401(K) PLANS: DOL Could Take Steps to Improve Retirement Income Options for Plan Participants
Published: 2016-08-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: As 401(k) plan participants reach retirement they face the challenge of making their savings last for an unknown lifespan, and many 401(k) plan sponsors do not offer options to help participants with this complex task. GAO was asked to review any related challenges and potential changes to help plan sponsors and participants.
This report examines, among other things, what is known about the adoption of lifetime income options in 401(k) plans, barriers that deter plan sponsors from offering such options, and the defaults that exist for participants who do not choose a lifetime income option. GAO administered a non-generalizable questionnaire to record keepers, conducted a non-generalizable survey of 54 plan sponsors, and interviewed a range of stakeholders.
section_title: What GAO Found
paragraphs: Workers relying in large part on their 401(k) plan in retirement may not always have a feasible way to make their savings last throughout retirement. Responses to GAO’s non-generalizable questionnaire from 11 401(k) plan record keepers—entities that manage participant account data and transactions for plans—showed that most plans covered by the questionnaire had not adopted products and services that could help participants turn their savings into a retirement income stream (referred to as lifetime income options in this report). Responses to the questionnaire represented more than 40 percent of all 401(k) assets and about a quarter of plans at the end of 2014. GAO found that of the plans covered by the questionnaire, about two-thirds did not offer a withdrawal option —payments from accounts, sometimes designed to last a lifetime—and about three-quarters did not offer an annuity—arrangements that can guarantee set payments for life.
Concerns about legal risks and record keeper constraints may deter many plan sponsors—typically employers that provide 401(k) plans and establish investment and distribution options—from offering lifetime income options. The Department of Labor (DOL) issues regulations and guidance for plan sponsors and is responsible for educating and assisting them to help ensure the retirement security of workers. For example, DOL has prescribed steps plan sponsors can take to satisfy their fiduciary duties (i.e. act prudently and in the best interest of participants) when selecting an annuity provider for a 401(k) plan. However, according to industry stakeholders GAO interviewed, those steps are not often used because they include assessing “sufficient” information to “appropriately” conclude that the annuity provider will be financially able to pay future claims without definitions for those terms. Without clearer criteria to select an annuity provider, fear of liability may deter plan sponsors from offering annuities. Further, GAO found that a mix of lifetime income options to choose from is not usually available. DOL provides an incentive in the form of limited liability relief to plan sponsors who, among other things, provide participants at least three diversified investment options. However, no such incentive exists for plan sponsors offering a mix of lifetime income options. Without some degree of liability relief, plan sponsors may be reluctant to offer a diverse mix of lifetime income options to their participants. Lastly, stakeholders told GAO that record keepers may make only their own annuities available to the plans they service. DOL provides guidance on selecting service providers, but it does not encourage plan sponsors to seek choices from their service providers, which may prevent plans from having appropriate annuity options available to offer participants.
Required minimum distributions (RMD) can offer a default for those who do not choose a lifetime income option by setting a minimum amount of taxable 401(k) income for those age 70 ½ or older, based on life expectancy. Some plan sponsors know how to administer RMDs, and some already choose to provide RMD payments calculated to last a lifetime. However, DOL’s guidance on default lifetime income is focused on a particular annuity type used only by a few plans. By issuing guidance encouraging plans to consider letting RMDs be the default distribution process for retiring participants, DOL may help create lifetime income for participants who do not choose an option.
section_title: What GAO Recommends
paragraphs: GAO makes seven recommendations to DOL, including that it clarify the criteria to be used by plan sponsors to select an annuity provider, consider providing limited liability relief for offering an appropriate mix of lifetime income options, issue guidance to encourage plan sponsors to select a record keeper that offers annuities from other providers, and consider providing RMD-based default lifetime income to retirees. DOL generally agreed, and described actions it would take to address the intent of the recommendations.

section_title: Letter
paragraphs: The importance of 401(k) plans as a source of lifetime income is growing  as an unprecedented number of workers are now reaching retirement and  facing the responsibility of managing their retirement savings account.  Since the inception of 401(k) plans, the Department of Labor (DOL) and  the Department of the Treasury (Treasury) have focused on ensuring that  plan participants accumulate savings for retirement, and have recently  begun to focus on how participants spend down these savings. Plan  participants today typically must take responsibility for identifying and  developing a retirement strategy to ensure income for the remainder of  their lives. Those who fail to do so face the risk of outliving their savings  and relying primarily on Social Security.
