Private Pensions: Participants Need Information on Risks They Face in Managing Pension Assets at and during Retirement
Published: 2003-07-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The decisions that retiring workers make about how and when to draw down their pension plan assets determine in part whether they will have pension income that lasts throughout retirement. Individuals will need pension and other retirement income to sustain them over a longer period of time than in the past. Moreover, the continuing trend towards pension plans with individual accounts has increased participants' responsibility for managing their pension assets during retirement. As such, our objectives were to determine: (1) what benefit payout options and accompanying information pension plans make available to participants at retirement, (2) what benefit payouts plan participants receive at retirement, and (3) the actions available to help retiring participants preserve their pension and retirement savings plan assets.
section_title: What GAO Found
paragraphs: Defined benefit (DB) plans make annuities available to all participants at retirement, while defined contribution (DC) plans make lump sums available to almost all participants. Recent data also show that about half of private sector workers who participated in DB plans had a lump sum option at retirement, and over a third of their counterparts in DC plans had an annuity option. Plan sponsors GAO spoke with provide retiring participants with applicable notices about their benefit payout options available under the plan. Additional information provided by plan sponsors GAO spoke with primarily focused on saving for retirement. Risks that can affect retirement income, or other considerations relevant to managing pension assets at and during retirement were generally not discussed. According to GAO's analysis, while 60 percent of recent retirees received annuities, an increasing percentage from 1992 to 2000 directly rolled over lump sum benefits into an individual retirement account or deferred their receipt by leaving these assets in the plan, a trend in part explained by the shift toward retirees with DC plan benefits. Additionally, GAO found that a growing percentage of those retirees who reported having a choice of benefit payouts chose to directly roll over their lump sum benefits or leave benefits in the plan rather than receive annuities. Actions available to help retiring participants preserve their pension and retirement savings plan assets range from options that would encourage the receipt of annuities to providing information to help participants make better decisions about managing their pension assets at and during retirement. According to an expert panel GAO used as part of this study, retirees need to be aware of the risk of outliving one's assets in retirement and the financial risks individuals face in retirement. Over 90 percent of GAO's panelists rated providing information on such risks as very or extremely effective in helping retiring participants make decisions about managing their pension assets.

section_title: Letter
paragraphs: The decisions that retiring workers make about how and when to draw  down their pension and retirement savings plan assets determine in part  whether they will have pension income that lasts throughout retirement.  Individuals are living longer on average once they retire and will need  pension and other retirement income to sustain them over a longer period  of time than in the past. Moreover, the continuing trend away from  traditional defined benefit (DB) pension plans that can guarantee a stated  level of income for life towards defined contribution (DC) plans with  individual accounts has made participants more responsible for managing  their pension assets during retirement. Increasingly, retirees have access  to their pension and retirement savings plan assets and the flexibility to  choose how and when to invest and draw down these assets.
The type of pension or retirement savings plan workers participate in  could influence the benefit payment options they have available. Private  employers may sponsor DB and/or DC pension plans for their employees.  DB plans must make available a joint and survivor life annuity to retiring  participants—a series of periodic payments that begin at retirement and  continue through the life of the participant (or other specified period) and  at the death of the participant, to the surviving spouse. These plans may  also offer a lump sum—a cash amount—as an alternative payout option to  the annuity. While some DC plans are required to make available a joint  and survivor annuity, DC plans typically make benefits available as a lump  sum (i.e., the participant’s account balance) or installment payments— periodic withdrawals paid until account balances are exhausted. DC plans  may offer to purchase an annuity.
Pension plan sponsors must provide certain disclosures and notices to  retiring participants about their pension benefit payment options. These  requirements vary based on type of plan and benefit options available  under the plan. For all DB plans as well as those DC plans subject to the  joint and survivor annuity requirement, plans must provide, among other  information, a written explanation of the terms and conditions of the joint  and survivor annuity, including information about other payout options  made available under the plan and the rights of the participant’s spouse.
Annuities and lump sums present different advantages and risks to  retirees. A life annuity, whether received from a plan or purchased,  generally provides insurance that a retiree will not run out of income no  matter how long he or she lives. However, if a retiree dies soon after  choosing or purchasing an annuity, he or she would likely receive  considerably less than if he or she had taken a lump sum and will be  unable to leave that asset as a bequest. Also, income from fixed annuities  may not be adequate to pay for unexpected large expenses or provide  protection against inflation.
Retiring participants who receive lump sums have the flexibility to  preserve or draw down these assets as they wish, but could risk running  out of pension assets if they live longer than expected, draw down assets  too rapidly, or suffer poor investment returns on their assets. A retiree  may choose to receive a lump sum directly from the plan as a cash  settlement and then invest or spend some of or the entire amount.  Alternatively, retirees who receive lump sums may preserve these assets  by purchasing an annuity with some or all of the proceeds to provide a  stream of income throughout retirement.
Because of concerns about whether retirees will preserve their pension  assets you asked us to determine: (1) what benefit payout options and  accompanying information pension plans make available to participants at  retirement; (2) what benefit payouts plan participants receive at  retirement; and (3) the actions available to help retiring participants  preserve their pension and retirement savings plan assets.
To determine what benefit payout options and accompanying information  DB and DC plans make available to participants at retirement, we  reviewed applicable laws and regulations to identify benefit payout  options plan sponsors must and may provide at retirement and the types of  accompanying information they must furnish to participants. We obtained  data on the types of payout options available to participants from the  Bureau of Labor Statistics’ (BLS) National Compensation Survey for 2000.  We interviewed pension experts and convened a Web-based expert panel  to identify factors that may affect the benefit payout options plans make  available. To examine how retiring plan participants receive their pension  benefits, we used publicly available data from the University of Michigan’s  Health and Retirement Study (HRS), covering the period from 1992 to  2000. In addition, we interviewed plan sponsors and practitioners to obtain  information and views on the benefit payouts retirees choose when they  have payout options and reasons why retirees prefer (or do not prefer)  different benefit payouts. To identify actions that could help retiring  participants preserve their pension and retirement savings plan assets and  obtain expert opinions and views, we interviewed pension experts and  surveyed our Web-based expert panel. A range of experts, including  academics, plan practitioners, and representatives of insurance providers,  employers, and public interest groups, participated on our expert panel.
We conducted our work between August 2002 and July 2003 in accordance  with the generally accepted government auditing standards. (See app. I for  more details on our data, scope, and methodology.)
subsections: section_title: Background
paragraphs: The standard of living of the elderly depends on total retirement income,  which includes Social Security, pensions, income from assets, and  earnings from employment. While Social Security provides a foundation  for retirement income, savings through pension and retirement savings  plans, as well as by individuals on their own behalf, can contribute  substantially to ensuring a secure retirement. For example, the Social  Security Administration reports that while 39 percent of income for  persons 65 and over came from Social Security income in 2001, 18 percent  of their income came from pensions (see fig. 1).
To encourage employers to establish and maintain pension plans for their  employees, the federal government provides preferential tax treatment  under the Internal Revenue Code (IRC) for plans that meet certain  requirements. A purpose of tax preferences for employer-sponsored  pensions is to encourage savings for workers’ retirement. Pension tax  preferences are structured to strike a balance between providing  incentives for employers to start and maintain voluntary, tax-qualified  pension plans and ensuring participants receive an equitable share of the  tax-favored benefits.
A qualified pension plan is a retirement plan that satisfies certain  requirements set forth in the Internal Revenue Code. In order to be tax- qualified, private pension plans must satisfy a number of requirements,  including minimum requirements on coverage and benefits. Private  pension plans must also generally meet the requirements of the Employee  Retirement Income Security Act of 1974 (ERISA). Title I of ERISA, among  other requirements, contains requirements regarding information that plan  sponsors must provide to participants and defines the obligations of the  individuals who administer employer-sponsored plans.
There has been a continuing trend from DB to DC plans over the last   2 decades. DOL reports that private sector employers sponsored over  56,000 tax-qualified DB plans in 1998 down from over 139,000 in 1979,  while the number of tax-qualified DC plans sponsored by private  employers more than doubled from over 331,000 to approximately 674,000  during this same period. Along with this continuing trend to sponsoring  DC plans, there has also been a shift in the type of plans that private sector  workers participate in. DOL reports that the percentage of private sector  workers who participated in a primary DB plan has decreased from 37  percent in 1979 to 21 percent by 1998, while the percentage of such  workers who participated in a primary DC plan has increased from 7 to 27  percent during this same period. Moreover, these same data show that, by  1998, the majority of active participants (workers participating in their  employer’s plan) were in DC plans, whereas nearly   20 years earlier most of them were in DB plans.
Employers who sponsor DB plans are responsible for making  contributions that are sufficient for funding the promised benefit,  investing and managing the plan assets, and bearing the investment risk  because the employer, as plan sponsor, agrees to make future payments  during retirement. However, under DC plans, workers bear the investment  risk because there is no promise made by the employer that money will be  available during retirement. Thus, as a result of this shift from DB to DC  plans, an increasing share of the responsibility for providing for one’s  retirement income has shifted from the employer to the employee.
