For those 401(k) savings plans that do not supplement defined benefit pension plans, it
may be appropriate to make the lifetime income option the default option. However, participants
must be afforded a reasonable time and appropriate disclosures in order to decide whether to opt
out of the default.

Participant Education (Questions 17-20)

In order for participants to make informed decisions about their benefit payment options,
appropriate information should be provided and that disclosure should, at a minimum, show the
monthly payment stream payable under any lifetime income option or other arrangement.
Defined benefit pension plans make such disclosures today as part of processing a retirement
application.

Because participants typically have access to their account balances in 401(k) savings
plans for events occurring before retirement, the information must be available as part of the
distribution process regardless of the triggering event. Providing the information at this time
could be the last opportunity to educate individuals about the differences between single sum
distributions and lifetime income.

The information given to participants in 401(k) savings plans should also include an
explanation of the risks related to taking a single sum distribution, such as longevity and
investment risk, as well as relevant factors to consider in evaluating whether the ability of the
provider of lifetime income options to make future payments and the reasonableness of the costs
of providing the benefit.

The Department should encourage plans to educate participants about the advantages and
disadvantages of lifetime income options as compared to single sum distributions. Doing so is
clearly one way to begin changing the discussion and the focus to what can be provided by the
funds workers save rather than just on accumulation. As suggested by the ERISA Advisory
Council Working Group reports cited in the RFI, one approach to encouraging participant
education is the expansion of Interpretative Bulletin 96-1, an approach we support.

Disclosing the Income Stream That Can Be Provided From an Account Balance
(Questions 21-24)

We think it would be valuable for benefit statements provided to participants in 401(k)
savings plans to show the lifetime income stream as well as the accrued account balance.’ Doing
so could help educate participants about the value of the account balance and its ultimate
purpose—the provision of income during retirement. Moreover, showing the income stream is
one way to help change the emphasis from the total amount saved to the income that the account
balance can provide. Too often, workers do not know the monthly retirement income that would
result from their accrued savings.

° While ERISA Section 105(a)(1)(A), 29 USC §1025(a)(1)(A), requires quarterly statements for the
typical 401(k) savings plan, the lifetime income stream should only be required on an annual basis.


The traditional defined benefit plans negotiated by AFL-CIO affiliate unions offer a range of
lifetime income options in addition to the statutorily mandated qualified joint and survivor
annuity, including term certain benefits (for example10, 15 or 20 years certain and life), joint and
survivor annuities with differing percentages of continued benefits (ranging from 66 2/3% to
100%), and Social Security leveling options.

The primary advantage to participants in defined benefit plans of selecting payments
through the plan are its simplicity and easy availability, the absence of any additional fees (both
ongoing investment management fees or any fees associated with an annuity purchase) and the
benefits of pooling risk. One disadvantage may be the limited options that the typical plan offers
compared to the array of alternatives available in the market.’

Lifetime Income Options Should Be Required (Question 13)

In our view, all defined contribution plans should be required to offer some form of
lifetime income option although we recognize that today’s relatively modest balances will not
provide significant retirement income.® However, including this requirement would make it
easier for participants to consider choosing lifetime income as opposed to confronting the market
on their own following the receipt of lump sum distributions. But, in order to have meaningful
lifetime annuity options available through defined contribution plans, significant changes in the
current annuity market to address the high cost of these products are needed.

In addition, if plans are required to offer lifetime income options, agency guidance must
be provided to plan sponsors on how to evaluate the varying annuity options available to assure
that only those options appropriate for providing retirement income are included. While the
Pension Protection Act required the Department to issue its regulation exempting the selection of
a provider for optional lifetime distributions from the safest available annuity standard, this
approach should be revisited if plans are required to offer a lifetime income option.

7 It is worth noting, however, that offering too many choices often leads to inaction and that

choosing among the various lifetime income options available in the market may require a level of
financial sophistication and understanding that many Americans do not have. See, e.g., John Turner,
Designing 402(k) Plans That Encourage Retirement Savings: Lessons from Behavioral Finance, AARP
Public Policy Institute (2006) available at http://assets.aarp.org/rgcenter/econ/ib80_pension.pdf; Sheena S.
Iyengar, Wei Jiang, Gur Huberman, How Much Choice is Too Much?: Contributions to 401(k) Retirement
Plans, PRC WP 2003-10, Pension Research Council (2003) available at http://www.archetype-
advisors.com/Images/Archetype/Participation/how%20much%20is%20too%20much. pdf, Annamaria
Lusardi and Olivia S. Mitchell, Financial Literacy and Retirement Preparedness: Evidence and
Implications for Financial Education WP 2006-144, University of Michigan Retirement Research Center
(2006) available at http://www.mrre.isr.umich.edu/public ns/papers/pdf/wp144.pdf; ERISA Advisory
Council, Report of the Working Group on Financial Literacy and the Role of the Employer (2007)
available at http://www.dol.gov/ebsa/publications/AC-1107a.html