Plan sponsors have been encouraged to offer options within 401(k) plans  that provide some level of guaranteed income over the course of  participants’ lives. Yet, many plan sponsors may still be reluctant to offer  lifetime income options, and plan participants may be inclined to avoid  committing to a lifetime income strategy when faced with a distribution  decision at retirement. Given the current state of lifetime income options  in 401(k) plans, you asked us to review challenges and potential changes  to help plan sponsors and participants. This report addresses the  following questions.  1.  What is known about the adoption of lifetime income options in 401(k)  plans?  2.  What barriers, if any, deter plan sponsors from offering lifetime  income options?  3.  What challenges, if any, do participants face in learning to make  informed decisions about lifetime income options?  4.  What defaults exist for participants who do not choose a lifetime  income option?
To better understand the adoption of lifetime income options in 401(k)  plans, we administered a questionnaire to 11 401(k) plan record keepers  that together accounted for approximately 42 percent of the 401(k) plan  market as measured by plan assets, 46 percent as measured by  participants, and 26 percent as measured by the number of plans, as of  December 2014. To examine what barriers, if any, deter plan sponsors  from offering lifetime income options, we conducted a non-generalizable  online survey of plan sponsors through industry organizations such as  PLANSPONSOR, the Plan Sponsor Council of America, the National  Association of Plan Administrators and BenefitsLink. To assess the  challenges participants may face in learning to make informed decisions  about lifetime income options, we reviewed a non-generalizable sample  of the written information some 401(k) plan sponsors provide to  participants when they leave an employer, referred to as separation  packets. We obtained separation packets from participants and industry  stakeholders we interviewed, as well as from publicly available sources  such as plan websites. We also obtained and reviewed examples of  information, such as lifetime income illustrations, that some service  providers make available for plan sponsors to include in benefit  statements or on plan websites to help participants plan for retirement. To  examine what defaults exist for participants who do not select a lifetime  income option, we coordinated with Boston Research Technologies, a  research firm. To review the survey methodologies we interviewed  individuals knowledgeable about the methodology and compared  selected survey responses against data from other large samples of  401(k) participants. We found the survey responses to be reflective of the  broader population of 401(k) plan participants and as a result, we  generalize the survey responses to that population. To answer all these  questions, we reviewed relevant research; industry publications; and  federal laws, regulations, and guidance on lifetime income options in  401(k) plans. We also interviewed industry stakeholders, researchers,  and government officials—including officials from DOL’s Employee  Benefits Security Administration (EBSA) as well as from the Department  of the Treasury’s (Treasury) Office of Tax Policy, Federal Insurance  Office, and Internal Revenue Service (IRS). This report builds on a variety  of past GAO work in this area, and a list of related reports is included at  the end of this product. Appendix I provides additional information on our  scope and methodology.
We conducted this performance audit from July 2014 to August 2016 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Lifetime Income Options
paragraphs: At retirement, participants in 401(k) plans enter the distribution—or  “spend-down” —phase during which they typically use their savings to  meet their retirement needs. Typically, participants can choose to take a  payment of their entire account balance, referred to as a “lump sum”  payment, or they can roll their account over to an Individual Retirement  Account (IRA) to preserve tax advantages on their savings. In contrast,  defined benefit plan (DB) participants must be offered an annuity, though  a lump sum payment can also be offered. Participants who receive lump  sums generally must decide on their own how best to make their money  last throughout retirement. Some participants have access to products  and services through their plan that can help them turn their savings into  a retirement income stream. In 401(k) plans, these generally fall into two  categories:
Withdrawal options are a series of fixed or variable payments from a  participant’s account. Participants may be able to set monthly  payments as a fixed dollar amount, a percent of their account  balance, or according to systematic withdrawal strategies designed—  but not guaranteed—to stretch their savings over a set period of time  or for life.