DB plans sponsored by private employers are required to offer joint and  survivor annuities to married participants beginning at the plan’s normal  retirement age. These annuity payouts, called qualified joint and survivor  annuities (QJSA), guarantee a benefit for the life of the participant and the  participant’s surviving spouse. DB plans may also offer a single-life annuity  to unmarried participants. With respect to DC plans, there is no uniform  requirement regarding benefit payouts they must offer. Rather, certain DC  plans must adhere to the QJSA requirements because, similar to DB plans,  they are subject to minimum funding standards. Other DC plans are not  subject to the QJSA requirements if the plan provides for payment in full  of the participant’s accrued benefit under the plan to the spouse on the  death of the participant and the participant has not elected to receive a life  annuity.
Plans subject to the QJSA requirements must provide participants with a  written explanation of the terms and conditions of the QJSA. As part of  this notice, participants must be furnished with a description of other  benefit payouts that the plan offers as options to the QJSA—including  information on their features and value of a participant’s benefits under  such options. In addition, the plan must provide participants with an  explanation of the participant’s right to make, and the effect of, an election  to waive the QJSA form of benefit, the rights of the participant’s spouse,  and the right to revoke an election to waive the QJSA form of benefit.
Because of concerns that participants who are offered QJSA benefits do  not have adequate information to compare these benefits with other  optional payouts, IRS has proposed regulations to strengthen the  requirements regarding the written explanation of a QJSA that plans must  provide. Specifically, the proposed regulations provide additional guidance  regarding information that plans furnish to describe the value of a  participant’s benefits under optional payouts compared with the value of a  participant’s QJSA benefits. The comparison must show what the  participant would receive under each optional payout relative to the QJSA  (including for those benefit payouts that are subsidized) in a way that is  meaningful. Additionally, this comparison must include information that is  more readily understandable to participants.
There is also required information that plans must provide retiring  participants about lump sum payouts. Plans that offer a lump sum payout  must provide a rollover notice to retiring participants. The rollover notice  must discuss the participant’s ability to have such payouts directly  transferred by the plan to another eligible retirement plan. Rollover  notices must also include information about the tax consequences of  choosing various payout options, such as rolling the assets to another  account or taking a lump sum directly as a cash settlement.
Retiring participants who have the option to receive benefits as a lump  sum amount (i.e., cash settlement) may also choose to directly “roll over”  their assets to another qualified retirement plan, such as an IRA. DB plans  that permit lump sums must adhere to certain rules regarding the  calculation of lump sum amounts. Lump sums must be at least as large as  the actuarial equivalent (i.e., present value) of a participant’s accrued  benefit (i.e., the value of the deferred annuity that the participant is  entitled to receive or at the plan’s normal retirement age).
DC plan participants also have the option to defer receipt of benefits by  leaving assets in their individual accounts. Both directly rolling over  assets into another qualified retirement plan and leaving benefits in the  plan preserve pension assets at the point of retirement. Also, DC plan  participants may have the option to receive their benefits as a series of  installment payments at retirement that he or she may spend or save as  desired. However, unlike a DB plan, a DC plan cannot itself provide a life  annuity, but can offer to purchase an annuity from an insurance company.  Retirees that do not choose or purchase annuities at the point of  retirement assume personal responsibility for managing their pension and  retirement savings plan assets to provide retirement income. In particular,  these retirees must decide how pension assets are saved or invested and  determine the timing and amount of withdrawals.
Increasingly, retirees will—on average—need to balance income and  expenditures over a longer period of time than in the past. This is in part  due to the long-term trend towards earlier retirement throughout most of  the twentieth century. Nearly half of all men now leave the labor force by  age 62 and almost half of all women are out of the workforce by age 60.  Moreover, the decline in the average retirement age has occurred in an  environment of rising longevity for the elderly. Falling mortality rates have  added almost 4 years to the expected life span of a 65-year-old man and  more than 5 years to the life expectancy of a 65-year-old woman since  1940.
Individuals face a variety of risks in managing their assets, income, and  expenditures at and during retirement. For example, retirees may outlive  their pension or retirement savings plan assets. In addition, inflation may  erode the purchasing power of their income, investments may yield  returns that are less than expected or decline in value, and large  unplanned expenses, such as those to cover long-term care, may occur at  some point during retirement.
Annuities offer a means to mitigate much of the financial uncertainty that  accompanies living to very old ages, but may not necessarily be the best  approach for all retirees. For example, an individual with a life shortening  illness might not be concerned about the financial needs that accompany  living to a very old age. Also, some individuals may want to continue to  accumulate assets during retirement and could invest their pension assets  in IRAs or financial products, in which such assets could be more heavily  invested in equities. Strategies to manage risk during retirement, when  most are decumulating rather than accumulating assets will necessarily be  highly individualized.
The Internal Revenue Service, DOL’s Employee Benefits Security  Administration (EBSA), and the Pension Benefit Guaranty Corporation are  primarily responsible for enforcing laws that govern private pension plans.  The Internal Revenue Service enforces provisions of the IRC that apply to  tax-qualified pension plans. EBSA enforces ERISA’s reporting and  disclosure provisions and fiduciary responsibility standards, which among  other things concern the type and extent of information provided to plan  participants. The Pension Benefit Guaranty Corporation insures the  benefits of participants in certain tax-qualified private sector defined  benefit plans.
Recognizing the importance of retirement savings, the Congress enacted  the Savings Are Vital to Everyone’s Retirement (SAVER) Act of 1997 to  advance the public’s knowledge and understanding of the importance of  retirement savings. The act requires DOL to, among other things, maintain  an ongoing outreach program to the public to effectively promote  retirement savings and to disseminate specific educational materials  related to retirement savings and the principles of saving and investment.  DOL’s Retirement Savings Education Campaign (RSEC), which began   2 years prior to passage of the SAVER Act, is an outreach program that  targets owners of small businesses, women, minorities, and youth to  change the way they think about, and act on, their retirement saving  needs. As part of its campaign, DOL is partnering with outside  organizations to develop informational materials and tools to help  individuals understand their retirement benefit options and make  informed decisions about retirement, including managing assets during  retirement.
section_title: DB Plans More Likely to Offer Annuities and DC Plans to Offer Lump Sums, and Plans Provide Only Applicable Notices on Benefit Payout Options
paragraphs: DB plans are more likely to make annuities available to retiring  participants because they are required to do so, while DC plans are more  likely to make lump sums available. Additionally, nearly half of private  sector workers who participated in a DB plan have a lump sum available at  retirement, while over a third of DC plan participants have annuities  available. Pension plan sponsors we spoke with provide participants with  applicable notices about their benefit payout options available under the  plan. Some plan sponsors we spoke with provide information beyond  these notices, but this information primarily focuses on saving for  retirement and not on issues related to managing pension assets at and  during retirement.
subsections: section_title: Nearly Half of DB Plans Make Lump Sums Available and Just Over a Third of DC Plans Make Annuities Available
paragraphs: DB plans are more likely than DC plans to make annuities available at  retirement, while DC plans are more likely than DB plans to make lump  sums available. The most recent BLS data (2000) show that, not  unexpectedly, all private sector workers who participated in DB plans had  an annuity option available at retirement, while only 38 percent of their  DC counterparts had this option. Almost all private sector workers who  participated in DC plans (94 percent) had a lump sum option available and  just under half (46 percent) of their DB counterparts had this option  available. Additionally, over half of these workers in DC plans had an  installment payment option (55 percent) available.
Some private sector workers in each type of plan also had more than one  benefit payment option available at retirement (see fig. 2). BLS data show  that 46 percent of private sector workers in DB plans had both an annuity  and lump sum option available. Also, 32 percent of all private sector  workers who participated in DC plans had a lump sum, an annuity and an  installment payout option available at retirement.
Two surveys conducted on the incidence of payout options plans make  available found similar results. These surveys indicated that almost all DC  plans offer a lump sum to retiring participants, and all DB plans offer an  annuity. In 2001, a study by Hewitt Associates on certain DB plans found  that 40 percent of these plans offered all participants a lump sum option.  A survey of certain DC plans by the Profit Sharing Council of America  shows that, in 2001, about 99 percent of the DC plans surveyed offered a  lump sum at retirement, 56 percent offered an installment option, and   28 percent offered an annuity. Plan sponsors we spoke with also  confirmed our findings from the BLS data.
Several factors may affect the benefit payout options plans made available  to retiring participants. Our expert panel suggested that DC plans do not  offer an annuity because of certain challenges associated with providing  this payout option. For example, members of the expert panel suggested  that current QJSA regulations—which require plans that offer an annuity  to offer a QJSA annuity and adhere to spousal consent rules—may be  administratively burdensome to plan sponsors. Also, some plans do not  offer an annuity in part because of the concern about being held liable for  any losses to participants in the event the annuity provider cannot meet its  financial obligations.
Our expert panel also identified worker preferences as an important factor  affecting the pension benefit payout options plans offer to retiring  participants. In part, plan sponsors offer lump sums in response to  employee demand for this option and choose not to offer annuities absent  employee demand for them. Also, pension experts and plan sponsors we  spoke with agreed that plans offer lump sums because workers generally  prefer them to annuities. A funding provider for defined contribution  plans, which used to only offer annuity payouts at retirement, expanded  the payout options it makes available to retiring participants in response  to participants’ desire for more options and control in managing their  pension and retirement savings plan assets.
section_title: Plans Provide Participants with Notices about Benefit Payout Options, but Information on Managing Assets during Retirement Is Not Widely Available
paragraphs: Plan sponsors we spoke with indicated that they provide retiring  participants with applicable notices about benefit payout options available  under the plan. For example, those sponsors that offer an annuity payout  told us that they provide the required QJSA and spousal consent notices to  participants. Also, those plan sponsors that offer a lump sum told us that  they provide participants with the required rollover notice that reviews the  tax consequences of choosing various payout options. Additionally, these  sponsors provide retiring participants with various accompanying  materials to the notices that further describe all the benefit payout options  available under their plans.
