

$6.72 Benefit per $1 Invested

Age 100 Payment

$31.79 Benefit per $1 Invested

Age 85 Payment

$0.94 Benefit per $1 Invested

Figure 2

Spending Longevity Annuity vs. Immediate Annuity

$1,000,000 Assets, Age 65, Male

$40,000

$45,000

$50,000

$55,000

$60,000

$65,000

$70,000

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Percent Annuitized Wealth

Annual Spending

Longevity Annuity Spending Immediate Annuity Spending

11.5% Age 85 Longevity Annuity

$55,385 Spending (33.7% Improvement)

60.1% Immediate Annuity

$55,385 Spending (33.7% Improvement)

0% Annuity - Bonds Only

$41,416 Spending

11.5% Immediate Annuity

$44,088 Spending (6.5% improvement)
18

Assumptions Case 1 Case 2 Case 3 Case 4 Case 5 Case 6

Mortality: Male(M) vs. Female(F) M F M F M F

Interest Rates: Real (2.5%) vs. Nominal (5.0%) 2.50% 2.50% 5.00% 5.00% ~5.00%1

~5.00%1

Bond-only Spending from $1 million $41,416 $41,416 $57,557 $57,557 $58,841 $58,841

Age 85 Longevity Annuity Results

Optimal2 Annuity Allocation (%) 11.5% 15.3% 8.2% 10.9% 7.9% 10.4%

Spending Improvement (%) 33.7% 27.9% 21.9% 18.3% 21.5% 18.2%

Immediate Annuity Results3

Annuity Allocation (%) 11.5% 15.3% 8.2% 10.9% 7.9% 10.4%

Spending Improvement (%) 6.5% 6.4% 3.3% 3.3% 3.1% 3.1%

Longevity Annuity Benefit Multiple4

5.23 4.35 6.61 5.52 6.91 5.84

1

Treasury yield curve on 07/13/06 ranged from 5.00% to 5.27%

2

Annuity allocation required to equalize income across all retirement years. Income from age 65 to 84 is bond-funded. Thereafter annuities fund income.

3

Immediate annuity prices estimated from age 67 longevity annuity prices

4

Ratio of longevity annuity spending improvement to immediate annuity spending improvement

Table 1

Robustness Analysis: Interest Rate, Mortality, and Annuity Pricing Assumptions

Age 85 Longevity Annuity vs. Immediate Annuity

Theoretical Bond/Annuity Prices Actual Bond/Annuity Prices
LIN

BA

The MetLife Retirement Income SelectorSM

To get started, enter information about you and your spouse. Enter how many years you’ll need your 

retirement income to last on Line A. Then, determine your annual income goal. If you have yet to complete a 

retirement budget, your Financial Representative can help you complete the Retirement Expense Worksheet. 

Once you determine this number, enter it on line B, Annual Income Goal Based on Projected Expenses. Then, 

enter your Guaranteed Income Available on line C. There are additional lines below line C to help you and 

your spouse make additional calculations. On line D, enter the Value of Savings to Be Used for Retirement 

Income. The lines below line D list some common income sources. On the next line, subtract the Guaranteed 

Income Available from your Annual Income Goal to determine the Income Needed from Additional Savings. 

Finally, consider if it’s important for you to leave a legacy to your heirs.

1. 

A. Years of Retirement Income Needed: _______________

 (Consider both your ages, and the likelihood of at least one of you living into your 90s.)

B. Annual Income Goal Based on Projected Expenses: $ ______________ 

 (Use enclosed Expense Worksheet to determine amount if unsure.)

C. Guaranteed Income Available: $ ______________

 (Use below to list specific amounts) (Total from below)

D. Value of Savings to Be Used for Retirement Income: $______________

 (Use below to list specific amounts) (Total from below)

 

E. Income Needed from Additional Savings: $ ______________

 (Total from line B minus total from line C.)