Annuities are guaranteed payments, normally purchased through a  contract with an insurance company for either a set period or for the  participant’s life. Annuities come in a variety of forms. For example,  deferred annuities enable the participant to delay the start date of  payments until as late as age 85.
section_title: Required Minimum Distributions
paragraphs: Under the Internal Revenue Code (IRC), plan sponsors must comply with  required minimum distribution (RMD) provisions under which participants  age 70 ½ or older in 401(k) plans must receive minimum annual  payments from their plan savings based on their account balance and  remaining life expectancy. Plan sponsors may have their service  provider, such as their record keeper or a third party administrator,  administer RMDs by calculating and issuing payments to plan participants  (see fig. 1). Typically, participants age 70 ½ or older who have not self- initiated withdrawals will automatically receive payments administered by  their record keeper or third party administrator pursuant to RMD  calculations. For participants who make insufficient withdrawals, the  record keeper will typically issue payments for the amount of the  difference to meet RMD requirements.
section_title: Retirement Risks
paragraphs: Participants may face various risks as they enter retirement, some of  which are new and different from those they may have become  accustomed to as they accumulated savings. For example, as shown in  figure 2, during both their working and retirement years participants may  face the risk that poor investment returns will lead to lower than expected  savings and the risk that inflation may erode the value of their savings as  prices rise. Additionally, poor investment returns just prior to or just after  retirement can substantially affect how long their savings will last. This is  known as “sequence of returns” risk and it can have a serious effect on  retired participants who have less ability to make up for lost of savings  through increased contributions or longer employment. Participants who  use a portion of their savings to purchase an annuity face the risk that low  interest rates at the time of their purchase will negatively affect the  amount of guaranteed income they can secure. Later in retirement,  participants may also face cognitive decline that affects their ability to  manage their savings.
In retirement, participants also face “longevity” risk; that is, the risk that  they will outlive their retirement savings. Longevity can be particularly  challenging for participants because it poses the overarching risk that the  longer a participant lives in retirement, the greater that participant is  exposed to other retirement risks. For example, increased longevity can  mean that there is a greater range of potential future investment  outcomes and a longer period over which inflation may erode the  purchasing power of available savings. Figure 3 may partially reflect the  effects of longevity risk, as those over 75 are more likely to find  themselves near or below the poverty line.
section_title: Providers of Lifetime Income Options to 401(k) Plans
paragraphs: Plan sponsors may hire companies to provide services and products that  help participants use their savings to generate lifetime income and  achieve other retirement goals. As shown in figure 4, service providers,  such as legal counsel and investment advisers may help plan sponsors  select appropriate lifetime income options for their participants. Record  keepers play a particularly important role with respect to in-plan lifetime  income options. They both administer withdrawal options for participants  and build and maintain the record keeping platforms on which annuities  are sometimes made available for plan sponsors to adopt for their  participants. Plan sponsors may also contract with one service provider to  provide multiple services to the plan. For example, a plan might contract  with a record keeper that is also an insurance company providing both  record keeping and annuities for participants, among other services.
section_title: 401(k) Plan Market
paragraphs: As of December 31, 2014, 401(k) plans represented more than $4 trillion  in assets, nearly 500,000 plans, and more than 60 million participants. As  shown in table 1, small defined contribution (DC) plans—those with less  than $10 million in assets—represent about 95 percent of DC plans while  large plans—those with assets greater than $200 million—make up a  majority of assets and participants.
section_title: Retirement Income in Other Countries
paragraphs: We previously reported that other nations with account-based retirement  systems have taken steps to help participants develop a lifetime income  strategy. Five of the six countries we reviewed generally ensured that  participants could choose among a lump sum, a withdrawal option, or an  annuity. All six developed innovative approaches and strategies to help  mitigate the financial risks participants face in securing adequate  retirement income.
section_title: Oversight of Retirement Plans
paragraphs: EBSA is the primary agency responsible for protecting pension plan  participants from misuse or theft of their pension assets as specified  under Title I of the Employee Retirement Income Security Act of 1974  (ERISA). Other statutory provisions applicable to 401(k) plans, such as  minimum distribution requirements, are also set out in the Internal  Revenue Code. ERISA is generally enforced by DOL’s EBSA, while  Treasury’s IRS enforces applicable provisions of the Internal Revenue  Code and is responsible for determining if plans qualify to receive  preferential tax treatment. Treasury’s Office of Tax Policy develops and  implements tax policies and programs and reviews regulations and  rulings to administer the Internal Revenue Code. State insurance  regulators are responsible for enforcing state insurance laws and  regulations, which typically involves reviewing insurance products and  their rates and examining insurers’ financial solvency and market  conduct. To carry out its responsibilities, EBSA issues regulations and  guidance; investigates complaints involving plan sponsors, fiduciaries,  and service providers; seeks appropriate remedies to correct legal  violations; and pursues litigation when it deems necessary. As part of its  mission, DOL is also responsible for assisting and educating plan  sponsors to help ensure the retirement security of workers and their  families. Title I sets standards of conduct and requires accountability for  the people who run or provide investment advice to plans, known as plan  fiduciaries, and requires administrators to provide participants with  certain disclosures, including periodic benefit statements as well as  summary plan descriptions.