While plan sponsors we spoke with provided some additional information  on saving for retirement, they generally did not provide information on  considerations relevant to managing pension and retirement savings plan  assets at and during retirement. For example, some of these sponsors  provide information on investment alternatives and the potential impacts  of various investment strategies on accumulating assets for retirement.  Some provide calculators or annual reports that, based on a participant’s  current account balance, estimate retirement income using various saving  strategies and age scenarios.
However, the information provided by the plan sponsors we spoke with  generally does not discuss considerations relevant to managing pension  and retirement savings plan assets at and during retirement. These plan  sponsors generally do not discuss the potential pros and cons of available  payout options as related to managing pension assets during retirement.  For example, these sponsors do not provide information that shows  income payments a retiring participant could receive from an annuity  compared with income payments the participant might receive from  personally investing and drawing down a cash settlement. Additionally,  they typically do not discuss risks retirees may face in managing their  assets during retirement, or provide information on how to assess needs at  or during retirement.
Plan sponsors are hesitant to provide information and education on  managing assets during retirement because of liability concerns. Although  plan sponsors are permitted to provide information and education to  participants, there is no specific guidance that plan sponsors may follow  to provide retiring participants with information on issues related to  managing their pension assets during retirement. If a plan sponsor  provides what is considered to be advice, the sponsor may be held liable  for any monetary losses a participant experiences for making an  unfavorable decision--with respect to choosing a benefit payout at  retirement or managing pension assets—based on information they  provide. Plan sponsors are, therefore, careful not to provide information  that may be perceived as advice and could result in litigation if  participants choose benefit payout options or assets management  strategies that ultimately reduce their retirement income.
A funding provider for defined contribution plans we spoke with does,  however, provide information and education on potential risks retirees  face and other considerations for managing assets during retirement. This  organization provides information on three risks to retirement income,  including eroding purchasing power due to inflation, outliving one’s  pension and retirement assets, and the possibility of getting lower than  anticipated investment returns due to market conditions. Participants near  and at retirement also receive information to better understand how each  of the various payout options they may choose from could be most useful  in meeting their individual retirement income needs and preferences.  Information and education is provided at key stages of an employee’s  participation in the plan using multiple communication approaches,  including seminars, Web-based planning tools, written materials,  worksheets, and one-on-one counseling. Representatives from this  organization cited several reasons for providing this type of information,  including an increase in payout options available and participant demand  for more information and education.
section_title: Most Retirees Receive Annuities, but an Increasing Percentage Receive Other Types of Benefit Payouts
paragraphs: When we analyzed the types of payout employees received at retirement,  we found retirees increasingly selecting benefit payouts other than  annuities. Although we found that about 60 percent of retirees received  annuities, over time an increasing percentage of more recent retirees  chose to directly roll over their lump sum benefits into an IRA or to defer  their receipt by leaving them in the plan. On the basis of our statistical  analysis, we found that retirees who received benefits from DB plans were  most likely to receive annuities, while those who received benefits from  DC plans were most likely to directly roll over these assets into an IRA or  defer the receipt of benefits. We found that participation in a DB plan was  the primary factor in choosing to receive an annuity.
Our analysis of recently retired workers with pensions indicates that while  most received annuities, many received other types of payouts. As shown  in figure 3, from 1992 to 2000 about 60 percent of new retirees with  pensions received an annuity. However, about 40 percent reported  directly rolling over benefits into an IRA or deferring receipt by leaving  benefits in their plan, and approximately 14 percent of retirees took  pension assets as a cash settlement.
While three-fifths of all retirees took annuities, over time an increasing  percentage of more recent retirees received other types of payouts.
Specifically, the percentage of all retirees who either directly rolled over  benefits into an IRA or deferred their receipt increased from about 32 to   47 percent, while the percentage who received cash settlements directly  from their plan changed little. In contrast, the percentage of retirees  receiving annuities ranged from a peak of about 65 percent to about   57 percent.
Most retirees participated in DB plans between 1992 and 2000, and payouts  received by retirees with DB benefits tended to be markedly different from  payouts received by retirees with DC benefits, which helps to explain why  most retirees received annuities. About 77 percent of retirees with DB plan  benefits received an annuity from those plans (see fig. 4), while only   8 percent of retirees with DC plan benefits received or purchased  annuities with their benefits (see fig. 5). Conversely, over three-quarters of  retirees with DC plan benefits directly rolled over assets into an IRA or  deferred receipt of benefits by leaving assets in their plan.
The growing trend towards payouts other than annuities may reflect, at  least in part, the continuing trend in coverage towards DC plans. Among  all retiring participants who received pension benefits, the percentage who  had participated in DC plans increased considerably over time, while the  percentage who had participated in DB plans decreased somewhat after  peaking in 1994. Also, little change occurred in the types of payouts  received by those with benefits from either DB or DC plans. For example,  about 90 percent of retirees with DC plan benefits received payouts other  than annuities over the entire period we examined. Similarly, during this  same period, retirees with DB plan benefits received their payouts largely  through annuities, with little change.
One likely reason why many retirees with DB plans receive annuities is  that many DB retirees do not have other payout options available. About  38 percent of the DB retirees we analyzed reported having a choice of  receiving a payout other than an annuity. We narrowed our analysis to  examine the payout choices made by retirees, eliminating from our  analysis DB retirees with no payout choice other than an annuity. Thus, in  addition to examining how all retirees receive their pensions, we also  analyzed only retirees who report having a choice of receiving benefits as  an annuity or as a lump sum amount. Over the period, the percentage of  retirees who chose to directly roll over their lump sum benefits to an IRA  or to defer receipt of benefits rose substantially, from around 44 percent of  retirees to about 66 percent (see table 2 in app. II). The percentage  choosing annuities and cash settlements, however, remained flat,  indicating that more retirees chose multiple payouts. Additionally, we  found that 64 percent of DB retirees with a choice still choose annuities  over other options. As with the full sample of retirees, the changes over  time among those with a choice of payout appears to be attributable  largely to the trend toward participation in DC plans, as we do not observe  many changes in payout choices within either plan type.
Currently, pension experts and plan sponsors we spoke with told us that  most retirees do not choose annuities when they have a choice of payout  options. For example, one plan administrator we spoke with indicated that  about two-thirds of retirees in the DB plans they administer choose  payouts other than an annuity when a choice of payout options is offered.  Additionally, a funding provider for DC plans reports that the percentage  of their participants who chose an annuity (single or joint life) as their  initial income selection fell from 78 percent to 45 percent from 1995 to  2001. Nevertheless, our analysis is not necessarily inconsistent with this  information. Although we found that most retirees with pension benefits  received an annuity, we also found that a growing percentage of all  retirees with a choice of payout options received benefit payouts other  than an annuity. Moreover, the majority of those retirees who received DC  plan benefits and who had a choice of payout options choose to receive  payouts other than an annuity (see table 2 in app. II).
It is also possible that the receipt of lump sums from DB plans, whether as  cash settlements or through directly rolling over lump sum benefits to an  IRA, has increased since 2000. Recently, 30-year Treasury bond rates,  which DB plan sponsors must use to determine lump-sum amounts, have  fallen from their overall 1990’s levels. As a result, lump sums from DB  plans have increased in value relative to participants’ annuity benefits, and  retiring participants may find lump sums more attractive when they are  available under their plan.
We further analyzed retirees with a choice of payouts to determine  statistically which factors may influence retirees to choose annuities. Not  unexpectedly, participation in a DB plan was the strongest predictor of  annuity choice. Also, retirees with lower total household assets (excluding  pensions and other retirement assets) and retirees with more years in the  workforce were more likely to choose an annuity, all else being equal. In  addition, different factors seemed to influence payout choices for retirees  with DC benefits as compared with those with DB benefits. For example,  retirees with DC plan benefits were more likely to be influenced by the  price of an annuity and by their perceived health status (with those  reporting they were in better health more likely to choose an annuity),  while these factors did not appear to affect retirees with DB plan  benefits.
Pension experts we spoke with suggested that annuities may appeal to  individuals with certain characteristics or preferences, while others prefer  to have control of their assets. Annuities may appeal to individuals who  expect to live long, are concerned about outliving their resources in  retirement, value a predictable, guaranteed income stream, or do not wish  or expect to leave a bequest. However, some retirees may decline to  consider annuities because such payouts are generally irrevocable, instead  preferring the flexibility that other payouts offer. Such retirees may  believe they can receive more income and better protect themselves  against inflation by investing assets on their own. Also, some retirees may  want to manage their pension assets because they have difficulty  comparing the value of a lump sum amount to its equivalent annuity  income stream. As such, retirees may believe lump sum amounts are  worth more than income payments from annuities.
Although not all retirees have the option to receive their pension as an  annuity, they may purchase individual annuities to pay income during  retirement directly from insurance companies. However, few retirees use  their pension benefits or other assets to purchase individual life annuities.  Some retirees may choose not to purchase an individual life annuity  because the availability of these annuities is limited, individual life  annuities have associated administrative and other expenses, and such  annuities generally do not provide protection against inflation.  Additionally, one individual annuity provider told us that the average  premium, or one-time payment an individual makes, to purchase an  individual life annuity is approximately $130,000.