8 Making a partial annuity option available in 401(k) savings plans would benefit participants by

offering a middle ground rather than an “all or nothing” approach to taking a distribution. (Question 10)


To make the benefit statement most meaningful, we suggest that the monthly payments
shown be based on the accrued balance with payments beginning at normal retirement age. For
those participants who are married, it would be helpful to include both single-life and joint and
survivor-type annuities, as well as any other option available under the plan.

We believe using the accrued balance (with projected interest at a reasonable rate) is the
most appropriate amount to use in showing potential lifetime income because it reflects what is
currently available to the participant, assuming the balance remains invested until retirement.
Including projected contributions to retirement age has the potential to mislead participants into
believing they will have more funds available at retirement.

The assumptions used to convert the account balance to monthly lifetime payments must
be described in the benefit statement, particularly because they are likely to change from
statement to statement. Without that description, participants may wonder about the differing
amounts shown over time. And, including caveats in the statement would also be appropriate.

The Department should consider specifying the assumptions to be used by plans to insure
uniformity across plans and avoid unreasonable or inappropriate assumptions. In addition, it
would be helpful for the Department to issue a standardized table of conversion factors on a
periodic basis to make it easier for both participants and plan sponsors to determine monthly
payments.

Transfer of Defined Contribution Distributions to Defined Benefit Plan

Before considering any action to facilitate the “purchase” of lifetime income from defined
benefit pension plans, we recommend the PBGC be consulted about the treatment of such
“annuities” in the event of plan termination. Based on affiliate experience,” PBGC will continue
payments in the event of a distress termination if the defined contribution balance has been
converted to a monthly stream of payments, but, in their view, these payments are not guaranteed
under Title IV of ERISA and the associated assets are outside the statutory allocation categories
in Section 4044 of ERISA.

We hope these comments are helpful to EBSA in promoting retirement security, an issue
of vital importance to all working families. Should there be any questions about our comments
or if additional information from the AFL-CIO would be helpful, please do not hesitate to contact
me at (202) 637-3953. /X\

i

Sincerely, /\

JIN
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Bur A

Damon A. Silvers\
Director of Policy & Special Counsel

" The issue arose in the context of a floor-offset arrangement where defined contribution balances
were merged into a defined benefit plan before its termination.


American Federation of Labor and Congress of Industrial Organizations

EXECUTIVE COUNCIL

RICHARD L. TRUMKA ELIZABETH H. SHULER ARLENE HOLT BAKER
PRESIDENT SECRETARY-TREASURER. &

Sent via email to e-ORI@dol.gov

May 3, 2010

Attention: Lifetime Income RFI

Office of Regulations and Interpretations
Employee Benefits Security Administration
Room N-5655

U.S. Department of Labor

200 Constitution Avenue, NW

Washington DC 20210

Re: Request for Information Regarding Lifetime Income Options for Participants and
Beneficiaries in Retirement Plans Docket ID: EBSA-2010-0007; RIN 1210-AB33

Ladies and Gentlemen:

The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO)
submits this response to the Request for Information Regarding Lifetime Income Options for
Participants and Beneficiaries in Retirement Plans issued by the Employee Benefits Security
Administration and the Internal Revenue Service.’ 75 Fed. Reg. 5253 (February 2, 2010)

The AFL-CIO, its 57 affiliated unions and its community affiliate, Working America,
represent more than 11 million workers. For more than 60 years, the American labor movement
has championed the provision of real retirement security to working families across all sectors of
our economy.

We face a retirement security crisis today. The current economic downturn, combined
with the erosion of secure, defined benefit pension plans and the explosion of cheaper, less
secure defined contribution plans, has exposed severe deficiencies in the current retirement
system. And, the decline in asset markets imperils the savings of workers and the funding of

Our responses note the question numbers from the Request for Information (RFI) where
appropriate. As we are not responding to all of the questions posed, the numbers are not consecutive. We
also note that while we do not have empirical data for plans covering represented workers, the responses
reflect discussion with various affiliates.



pension plans. Without systemic reform, it will take years for depleted retirement accounts and
pension funds to turn around.

Today, only 16 percent of workers are very confident about having enough money for a
comfortable retirement—the lowest level in 20 years, according to the 2010 Retirement
Confidence Survey.’ This lack of confidence is justified as the majority of America’s workers
will face retirement with far less security than previous generations.