In addition to retirement income goals, is it important for you to leave a legacy for heirs 

or charity? Yes No

Explain: ______________________________________________________________________________

_____________________________________________________________________________________

Client Spouse

Name:____________________________________

Date of Birth: ____________ Age: __________

Retirement Age: _______ Already Retired

Name:____________________________________

Date of Birth: ____________ Age: __________

Retirement Age: _______ Already Retired

Client—Annual Amount

Social Security: __________________________

Pension Income:_________________________

Income Annuity (SPIA): ___________________

Other Fixed Income: _____________________

Spouse—Annual Amount

Social Security: __________________________

Pension Income:_________________________

Income Annuity (SPIA): ___________________

Other Fixed Income: _____________________

Client—Total Amount

401(k)/403(b): __________________________

Investments: ____________________________

Savings:________________________________

Other: _________________________________

Spouse—Total Amount

401(k)/403(b): __________________________

Investments: ____________________________

Savings:________________________________

Other: _________________________________
Agree Disagree My Answer

1. I prefer a predictable retirement income check each month, like 

a regular paycheck, in exchange for giving up some of my ability 

to take more income when I may need it.

1 0

2. I don’t want to worry about the ups and downs of the market 

after I retire and the effect on my income, even though I may 

miss out on opportunities to increase my income level if the 

market goes up.

1 0

3. I am much less concerned with how long my retirement funds 

last and much more concerned with living my desired lifestyle in 

my earlier retirement years.

0 1

4. It’s important for a large portion of the income generated from 

this account to last my entire lifetime. 1 0

5. I would be comfortable giving up access to this money in order 

to receive the most income possible. 1 0

6. If income from my retirement funds suddenly dropped by 

10%–15%, I would be concerned about how it might impact my 

lifestyle.

1 0

7. It’s important for me to have a large portion of this account 

available at all times—for things like unexpected home repairs or 

family emergencies—even though that may mean less income is 

available throughout my retirement years. 

0 1

8. I would like to actively manage this investment and the income 

stream it generates—and I’m confident I will be able to continue 

to do so as I age. 

0 1

9. Having the flexibility to use my assets to generate the income 

I want today is important to me, even if it means I risk running 

out of assets and having no income later.

0 1

 

2.

Now it’s time to determine your comfort level with the concepts of flexibility and guarantees. Keeping 

in mind the savings you have indicated are available for retirement income, answer the following 

questions. Write the number that corresponds with your answer in the “My Answer” column, then 

add the numbers in that column for your Income Selector Score. 

Your Income Selector Questionnaire Score >
22%

75%

3%

60%

31%

5%

4%

45%

33%

17%

5%

35%

29%

30%

6%

36%

41%

17%

6%

0-1 Points

Flexible Income

4-5 Points

Balanced Income

6-7 Points

Stable Lifetime Income

8-9 Points

Guaranteed Lifetime 

Income

It appears that you’re 

interested in having 

access to your money 

at all times, especially 

at this point in your 

life. You’re a confident 

investor who is 

comfortable weathering 

market volatility since it 

will give your income the 

potential to grow during 

your retirement. Based 

on your answers to the 

questionnaire, you may 

prefer income solutions 

that offer the potential 

for maximum liquidity 

and flexibility with a 

relatively small amount 

of guarantees.

Access to your money is 

important and you feel 

you can handle some 

market volatility, as long 

as you have a small 

safety net to fall back 

on. Placing some money 

aside to cover lifetime 

income, while important, 

may be a second 

priority. Based on your 

answers, you may prefer 

a solution that offers a 

degree of flexibility with 

a modest amount of 

guarantees.

Your answers show that 

you value both flexibility 

and guarantees when it 

comes to your retirement 

income needs. You are 

willing to give up some 

control of your savings 

in exchange for a more 

predictable income 

stream. You’d also like to 

be somewhat involved 

in the management of 

your investments and 

maintain a degree of 

flexibility. Based on 

your answers, you may 

want to consider a 

balanced mix of various 

withdrawal options 

and lifetime income 

guarantees.

Guaranteed lifetime 

income seems to be a 

high priority for you. 