The demand for individual annuities may grow as the market continues to  develop innovative annuity products that appeal to consumer preferences.  For example, demand for individual variable annuities, which offer the  potential for higher income payouts based on investment returns is  growing. Additionally, as more individuals will be approaching retirement  with responsibility for managing a larger share of their pension assets, the  demand for individual life annuities may increase.
section_title: Range of Actions Available to Help Retiring Participants Preserve Their Pension Assets
paragraphs: Pension experts identified a range of actions that could help retiring  participants preserve their pension and retirement savings plan assets.  Some policy options would require plans to payout or offer annuities to  retiring participants, while others would make it easier for plans to offer  annuities at retirement, or encourage retiring participants to choose  annuities. Additionally, pension experts generally agreed that information  and education could be provided to participants to help them make better  decisions regarding how they manage their pension assets during  retirement. For example, they noted that participants need to be aware of  various risks that may affect how participants manage and draw down  their pension assets to provide income during retirement. At present,  public education focuses primarily on saving for retirement.
subsections: section_title: Actions Available to Increase or Encourage Receipt of Annuities
paragraphs: Some actions that could help retiring participants preserve their pension  and retirement savings plan assets include options intended to increase or  encourage the receipt of annuities. While annuities are not the only way  plan participants can preserve their pension assets at retirement, they can  provide guaranteed income throughout retirement. Thus, we asked an  expert panel to identify options that could encourage more annuitization  of pension and retirement savings plan assets at retirement.
Some options are intended to increase the number of retiring participants  who receive annuities by imposing new requirements on plan sponsors.  One option is to require that all pension and retirement savings plans pay  life annuities to retiring participants. Such a mandate would ensure all  retiring participants have pension income for their remaining lifetimes. A  variation on mandatory annuitization would make life annuities the default  payout option in all DC plans. This could be achieved by requiring all tax- qualified DC plans to offer a life annuity at retirement and retiring  participants to actively choose to receive some other payout (e.g., a cash  settlement) instead of an annuity. While annuities would not be  compulsory, it is likely that more retiring participants would choose  annuities because choosing to receive some other payout would require an  affirmative choice. This is because some retiring participants may not take  the necessary steps to choose another type of payout available under their  plan.
Another somewhat less stringent option than mandatory annuitization is to  require tax-qualified DC plans to offer annuities to retiring participants  like DB plans are required to do. This option would provide more retirees  with the opportunity to preserve retirement savings by choosing an  annuity from their plan without requiring that they do so. Also, concerns  that some participants might have about the expense of purchasing an  individual annuity and potential difficulty in searching for an annuity  product could be mitigated if annuities were available under their plan.
Although these actions would increase the number of retirees who receive  annuities thus ensuring retirement income throughout their lives, they also  have drawbacks. For example, requiring that pension plans provide life  annuities to retiring participants would reduce people’s ability to tailor the  receipt of benefits to their particular circumstances. Depending on one’s  individual circumstances and preferences, an annuity may not be the best  payout option for managing pension assets during retirement. A retiring  participant who is in poor health or needs cash to cover certain expenses  may not want to receive an annuity. Also, some retirees might increase  their income by rolling over benefits directly to an IRA, thus enabling them  to invest and draw down their pension assets during retirement.
Requiring all tax-qualified DC plans to offer annuities to retiring  participants—as the default payout option or not—might not substantially  increase the number of retirees who choose annuities. Our analysis shows  that recent experience with retiring participants who have a choice of  payout options indicates that these retirees increasingly choose to directly  roll over their lump sum benefits into an IRA or defer the receipt of  benefits. Also, some plan sponsors and pension experts we spoke with  indicated that retiring participants generally do not choose annuities when  they have other payout options available.
A common drawback of such requirements on plans to offer annuities at  retirement is that they could increase the administrative and regulatory  burdens plan sponsors face. DC plans would have to comply with  applicable laws and regulations that must be satisfied when annuities are  provided, such as offering annuities that provide income for the life of the  participant and spouse or beneficiary. And those plans that do not  currently offer an annuity payout option at retirement would have to  contract with an annuity provider. Imposing new requirements on plans to  pay or offer annuities at retirement represent prescriptive approaches that  do not necessarily help retiring participants understand their pension  payout options or make decisions suited to their individual needs or  preferences.
While requiring plan sponsors to pay or offer annuities represents one set  of options for increasing annuitization, other options involve modifying  certain requirements to make it easier for qualified plans to offer annuities.  One such modification could be providing regulatory relief to plan  sponsors from potential fiduciary liability they assume in selecting an  annuity provider. Because plan sponsors must generally select the safest  available annuity for participants, those that do not offer annuities may be  concerned about being held liable for any losses to participants in the  event the annuity provider cannot meet its financial obligations. Another  modification could be exempting DC plans that are not required to offer an  annuity but choose to do so from having to make a joint and survivor  annuity the default payout or from satisfying associated spousal consent  requirements. These modifications could encourage more DC plans to  offer annuities to the extent they reduce administrative or regulatory  burdens that plans would incur otherwise. However, these modifications  could lessen certain protections available to plan participants that receive  or choose annuities.
In addition to options that focus on plan sponsors, our expert panel  identified other policy options that focus on encouraging more retiring  participants to choose annuities or purchase them with their pension  assets. For example, lowering taxes on annuity income from qualified  plans could encourage some retiring participants, who would not  otherwise do so, to choose or purchase an annuity. Such an incentive  would not involve any new requirements on plan sponsors to payout or  offer annuities at retirement.  Nor does it constrain an individual’s choice  because retiring participants who receive lump sum benefits could  partially annuitize their pension assets and maintain some assets they  could more easily access to cover immediate and/or large expenses. Also,  a tax incentive for qualified plan annuities could potentially help to reduce  the long-term burden on government assistance programs, such as the  Supplemental Security Income and Medicaid programs, to the extent that  fewer retirees deplete their assets during retirement.
However, a tax incentive for income provided by qualified plan annuities  could also have drawbacks. For example, such an incentive might be  limited to only those assets held in qualified retirement plans. Also,  annuities could be made more attractive to some retiring participants for  whom another payout option might be more advantageous, such as those  in ill health who need large sums of cash to cover medical expenses.  Moreover, some participants, who would elect an annuity from their plan  even in the absence of such an incentive, would benefit. To the extent this  option encourages more retirees to choose or purchase annuities, it would  result in the federal government forgoing some amount of revenue.
Another option that could encourage more retiring participants to choose  annuities would involve modifying the mandatory interest rate that DB  plan sponsors must use to calculate lump sums. By law, DB plans must use  the interest rate on 30-year Treasury bonds, which some pension experts  and plan sponsors consider to be low and thus inflate the value of lump  sums relative to annuities. A higher mandatory interest rate would  generally decrease and potentially equalize the value of lump sums from  DB plans relative to participants’ annuity benefits. As a result, smaller  lump sums may not be as economically attractive to some retirees.  However, the extent to which more retiring participants with DB benefits  would choose annuities instead of lump sums when they are both offered  is uncertain.
Alternatively, the taxes that apply to lump sums (i.e., cash settlements)  received directly by individuals prior to retirement could also be applied to  cash settlements received by retiring participants. Currently, lump sums  that are received directly by participants as cash settlements (prior to  attaining age 59-½) are subject to certain taxes. Less favorable tax  treatment of cash settlements, while not requiring retiring participants to  take an annuity or any other type of payout, could encourage retirees to  preserve their pension benefits. However, this option could be  disadvantageous for some retiring participants. For example, those  participants who are in poor health and need cash to pay for medical  expenses may want the access to large sums of cash and flexibility that a  cash settlement provides. Moreover, to the extent retiring participants  have difficulty comparing the value of annuity income payments with lump  sum amounts, options that seek to influence the payouts chosen by  retiring participants might have limited impact.
section_title: Increased Information and Education Could Help Participants Make More Informed Decisions
paragraphs: Beyond options focusing exclusively on annuities, pension experts we  spoke with generally agreed that retiring participants need information  and education to help them make decisions about how to manage their  pension assets during retirement. While annuities reduce the risk of  outliving one’s assets, they may not always be the best choice for  addressing individual retirement needs and preferences. Moreover, retiring  participants may have a choice of benefit payout options, and the payouts  they choose may or may not address their individual retirement income  needs and preferences.
According to our expert panel, retiring participants need information and  education on various risks that affect the level of income needed during  retirement. These risks include outliving one’s assets during retirement  (i.e., longevity risk) and financial risks, such as declining purchasing  power of retirement income (i.e., inflation risk) that affect how retirees  balance income and expenses. Almost all of the respondents from our  expert panel rated information on the financial risks individuals face in  retirement (96 percent) and the risk of outliving one’s assets in retirement  (91 percent) as very or extremely effective in helping retiring participants  make decisions about how to manage pension assets. Furthermore, a  recent study by the Society of Actuaries on retirement risks indicates that  both retirees and individuals approaching retirement age tend to  underestimate the average life expectancy of individuals at age 65. This  study also reports that 63 percent of pre-retirees and 55 percent of retirees  surveyed are somewhat or very concerned about not being able to keep  the value of their savings and investments growing faster than inflation.