section_title: DOL and Treasury Actions on Lifetime Income for Participants and Their Beneficiaries
paragraphs: In recent years, DOL and Treasury have taken a number of steps to  protect beneficiaries by attempting to help plan sponsors and their  providers offer lifetime income options. For example:  In 2008, EBSA promulgated a “safe harbor” that describes actions  plan fiduciaries can take to satisfy their fiduciary responsibilities when  selecting an annuity provider.
In 2010, Treasury and EBSA published a request for information (RFI)  on expanding lifetime income options in 401(k) plans and received  793 submissions.
In 2012, IRS explained how a plan sponsor with both a defined benefit  plan and a defined contribution plan (such as a 401(k) plan) can allow  participants to use their defined contribution account balance to  increase their defined benefit plan life annuity payments.
In 2013, EBSA published a notice that it was considering a proposal  requiring participant benefit statements to include an illustration of  401(k) account balances as a stream of lifetime income payments.
In 2014, IRS amended finalized a rule to allow for the use of qualifying  longevity annuity contracts (QLAC) in 401(k) plans, and it amended its  RMD regulations to provide for specified annuities beginning  payments after the participant reaches age 70 ½ to not be included  when calculating RMDs. That same year, EBSA and IRS also  clarified how a deferred annuity—an annuity that makes payments  that begin in the future rather than at the time of purchase—can be  included in a target date fund (a common default investment used by  401(k) plans).
DOL, Treasury, and the Administration have also taken steps that may  help participants implement a retirement strategy. On April 8, 2016, DOL  promulgated regulations that treat as a plan fiduciary anyone who  furnishes investment advice or recommendations to an employee benefit  plan, plan fiduciary, plan participant or beneficiary, IRA or IRA owner;  establishes that such investment advice must be in the best interest of  participants; and provides for participants to hold those who furnish them  investment advice to account under ERISA. Furthermore, in an action  that could have an impact on those participants who do not make  decisions about their 401(k) account, in September, 2015, President  Obama issued a Behavioral Science Insights Policy Directive to  encourage the design of government policies that better serve the  American people. The President noted that automatic enrollment and  escalation in retirement savings plans have made it easier for Americans  to accumulate retirement savings, and he called for federal agencies,  applying behavioral science insights, to give particular consideration to  the selection and setting of default options when individuals are  presented with choices.
section_title: Most Plans in Our Review Did Not Offer Withdrawal Options or Annuities, and Many Did Not Allow Partial Annuitization
subsections: section_title: About Two-Thirds of Plans in Our Review Did Not Offer Withdrawal Options
paragraphs: Record keepers reported that most plans covered by the questionnaire  did not offer withdrawal options, which unlike annuities, are 401(k) plan  account distributions that may be designed, but are not guaranteed, to  last for life. In addition to providing lump sums, record keepers reported  that roughly a third of plans covered by our record keeper questionnaire  adopted some form of a withdrawal option, including installment  payments, systematic withdrawals, or managed payout funds. We sent  a questionnaire to a non-generalizable sample of plan record keepers that  represented about a quarter of the 401(k) plan market at the end of  2014. Plans generally do not have to provide participants with  distribution options that will help them secure lifetime income in  retirement. Plans can provide lump sum distributions of participants’  entire account balances and remove participants from the plan after  participants reach the plan’s retirement age. However, when made  available by plans, withdrawal options allow participants access to their  401(k) plan account throughout retirement. Withdrawal options can be  structured in a variety of ways, some designed, but not guaranteed, to  stretch a participant’s savings throughout retirement (see table 2).
Record keepers reported that mid-size and large plans covered by our  questionnaire had the highest adoption rates of withdrawal options and  were also more likely to make sophisticated withdrawal options available  to participants. As shown in figure 5, these mid-size and large plans had  higher adoption rates of both installment payments and systematic  withdrawals than small plans. One plan adviser we interviewed  suggested this variation in adoption rates is due to small plans’ persistent  view of 401(k) plans principally as an asset accumulation vehicle and a  lack of focus on helping participants with their retirement income needs.