However, you may be 

willing to tolerate slight 

amounts of market 

volatility in order to 

maintain a degree of 

flexibility for unexpected 

events. Based on your 

answers, you are looking 

for a high level of 

predictability in your 

income—knowing 

when and where it’s 

coming from at all 

times. You may prefer a 

solution that offers some 

guaranteed lifetime 

income and some 

withdrawal options.

Having a high level of 

guaranteed lifetime 

income may be your 

top priority. Based on 

your answers, your 

number one concern is 

outliving your income 

and you don’t feel 

comfortable managing 

your investments day-today to make sure they 

last. You may prefer 

solutions that offer a 

high level of predictable 

lifetime income with less 

flexibility.

3. More Income 

Flexiblity

More Income 

Guarantees

Traditional Investments Variable Annuity with Guaranteed Income Benefit Lifetime Income Annuity Longevity Income Protection Annuity

This is a tool to help you better understand the relative flexibility and guarantees associated with certain types of products, and how these can 

be used to help you meet your income goals. Below are some of the hypothetical assumptions used to determine the suggested 

allocation percentages. This is not a recommendation to purchase any particular product. These are only suggestions; the final decision is yours. 

For details about specific products, features, and limitations based on your age and situation, please speak to your Financial Representative.

1: For Traditional Investments: Assumed historical returns and industry recommended annual withdrawal rates; consideration is not given to 

taxes, fees, or charges associated with the purchase of any particular product.

2: For Longevity Income Protection Annuity: Guaranteed income payment from a Deferred Income Annuity assumes a life-only income option 

and a start date at age 85. 

3: For Lifetime Income Annuity: An immediate income annuity using a life-only income option.

4: For Variable Annuity with Guaranteed Income Benefit: Optional income benefit rider assuming withdrawals up to the amount permitted in 

the rider. Fees, charges, and waiting periods associated with the purchase of this rider are not considered.

Protected Flexible Income

2-3 Points
Metropolitan Life Insurance Company

200 Park Avenue

New York, NY 10166

www.metlife.com

0810-0160 Income Selector Ques

© 2009 METLIFE, INC. L0310093338[exp1210][All States][DC]

PEANUTS © United Feature Syndicate, Inc.

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FPO

Variable annuities are offered by prospectus only, which is available from your registered representative. You should 

carefully consider the product’s features, risks, charges and expenses, and the investment objectives, risks and policies 

of the underlying portfolios, as well other information about the underlying funding choices. The amounts allocated to 

the variable investment options of your account balance are subject to market fluctuations so that, when withdrawn or 

annuitized it may be worth more or less than its original value. 

The principal value and rate of return in a variable annuity will fluctuate due to market conditions. Therefore, at any point in time, the value of the 

annuity contract may be worth more or less than the owner’s actual investment in the contract. There is no guarantee that any of the variable options 

in this product will meet their stated goals or objectives. This and other information is available in the prospectus, which you should read carefully 

before investing. Product availability and features may vary by state. 

Annuity product guarantees are based on the claims-paying ability of the issuing insurance company. Most annuity products have terms and 

exclusions for keeping the policy in force. Your representative can provide additional details.

Metropolitan Life Insurance Company, New York, NY 10166. Securities products, including variable products, are offered by registered 

representatives of either MetLife Securities, Inc., 200 Park Avenue, New York, NY 10166 or New England Securities, Corp., 501 Boylston Street, 

Boston, MA 02116; both are affiliates and members FINRA/SIPC. 
CONFIDENTIAL 

The Rise (of DC) and the Fall (of DB)

-50

50

150250350450550650750850

198119831985198719891991199319951996199920012

Defined Benefit and Defined Contribution Plans 

(in thousands of plans)

167,293 plans 

4

378,318 plans

81

Source: Private Pension Plan Bulletin, Abstract of 2007 Form 5500 Annual Reports, U.S. Department Of Labor Employee 
CONFIDENTIAL 

People Underestimate The Time Spen

50% Chance 

of living 

beyond

25% Cha

of living 

beyond

Male (age 65) 85 92Female (age 65) 88 

50% Chance of 

living beyond

50% Chance that at le

one will live beyond

Couple (both age 65) 92 

Source: Annuity 2000 Male and Female Mortality Tables