Our expert panel also noted the importance of information and education  on other considerations relevant to managing pension and retirement  savings plan assets during retirement. Such considerations include how to  assess needs in retirement, how to compare annuity and lump sum  amounts, the value of expected benefit from DB and DC plans, how  annuities provide retirement income, and strategies for drawing down  pension assets during retirement. At least 60 percent of our expert panel  participants rated such considerations as very or extremely effective in  helping retiring participants make decisions about managing their  pensions during retirement.
Overall, federal efforts to provide information and education on retirement  planning have focused on accumulating pension assets and not on how to  manage these assets to provide income throughout retirement. Under its  authority to implement the SAVER Act, current DOL outreach efforts are  primarily aimed at advancing public awareness and understanding about  the importance of saving for retirement. For example, DOL convened two  national summits focusing on challenges to saving for retirement. Also, as  we previously reported, DOL conducts a range of outreach activities,  including developing and distributing publications and using public service  announcements.
DOL has begun to broaden the focus of its education initiatives to include  managing assets during retirement. For example, DOL is developing a tool  kit for those near retirement that will include some information on  considerations relevant to managing retirement assets during retirement.  However, some pension experts told us that there is a need for more focus  on managing pension and retirement savings plan assets during retirement.  These experts generally agreed that the federal government could improve  public awareness and understanding about issues related to managing  pension assets during retirement.
Also, pension experts we spoke with generally agreed that participants  need information and education in several areas to help them make  decisions about how to manage their pension assets during retirement.  Some of these experts told us that many participants do not accurately  assess the risk that they could live to very old age and have little income to  meet their needs. Others indicated that retiring participants do not  understand how annuities provide retirement income or how to assess  retirement income needs.
At present, federal pension law does not generally address managing  pension and retirement savings plan assets during retirement. Disclosures  plan sponsors must provide to participants about their pension benefits  are intended to give them information about rights and obligations under  the plan. There are no additional requirements on plan sponsors to provide  information and education to participants regarding managing pensions  during retirement. Also, while DOL issued regulatory guidance for plan  sponsors who want to provide investment information and education to  their participants, it has not issued similar guidance regarding the  provision of education on retirement planning. Recognizing the need for  more information on retirement planning, DOL’s Employee Retirement  Income Security Act Advisory Council Working Group on Planning for  Retirement issued a report that recommended DOL explore regulatory  measures to encourage employers to provide retirement planning advice  to their employees.
section_title: Conclusions
paragraphs: The decreasing number of employer-sponsored pension plans that offer  only life annuities at retirement and the increasing percentage of retiring  participants who choose benefit payouts other than annuities suggest that,  in the future, fewer retirees may receive pension income guaranteed to last  throughout retirement. The growth in the number of DC plans, along with  the increasing availability of lump sums from DB plans, means that  retirees will face greater responsibility and choices for managing their  pension and other assets at and throughout retirement. Depending on their  choices, retirees could be at greater risk of outliving their pension and  retirement savings plan assets or ultimately having insufficient income to  maintain their standard of living through their retirement years.
Such risks underscore the need for providing enhanced information and  education to participants about their available payout options, the issues  they may face in managing retirement assets, and how different options  may mitigate, or increase, these risks. As part of their responsibility,  retirees will have to weigh certain pros and cons of different ways to  manage and preserve pension assets. Currently, the notices that plan  sponsors must furnish to retiring participants are not sufficient to help  them choose payout options that suit their individual circumstances, while  assuring adequate levels of such income to the extent possible. Our expert  panel suggested that providing several types of information, such as on  risks that could affect retirement income security, could help retiring  participants make more informed decisions regarding how they balance  income and expenditures during retirement.
section_title: Matter for Congressional Consideration
paragraphs: To improve public awareness and understanding of important  considerations related to managing pension and retirement savings plan  assets at and during retirement, the Congress should consider amending  ERISA so that it specifically requires plan sponsors to provide participants  with a notice on risks that individuals face when managing their income  and expenditures at and during retirement.  Also, the Congress could  consider stipulating that this notice must be provided to participants at  certain key milestones, such as at enrollment in the plan, when  participants receive or when changes are made to certain plan documents,  when participants reach various years of service, when a participant  separates from service, and/or at retirement among other instances.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the Department of Labor and the  Department of the Treasury.  We received technical comments from both  agencies that we incorporated as appropriate.
In the draft of this report we sent to agency for review, we recommended  that the Secretary of Labor direct the Assistant Secretary, Employee  Benefits Security Administration, to require plan sponsors to provide  participants with information on risks that individuals face when  managing their income and expenditures during retirement.  DOL officials  said that the Secretary does not currently have the legal authority under  ERISA to require plan sponsors to provide such information.  Consequently, we changed our recommendation to a matter for  consideration for the Congress to amend ERISA so that it requires plan  sponsors to provide a notice to participants on risks that may affect an  individual’s ability to manage income and expenditures at and during  retirement.
In addition, we received a letter from the Department of the Treasury that  neither agrees nor disagrees with our findings and conclusions. Instead,  the letter highlights the Administration’s proposal to replace the 30-year  Treasury rate as the mandated discount rate used in many pension  calculations. Of relevance to this report, the letter notes that the  Administration’s proposal would affect the calculation of lump sum  payments (see app. V).
We are sending copies of this report to the Secretary of Labor,  the Secretary of the Treasury, and interested congressional committees.  We will also make copies available to others on request. In addition, the  report will be available at no charge on GAO’s Web site at  http://www.gao.gov.
If you have any questions concerning this report, please contact me at  (202) 512-7215 or George A. Scott at (202) 512-5932. Other major  contributors to this report include Jeremy Citro, Mark M. Glickman,   Gene Kuehneman, Luann Moy, Nyree M. Ryder, Patrick DiBattista,   Joseph Applebaum, and Roger Thomas.
section_title: Appendix I: Data, Scope, and Methodology
paragraphs: We used a variety of data sources to examine the pension payouts plans  make available to retiring participants and the benefit payouts they  receive, as well as to identify what available actions could help retiring  participants preserve their pension and retirement savings plan assets. We  used National Compensation Survey (NCS) data from the Bureau of Labor  Statistics (BLS) to determine the availability of various pension payout  options. Further, we analyzed Health and Retirement Study (HRS) data  covering individual respondents that retired between 1992 and 2000 to  determine the pension payouts retirees receive and what factors  influenced their choice of payout.
Generally, the estimates in this report of the availability and the receipt of  pension payouts are derived from a sample of usable responses (i.e., NCS  and HRS) and therefore are subject to sampling and nonsampling errors.  Sampling errors are the differences that can arise between results derived  from a sample and those computed from observations of all units in the  population being studied. When probability techniques are used to select a  sample, statistical measures called “standard errors” can be calculated to  measure possible sampling errors.
Nonsampling errors also affect survey results. They can be attributed to  many sources: inability to obtain information about all establishments in  the sample; definitional difficulties; differences in the interpretation of  questions; inability or unwillingness of respondents to provide correct  information; mistakes in recording or coding the data; and other errors of  collection, response, processing, coverage, and estimation for missing  data. Computer edits of the data and professional review of both  individual and summarized data reduce the nonsampling errors in  recording, coding, and processing the data. These nonsampling errors can  influence the accuracy of information presented in the report, although the  magnitude of their effect is not known.
Finally, we convened a virtual expert panel—using a Delphi method—to  identify and evaluate the actions available to help retiring participants  preserve their pension and retirement savings plan assets at and during  retirement. We performed our work between August 2002 and July 2003 in  accordance with generally accepted government auditing standards.
subsections: section_title: Data
subsections: section_title: BLS Employee Benefits Data
paragraphs: BLS collects information covering incidence and detailed provisions of  selected employee benefit plans as part of the NCS. The portion of the  NCS from which reported estimates on employee benefits were made  covers all private-sector establishments in the United States, with the  exception of farms and private households. The most recent (2000) NCS  obtained data from 1,436 private industry establishments, representing  over 107 million workers; of this number, nearly 86 million were full-time  workers and the remainder—nearly 22 million—were part-time workers.   NCS collects incidence and provisions data for both defined benefit and  defined contribution retirement plans. Excluded from the survey are self- employed persons, proprietors, major stockholders, members of a  corporate board who are not otherwise officers of the corporation,  volunteers, unpaid workers, family members who are paid token wages,  the permanently disabled, partners in unincorporated firms, and U.S.  citizens working overseas. BLS statistics based on NCS data are estimates  derived from a sample of usable occupation quotes selected from the  responding establishments. They are not tabulations based on data from  all employees in private establishments within the scope of the survey.  BLS did not calculate estimates of sample error for these statistics.  Summary, data collection, and survey methodology information for the  NCS is publicly available through the Bureau of Labor Statistics’ World  Wide Web site at http://www.bls.gov/ncs/home.htm.