Ensuring that working families have sufficient retirement assets and savings to support a
comfortable retirement is an important national policy objective. Everyone should have adequate
retirement income after a lifetime of work to maintain a reasonable standard of living in
retirement. And, the data shows that 401(k) savings plans are not up to the task. As of June
2009, the median account balance in a workplace plan was around $27,000 and for those near
retirement (ages 55 to 64), the median was only $69,1272

We should recognize the preference for lump sum payments is directly related to the
inadequacy of 401(k) savings plan account balances. Workers and retirees will continue to
choose lump sum payments as long as the typical balance does not provide meaningful retirement
income when it is annuitized. A $70,000 account balance is a very large amount of money in
relationship to workers’ current financial needs but provides only a trivial amount of monthly
lifetime income."

In our view, defined benefit pension plans remain the soundest and most cost-effective
vehicles for building and safeguarding retirement income security, with professional asset
managers, lower investment fees and better returns. We are fully committed to strengthening and
improving existing defined benefit plans and 401(k) savings plans through legislative and
regulatory action. But, we cannot ignore the reality that the current system is inaccessible,
inadequate or insecure for the millions of workers without pensions.

We welcome the agencies’ attention to retirement security, but we are concerned that the
RFI focuses on only one small aspect of the crisis we face. More than just tinkering with existing
savings plans, offering automatic enrollment in Individual Retirement Accounts and encouraging
lifetime income options must be done. We need a new private sector retirement system for future

° Ruth Helman, Craig Copeland and Jack VanDerhei, The 20/0 Retirement Confidence Survey,
Employee Benefit Research Institute (March 2010) available at
http:/Avww.ebri.org/pdf/briefspdf/EBRI_1B_03-2010_No340_RCS.pdf.

Craig Copeland, Individual Account Retirement Plans: An Analysis of the 2007 Survey of
Consumer Finances, With Market Adjustments to June 2009, Employee Benefit Research Institute (August
2009) available at http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=4326,

‘ For a 60-year old worker and his 60-year old wife, a balance of $70,000 provides monthly

payments of less than $400 on a joint and 100% survivor annuity using the federal Thrift Savings Plan
calculator or ImmediateAnnuities.com, Instant Annuity Calculator, (assuming Pennsylvania residency).

ve


generations, one that combines the best features of both defined benefit and defined contribution
plans in order to achieve more comprehensive coverage and adequate benefits for all workers.

Lifetime Benefit Payments Availability and Advantages (Questions 1-8)

The most significant advantage of lifetime benefit payments is the security of a steady,
guaranteed monthly income stream. In defined benefit plans, this payment stream generally also
provides continued payments to a spouse or other designated beneficiary.

As a result of the guaranteed payment stream, participants do not face longevity or
investment risk. In addition, the plan bears the responsibility for the ongoing investment of plan
assets and its larger pool of assets and use of professional investment managers can provide
better returns at a lower cost.°

The potential disadvantages include the inability to access funds in the event of a
financial emergency, and for those without an option to elect an annuity with continued payments
to a beneficiary who die shortly after retirement, there is a perceived loss.

Notwithstanding the strengths of a secure, lifetime benefit stream, most workers elect
lump sum distributions if they have the choice of doing so under a defined benefit pension plan.
(Question 2) In the case of 401(k) savings plans negotiated by AFL-CIO affiliate unions, most
plans were designed to supplement defined benefit pension plans and the lump sum distribution
is the only payment form.°

The most typical reasons participants elected the lump sum option noted by AFL-CIO
affiliate unions included:

¢ The fear that the employer and the plan might not be there in the future and, in some
instances, the potential loss of benefits given the limits of the guarantees provided by the
Pension Benefit Guaranty Corporation (PBGC).

e The size of the potential payment since the present value of an annuity offered by the
defined benefit plan could be the largest sum workers would ever have available and for

some, it could be used to meet immediate financial needs.

¢ The preference to manage their own money and the belief they could achieve better
results.

e The desire to provide a legacy to their heirs.

° Beth Almeida and William B. Fornia, A Better Bang for the Buck: The Economic Efficiencies of

Defined Benefit Pension Plans, National Institute on Retirement Security (August 2008) available at
http://www.nirsonline.org/storage/nirs/documents/Bang%20for?620the%20Buck%20Report.pdf

® Because the lump sum distribution is the only option, none of our affiliate unions are aware of any

negotiated 401(k) savings plans using employer contributions to fund lifetime income. (Question 5)

we