section_title: HRS Retirement Data
paragraphs: HRS is a national panel study intended to provide data related to  retirement, health insurance, saving and economic well-being. The HRS  began with an initial (1992) sample of over 12,600 persons in 7,600  households. The HRS baseline is drawn from in-home, face-to-face survey  interviews conducted in 1992 for the 1931-1941 birth cohort (and their  spouses, if married, regardless of age); and in 1998 for newly added   1924-1930 and 1942-1947 birth cohorts. Follow-ups are administered by  telephone every second year, with proxy interviews after death. Future  data collections will largely replicate the 1998 HRS in design, format,  coverage, structure, and measurement. Data is collected by the Institute  for Social Research, University of Michigan, and is supported by funding  from the National Institute on Aging (NIA), the Social Security  Administration (SSA), the Department of Labor, the state of Florida  Department of Elder Affairs, and the Assistant Secretary for Planning and  Evaluation at the Department of Health and Human Services. HRS is an  ongoing survey that plans to be continually representative of the complete  U.S. population over the age of 50 by adding additional cohorts every   6 years while continuing to follow up with existing cohorts. Further  information on the design, history, content, and use of HRS study  components is available at  http://hrsonline.isr.umich.edu/intro/sho_intro.php?hfyle=uinfo.
section_title: RAND HRS Data
paragraphs: The RAND HRS data file is a cleaned and streamlined version of the Health  and Retirement Study with derived variables covering a broad, though not  complete range of measures and which are named consistently across  waves. NIA and SSA support the development and continued maintenance  of the RAND HRS data. As of late 2001, RAND HRS data included the HRS  cohort (1931-1941 birth cohort, plus spouses) and is based on 1992, 1994,  and 1996 public releases and the 1998 and 2000 preliminary releases.
section_title: Methodology
subsections: section_title: Determining Defined Benefit and Defined Contribution Payout Options and Accompanying Information Available at Retirement
paragraphs: We reviewed applicable laws and regulations to identify benefit payout  options plan sponsors must and may provide at retirement and the types of  accompanying information they must furnish to participants. We obtained  data from NCS on the types of payout options available to participants.  Specifically, we tabulated supplementary NCS data published by BLS in  the Monthly Labor Review (April 2003). We recalculated the percent of  participants with each payout option to include only those for which  benefit options were determinable. Also, we interviewed plan sponsors  and practitioners to supplement BLS data and to determine what benefit  payout options DB and DC plan sponsors typically make available to  participants at retirement. Further, we asked our Delphi panel to identify  factors that affect the benefit payout options offered to retiring  participants, as well as conducted interviews with plan sponsors and  practitioners to determine some of the factors that affect the options  offered.
We determined what information DB and DC plan sponsors must provide  to retiring participants about their benefit payout options by reviewing  relevant provisions of pension laws and regulations. We also interviewed  plan sponsors to determine the information plan sponsors do and do not  provide to retiring participants and some factors that influence the types  of information they provide. While we did not have a specific selection  criteria for interviewing pension plan sponsors, we sought a range in terms  of the type of company (i.e., we interviewed an insurance, a manufacturing  company, a pharmaceutical, a tobacco company, a funding provider for  educational institutions, and a law firm) and in the types of plans (i.e., we  interviewed both DB and/or DC plan sponsors).
section_title: Determining Benefit Payouts Plan Participants Receive at Retirement
paragraphs: We analyzed HRS data to determine the benefit payouts pension plan  participants receive at retirement. We examined benefit payouts for   1,523 HRS respondents that reported being covered by a pension on a job  they held in the preceding survey wave and left to enter retirement. This  information was collected for HRS in 1994, 1996, 1998, and 2000 (survey  waves 2-5) and included respondents that retired between   1992 and 2000. We used information reported by individual respondents on  the type of plan they participated in and on the corresponding pension  payouts received. We only examined pension payouts received at the  earliest time at which a respondent reported leaving a job to retire. For  example, a respondent who reported being retired in 1994, reported  resuming work in 1995, and again reported retiring in 2000 would be  categorized as a 1994 retiree and not as a 2000 retiree.
Our analyses depend upon the accuracy of reported plan type among the  recently retired who received or deferred a pension payout in connection  with their recent retirement. Some experts have expressed concerns  regarding the accuracy of HRS respondents with respect to pension  availability and type of pension. Workers who are years away from  retirement may not have good information about their plan type. To  mitigate this concern, we limit our analyses to respondents who leave a  job they held in the previous wave to retire. We believe that these  respondents are likely to have more accurate information about their  pension plans because they likely will have received recent information on  their plans and payout choices. Accordingly, we confirm a respondent’s  reported plan type and choice of payouts by examining the respondent’s  actual payout from a DB or DC plan, and where discrepancies exist  between a respondent’s plan type description and actual receipt of  benefits from a type of plan we use the information from the actual  receipt. There is a range of sampling errors for the estimated percentages  of retirees that receive each type of pension payout as reported in tables   2-4. Except as noted in these tables, all estimated percentages had  sampling errors less than plus or minus 6 percentage points at the   90 percent confidence level.
To determine the payouts plan participants receive at retirement, we  tabulated the number and percent of participants for four benefit payout  option categories. These four categories include receiving or purchasing  an immediate annuity, rolling over assets directly into an Individual  Retirement Account (IRA), deferring receipt of benefits by leaving them in  the plan, or receiving benefits directly from their plan as a cash settlement  directly from their plan (i.e., lump sum amount). We tabulated figures for  the receipt of pension payouts, as well as payouts elected by those retirees  with a choice of payout options, for HRS waves two through five. The  numbers and percent receiving any given pension payout may exceed the  totals because individuals may have more than one pension and because  respondents may receive more than one payout from a pension (e.g., a  respondent with a DB pension may take a partial cash settlement and  receive an annuity for the remainder).
There are payout categories where the effect on receipt of pension  benefits differs between retirees with benefits from DB plans and those  with benefits from DC plans. The payout category “deferring benefit  receipt” for retirees with benefits from DB plans generally means delaying  the receipt of an annuity, while for retirees with benefits from DC plans  this payout category generally means maintaining the DC account balance  with the plan sponsor. Also, while retirees with annuities from DB plans  receive an immediate annuity from their plan sponsor, retirees with  annuity payouts from DC plans may have converted their account balance  into an annuity through their pension plan sponsor or used their account  balance to purchase an annuity privately. The HRS data on annuity  payouts received by retirees with DC plan benefits do not permit us to  determine whether these annuities are from plans or were purchased  privately. A further possibility is that retirees with DC plan benefits that  receive a cash settlement and privately purchase an annuity might  categorize this payout as a cash withdrawal or as an annuity. We  categorize DC participants pension payouts based on the retiree’s survey  responses.
We further tabulated pension payouts separately for DB and DC pensions.  We excluded 49 respondents from this tabulation because their survey  responses did not distinguish whether the pension payouts they reported  corresponded to their DB or DC pension. We tabulated DB and DC  pension payouts using the same four categories as for the overall  tabulations. Additionally, we tabulated benefit payouts for retirees with a  choice of benefit payouts. This group includes all retirees participating in a  DC pension as well as DB participants that reported having a choice or  demonstrated having such a choice by receiving all or part of their DB  pension in a form other than an annuity.
We also conducted logistic regressions on retiree payout choices to  evaluate factors that might influence retirees to choose an annuity versus  other payouts. We augmented the main HRS information with  accompanying information from the RAND HRS data set. Survey sample  weights were used throughout our analysis because HRS data is collected  from a stratified sample. We used the individual sampling weights from the  first survey wave in our regressions and to calculate associated standard  errors. We used STATA software to estimate logistic regression  parameters and associated standard errors. Results of our regression  analyses are presented in appendix II.
To supplement results from our analysis of HRS data, we interviewed plan  sponsors and practitioners to obtain testimony and data on the payouts  participants receive at retirement, as well as the benefit payouts retiring  participants choose when offered a choice of payout options. In addition,  we obtained plan sponsors and practitioners’ views on why retiring  participants choose (or do not choose) certain payout options, such as  annuities or lump sums. We also asked our Delphi panel to identify the  most significant factors that affect the payout options retiring participants  elect.
section_title: Identifying Actions Available to Help Retiring Participants Preserve Their Pension and Retirement Savings Plan Assets
paragraphs: We convened a virtual panel on the Internet of 27 experts in the area of  pensions and retirement to address the third study objective. The panelists  were asked to identify factors affecting benefit payout options offered to  and/or elected by retirees, policy options that could encourage more  annuitization of pension and retirement plan savings, and the role that  education and information could play in helping retirees make optimal  decisions about retirement income management. We employed a modified  version of the Delphi method to organize and gather opinions from  experts in the area of pensions and retirement using a Web-based forum.  The panel was selected from a list of experts, including from participants  in the Comptroller General’s Retirement Advisory Panel, referrals from  interviews, experts cited in the literature, and representatives of other  important players in the pension and retirement field. To ensure we had a  range of views, we asked participants from several different backgrounds  including: academic, practitioners, legal experts, plan sponsors, consumer  and public interest groups, and insurance providers, to participate in our  survey. Of the 30 experts we contacted, 27 agreed to participate. The  identity of respondents, as well as their comments and answers, remained  anonymous to other participants.
Our Delphi process entailed 3 questionnaire phases. Phase I asked the  panel to identify the most significant factors that affect pension and  retirement savings plan benefit payout options offered to and elected by  retiring participants; identify options that could be considered to  encourage more annuitization of pension and retirement plan savings and  the likely effects and tradeoffs of these options; and discuss the role of  information and education. Phase II presented 7 follow-up questions  where respondents were asked to either rank or rate the responses from  phase I (all responses were included in follow-up questions). The Phase III  survey provided panelists with some of the key findings from phase II and  solicited their feedback about these findings. Phase III also asked the  panel to identify options to encourage retiring participants to preserve  their pension assets at retirement by deferring the receipt of benefits (i.e.,  leaving assets in an account balance), or rolling over assets directly to an  IRA at retirement. A full discussion of this expert panel, including the  process we employed and methodology, and highlights of results from  phases I and II are presented in appendix III. A copy of the phase II  questionnaire can be viewed at http://www.gao.gov/cgi-bin/getrpt?gao-03- 990sp.
section_title: Appendix II: Descriptive Statistics and Regression Analyses
paragraphs: This appendix presents more detailed descriptive statistics for our analysis  of the relationship between the choices to receive an annuity versus other  pension payouts. It includes further discussion of pension payout  categories and retiree choice, characteristics of retirees by payout choice,  and regression statistics.
subsections: section_title: Pension Payout Categories and Retiree Choice
subsections: section_title: Pension Payout Categorization
paragraphs: For each respondent in the Health and Retirement Study (HRS) who  reports leaving a job to retire, HRS collects information on how the  respondent received his DB and/or DC pension payouts. Retirees with DB  pensions are asked whether they (1) expect future benefits, (2) are  receiving benefits now, (3) received a cash settlement, (4) rolled benefits  into an IRA, or (5) lost benefits. Retirees with DC pensions are asked  whether they (1) withdrew the money, (2) rolled assets into an IRA, (3) left  plan assets to accumulate, or (4) converted assets to an annuity. We  characterize these pension payouts in four categories:    Annuities include DB respondents receiving benefits now and DC  respondents who converted assets to an annuity.
Cash settlement includes DB respondents who received a cash settlement  and DC respondents who withdrew the money from their plan.
Direct rollover into IRA and/or deferred benefits includes DB and DC  respondents who rolled plan assets into an IRA directly from their plan,  includes DB respondents who expect future benefits and includes DC  respondents who left plan assets to accumulate.
We used these categories for all HRS retirees receiving one or more  pension payout. These payouts are reported in table 1.
section_title: Choice
paragraphs: In addition to tabulating the form in which retirees receive their pensions,  we also analyzed the pension payouts received by retirees who had a  choice among different pension payout options. We identify this subset of  retirees from HRS answers about the available options for payout of a  pension associated with the job from which a respondent retired. For DB  participants, we used information from HRS waves prior to retirement,  since questions about options for pension payouts are asked only when  the respondent has a current job, not retrospectively about a job from  which a respondent has retired. We define “choice” as having the option to  take a pension as either a lump sum amount (i.e., as a cash settlement or  as a direct rollover to an IRA) or as an annuity. We include in this  definition all DC participants. This is because all DC participants have the  option to take a rollover IRA, almost all have the option to take a cash  settlement, and all have the option of purchasing an annuity on the private  market. We also include DB participants who annuitize and who report in  the prior wave that they had the option of taking a pension as a lump sum  or in installments. Additionally, we consider DB participants whom we  observe a cash settlement or IRA rollover to have had a choice, because  almost all DB plans must offer an annuitized payout of benefits. Thus, the  only retirees we categorized as not having a disposition choice are DB  participants who elect to receive an annuity and who, in the previous  wave, report that they did not have a lump sum option.
Using our definitions of choice, we analyzed pension payouts for those  retirees who choose the form of their pension over other available forms.  These payouts are reported in table 2.
section_title: Characteristics of Retirees by Payout Choice
paragraphs: For retirees who made different pension payout choices, we calculated  means for several descriptive variables for each category. We included  only those retirees with a choice of payouts and present the means for  three categories: (1) those who chose an annuity; (2) those who did not  choose an annuity; and (3) all retirees with a choice of payout.
section_title: Regression Analysis
paragraphs: We performed logistical regressions to ascertain the contributions of  different factors to the probability of choosing an annuity. Specifically, we  calculated logistic regressions of the form:  log(p/1-p) = β*X + ε.
Where the β are coefficients that represent the effect that our explanatory  variables have on the log odds of having an annuity versus not having an  annuity, and X represents a series of retiree characteristics; and ε an error  term.  Only retirees with information available on all explanatory variables  were included in these regressions.
We calculated this regression for all retirees, and separately for those who  took a pension from a DB plan and those who took a pension from a DC  plan (see tables 4, 5, and 6).
section_title: Appendix III: Delphi Panel on Options to Encourage the Preservation of Pension and Retirement Plan Savings
paragraphs: This appendix presents the results from the expert panel on options to  encourage the preservation of pension and retirement savings. Included  here are the questions and some of the results from the three  questionnaires that were completed by members of the panel selected for  this study (referred to as “phase I,” “phase II,” and “phase III”). We  obtained a pledge of confidentiality from our requesters that they would  not request any of the responses obtained during this Delphi survey  process. A complete set of descriptive statistics from the survey can be  found at http://www.gao.gov/cgi-bin/getrpt?gao-03-990sp. We administered  the questionnaires for phases I and II over the Internet; we administered  phase III via E-mail.
subsections: section_title: Phase I
paragraphs: In the first phase of the expert panel, which ran from February 11 to  February 28, 2003, we asked the panelists to respond to three open-ended  questions about the preservation of pension and retirement plan savings.  We developed these questions based on our study objectives. We pre- tested the questions on the on-line version with two individuals to ensure  that the questionnaire (1) was clear and unambiguous, (2) did not place  undue burden on individuals completing it, and (3) was independent and  unbiased. We made relevant changes before we deployed the first  questionnaire to all participants on the Internet.
Phase I consisted of open-ended questions on themes related to the  preservation of pension and retirement plan savings. The questions  addressed the following themes.  1.  Factors that affect pension and retirement savings plan benefit payout  options offered to and elected by retiring participants.  2.  Options that could be considered to encourage more annuitization of  pension and retirement plan savings and the likely effects and  tradeoffs of these options.  3.  The role of information and education in managing pension and  retirement plan savings during retirement.
After panelists completed the first questionnaire, we performed a content  analysis on the responses to the open-ended questions in order to compile  a list of the most important factors affecting preserving pension and  retirement savings, as well as identify options that may encourage more  annuitization of pension and retirement assets, and the type of education  and information that could assist retirees in making optimal decisions  regarding their retirement income. We coded panelists’ responses, and  similar responses were given the same code. To maintain standards of  methodological integrity, two team members coded each of the  participant’s responses together and, when necessary, codes were updated  to reflect participants’ responses. Any disagreements in coding decisions  were discussed until consensus was reached. We had a third person  review some of the coded responses to ensure that our coding decisions  were valid. We contacted respondents, if necessary, when a response was  unclear. We reviewed and coded answers to each of the three questions to  develop close-ended questions for phase II of the survey.
Twenty-four of the 27 panelists selected completed phase I of the survey  (about 89 percent response rate). Those that did not complete this phase  were dropped from subsequent phases. Below are lists of the categories  for the responses from the phase I open-ended questions. Categories are  presented in order of frequency from most frequently to least frequently  provided responses for each of the questions.
subsections: section_title: Factors Affecting Payout Options Offered and/or Elected
paragraphs: Worker preferences for the type of plan they want and /or how they  receive benefits [employers include certain benefits in the plan because  workers want them or workers prefer to receive benefits in a certain way].
Lack of consumer knowledge/understanding about annuitization and/or  key risks they will face in retirement.
Challenges to offering an annuity, such as administrative cost/burden, or  compliance with applicable rules (including QJSA, PBGC premiums, etc.).
Adequacy of available annuity product types (i.e., variety, pricing, value of  payments, lack of inflation protection, etc.).
The value of lump sums from DB plans has increased [low 30-year  Treasury rate makes lump sums more valuable].
Trends in types of employer-sponsored plans.
Participants’ expectations about needs in retirement (e.g., income,  expenses, longevity).
Preferences of owners/executives who start plans.
Individuals believe they can do better managing the money than with an  annuity.
The role of financial advisors [financial planners prefer lump sums  because they receive better commission].
Changes in plan design/features within plans.
Impact of laws and regulations on employer decisions (i.e., impact of  ERISA or the tax code).
Trends in workforce demographics and retirement [greater worker  mobility, people are living longer].
Changes in the availability and/or election of various payout options.
Amount of retirement/saving plan assets of future retirees.
Concerns and trust issues about annuity providers and/or employers  ability to provide annuity payments (i.e., solvency issues).
Widespread media, investment community, and employee focus on  account balances [the focus for pensions have been on saving and  accumulating].
Competitive pressures: attract workers, minimize/stabilize costs.
Workers/retirees already have annuity income (i.e., from social security,  from a DB plan, from a spouse’s plan).
Household decisions about retirement income.
Bequest motives.
Retirees/employees don’t have adequate information to make benefit  elections.
Participants’ lack of understanding about the value of certain DB plan  benefit features (e.g., early retirement subsidies).
PBGC guaranties qualified DB annuity payouts.
Participants do not understand investments and/or how to invest their  retirement savings.
The taxation of distributions from various types of retirement plan  vehicles.
Change in employee attitude about employers’ role in providing retirement  security.
Concerns of higher-income DB participants about potential loss of benefits  as a result of PBGC guarantee limits.
Inertia-the real and/or perceived cost of changing the status quo in terms  of options offered.
section_title: Options That Could Encourage More Annuitization of Pension and Retirement Plan Savings
paragraphs: Increase information and education to participants/ retirees.
Provide tax incentives for employees who receive qualified annuity  income (i.e., favorable tax treatment of annuity income).
Mandating pension/retirement saving plan benefits be paid as annuities  (partial or full).
Change related regulations (e.g., interest rate for DB lump sum  calculations, PBGC premium requirements, etc.) that affect pension  obligations or payout options.
Require qualified DC plans to offer an annuity option.
Modify rules/regulations that currently apply when plans offer an annuity  (e.g., limit QJSA provisions).
Mandating qualified DC plans offer an annuity as a default option of  pension benefits (i.e., apply QJSA provisions).
Have PBGC or another government agency provide annuities to employers  and/or employees (i.e., as a competitor to provide or sell annuities).
Develop more adequate annuity products (not a policy option per se).
Provide tax incentives for employers and/or insurance providers to  provide annuities to retirees.
Apply the same tax penalties for taking a lump sum at retirement as are  applied for pre-retirement lump sum distributions.
Simplify various DB plan rules to level the playing field with DC plans.
Amend ERISA Investment Advisor rules to clarify that plan sponsors may  provide information/education on managing income during retirement.
Change benefit portability rules/regulations.
Allow employer plans to distribute a certain amount of pension benefits as  annuity income and the remainder with participant discretion.
Allow plan sponsors or employers to form or join purchasing pools to  offer annuities.
Set minimum standards for state insurance guaranty funds.
Enable government to act as an insurer for commercial annuity providers  (i.e., federal guaranty program).
Require pension/retirement plans that allow retirees to elect lump sums to  also offer the option to annuitize some benefits at a later date.
Require pension/retirement plans offering distributions in the form of an  annuity to offer an inflation-indexed annuity option.
Require all DC plans that do not normally pay out in the form of an annuity  to roll out all lump sum distributions to a new type of IRA that pays  benefits in the form of a J&S annuity.
section_title: The Role of Information and Education
paragraphs: Helping participants to understand longevity risk (i.e., risk of outliving  assets).
Strategies/advice for managing retirement income during retirement (i.e.,  decumulation).
Helping participants/retirees understand financial risks that they will face  in retirement (e.g., inflation, lower standard of living, investment).
Helping participants assess needs in retirement (i.e., health, income, etc.).
Annuities-what are they? How do they work?, etc.
Improving financial literacy.
Payout options plans make available to retiring participants (e.g.,  description and/or value of retirement benefits under available options).
Seeking financial “advice,” and other resources for retirement income  planning.
How to project potential retirement income from pensions/retirement plan  savings.
The value of expected DB and/or DC plan benefits (i.e., what a  participant’s accumulation is likely to provide).
How to compare annuity and lump sum amounts (i.e., how to compare  equivalent amounts).
De-emphasize information and education on investing/investments vis-à- vis retirement income needs.
Available annuity products employers could offer.
The tradeoffs of extending one’s working life.
The pricing of annuity products (i.e., administrative fees).
How guaranteed lifetime income from a participant’s retirement plan  could enhance government provided retirement income.
How various types of retirement savings plans are taxed.
How to take inventory of retirement income sources.
section_title: Phase II
paragraphs: We analyzed the responses to the questions above to develop the phase II  questionnaire. The purpose of the second phase was to provide the  panelists with the opportunity to consider the other panelists’ responses to  the first phase and to respond in a structured, quantifiable way. Phase II,  which ran from April 3 to April 18, 2003, consisted of several closed-ended  questions on the categorized responses to phase I (all response  codes/categories were included in follow-up questions).
In phase II, panelists rated these items on various dimensions (e.g.,  major/minor factor, effectiveness of options, help/hinder coverage, ease of  compliance) depending on the theme. We also asked the experts to rank  responses to phase I questions one and three. We pretested the questions  for the second phase; using the same methods as in phase I. Twenty-two of  the 24 panelists that completed the phase I survey also completed phase II  (about 92 percent response rate for those included in phase II). Those that  did not complete this phase were dropped from subsequent phases.
As part of the analysis, we calculated the frequency of responses to  identify the highest rated items for phase II. The results in this section are  displayed based on responses that were rated in the top two rating  categories for questions 1 and 3-6, as well as the top five responses  identified most frequently in the top five for questions 2 and 7. To be  included in the top five for the rating questions, at least 85 percent of  panelists had to respond to the question. For the questions with a five- point scale, we collapsed the scale to a three-point scale by combining the  top two available responses and combing the bottom two available  responses. For example, if the five-point scale included extremely  effective, very effective, moderately effective, somewhat effective, slightly  or not effective, the three-point scale will be: extremely or very effective;  moderately effective; and somewhat, slightly or not effective. For the  ranking questions (2 and 7), we identified the most frequent responses  ranked in the top five by calculating the frequency in which they were in  the top five. We report the top five responses for all phase II questions in  this appendix.
section_title: Factors Affecting Payout Options
paragraphs: In the phase I questionnaire, we asked each member of the panel “What do  you consider to be the top 5 factors in pensions and retirement affecting  the payout options offered to retiring participants and/or elected by  retirees? (In your response, you might consider trends in employer  pensions, worker preferences, workforce coverage and participation,  retirement, the economy, or any other trends you believe are important.  Please identify the most significant first).” We compiled a list of the factors  that experts identified and categorized them. We then presented the list of  factors to the experts in phase II and asked them to rate how great a  factor, if at all, are each of the trends were in affecting payout options  offered to retiring participants and/or elected by retirees. The ratings were  made on a four-point scale ranging from “major factor” to “not a factor”  (panelists were also given the option of responding “no answer”).
We also asked panelists to rank the factors identified as at least moderate  in question 1. Responses in the top five for the question, “among the  factors that you checked as ‘at least moderate,’ what would you rank as  the top 5 factors affecting plan payout options offered and/or elected by  retiring participants?” are shown in table 8.
section_title: Options That Could Encourage More Annuitization of Pension and Retirement Plan Savings
paragraphs: In phase I, we asked panelists: “What options, if any, could policymakers  consider that could encourage more annuitization of pension and  retirement plan savings at retirement? What are the likely effects and  tradeoffs associated with each of these options with respect to plan  sponsors, participants, the pensions and investment community, and the  federal government? (Please consider such options as mandates,  incentives, other government actions, information and education, etc. in  your response.)” After categorizing responses to this question, we asked  the following series of questions in phase II. The ratings were made on a  five-point scale for each of these questions (panelists were also given the  option of responding “no answer”).  1.  How effective, if at all, would each of the following options be in  encouraging more annuitization of pension and retirement plan  savings?  2.  In your opinion, would the following options help or hinder pension  and retirement plan coverage?  3.  How easy or difficult would it be for plan sponsors to comply with  and/or act on the following options?
section_title: The Role of Information and Education in Managing Pension and Retirement Plan Savings during Retirement
paragraphs: In phase I, we asked panelists, “What types of information and education  could help retiring participants make more optimal decisions regarding the  use (i.e., saving and spending) of pension and retirement plan savings  during retirement? How and in what form could each type of information  or education be delivered?” After categorizing the responses to that  question, we followed up with a rating and ranking question about the  effectiveness of each type of information and education.
We then presented the list of types to the experts in phase II and asked  them to rate how effective, if at all, each type of information and education  would be in helping retiring participants make more optimal decisions.  The ratings were made on a five-point scale ranging from “extremely  effective” to “slightly or not effective” (panelists were also given the option  of responding “no answer”). We calculated the frequency of responses for  the types rated in the phase II questionnaire.
We also asked panelists to rank the types of information and education  identified as at least moderately effective in phase I. The top five most  commonly ranked responses to the question, “Among the types of  information and education that you rated ‘at least moderately effective,’  what would you rank as the five most effective types to help retirees make  more optimal decisions?” are shown in table 13.
section_title: Phase III
paragraphs: The third phase, which was conducted via e-mail, ran from May 6 to May  13, 2003. The purpose of this phase was to provide panelists with some of  the key findings from phase II and obtain feedback about the results, as  well as to identify other ways that a retiree could preserve their retirement  savings. We conducted a pretest of the questionnaire and made changes as  necessary. Ten experts (45 percent of the 22 panelists that completed  phase II) responded with comments or responses to our questions.
In the third phase, we asked panelists the following questions.  “For each of the options below please discuss what actions (policy or  otherwise), if any, could encourage more retirees to preserve their pension  and retirement savings plan assets. Please discuss some of the potential  tradeoffs, such as the effect on plan coverage, plan compliance, and  effectiveness for preserving pension and retirement savings plan assets, of  the options identified.”  1.  Options to encourage retiring participants to preserve their pension  assets at retirement by deferring the receipt of benefits (i.e., leaving  assets in an account balance), or rolling over assets directly to an IRA  at retirement.  2.  Options to assist retirees in managing their assets personally with the  objective of providing an income stream to help them balance income  and expenditures.  3.  What other options, if any, should be considered to help retiring  participants preserve their pension and retirement savings plan assets  at retirement?
Originally, we asked the panelists to respond to these three questions  about actions that could encourage the preservation of pension and  retirement savings plan assets. Based on feedback about the length of and  time commitment needed to respond to the phase III questionnaire, we  narrowed the focus and gave panelists the option of only responding to  question one. Some respondents provided answers for all three of the  questions and others only responded to question one. Responses to this  questionnaire are presented at http://www.gao.gov/cgi-bin/getrpt?gao-03- 990sp.
section_title: Appendix IV: GAO’s Delphi Panel of Experts
section_title: Appendix V: Comments from the Department of The Treasury