Further, this plan advisor and other industry stakeholders noted that  sponsors of larger plans are better positioned to negotiate reductions in,  or waivers from, the fees record keepers charge for administering  withdrawal options, which could affect their adoption. Similarly, figure 5  shows record keepers reported that mid-size and large plans covered by  our questionnaire had at least twice the adoption rate of systematic  withdrawal options as small plans. Industry stakeholders indicated that  systematic withdrawal options are generally more prevalent among larger  plans because they have more experience offering withdrawal options.  These industry stakeholders explained that because of this greater level  of experience with offering withdrawal options, larger plans may also be  more comfortable offering more sophisticated options like systematic  withdrawals. Record keepers reported that a few plans covered by our  questionnaire adopted managed payout funds, but unlike other  withdrawal options, such as installment payments and systematic  withdrawals, that are available among all the record keepers who  responded to our questionnaire, industry stakeholders told us managed  payout funds are not readily available as an in-plan option. In addition,  industry stakeholders told us that managed payout funds are found  primarily outside of 401(k) plans in the retail market.
Although RMDs have not been identified by EBSA or IRS as a default  systematic withdrawal option, RMDs can serve that purpose for retirees  who remain in the plan beyond age 70 ½ if they are calculated to provide  minimum amounts based on a retiree’s life expectancy and account  balance. Plans may and do also adopt other methods that satisfy the  RMD provisions. Withdrawals can satisfy those provisions as long as the  distributions from those options are as much or more than the applicable  RMDs, such as when plans only offer lump sum withdrawals of the entire  account balance. Therefore, the RMD provisions can be met without  providing participants with payments based on life expectancy. In fact,  industry research has shown that many plans do not allow retired  participants to take partial withdrawals; instead, retirees must either  withdraw their entire account balance or forgo withdrawing any funds.  Further, according to a record keeper, some plans may require  participants to take lump sum distributions of their entire account balance  before reaching age 70 ½ to avoid having to administer RMDs.  Similarly, a lump sum distribution for a participant age 70 ½ or older  would also allow a plan sponsor to meet RMD requirements. However,  none of these practices help to provide participants with lifetime  retirement income.
section_title: About Three-Fourths of Plans in Our Review Did Not Offer an Annuity Option
paragraphs: Record keepers reported that about three-quarters of plans covered by  our questionnaire did not offer an income annuity. Among the options  offered by roughly a quarter of plans in our record keeper questionnaire  were fixed immediate annuities, guaranteed minimum withdrawal benefits  (GMWB), and deferred annuities (see table 3 for a description of each  option). Plans adopt annuity options to allow participants to secure  guaranteed income for retirement from their 401(k) plan savings. Annuity  options are structured in a variety of ways, such as the timing of its  purchase or the beginning of payments, to meet different guaranteed  retirement income needs of participants.
Record keepers reported that plans covered by our questionnaire most  frequently adopted a fixed immediate annuity, a simple and traditional  form of annuity benefit found in 401(k) plans that offered annuities. As  shown in figure 6, small and mid-sized plans in our review had slightly  higher adoption rates than large plans. Some industry stakeholders told  us that smaller plans generally have higher adoption rates of in-plan  annuity options because they are more likely to use record keepers that  are insurers and participate in group annuity contracts.
What Are 401(k) Plan Group Annuity Contracts?
Record keepers reported that most small plans covered by our  questionnaire are funded through the use of   group annuity contracts,  as shown in Figure 7. Group annuity contracts place a “wrapper” of  benefits, namely an annuity or a minimum death benefit, around a  bundle of investments that are similar to mutual funds. See Appendix  III for an illustration of how group annuity contracts are used as a plan  funding mechanism.  We previously reported that some plan sponsors  may be unaware that their plan is funded through a group annuity  contract or may not know to consider the terms of the option. Industry  stakeholders explained that even though group annuity contracts have  provisions—including terms and rates—for participants to purchase or  receive an annuity at retirement, they are principally used as a funding  mechanism for insurers to administer plan assets and are therefore  rarely used to provide lifetime income. One insurer said that the cost to  administer a plan through a group annuity contract is competitive with  those administered directly with investment funds. However, we  previously reported that fees associated with group annuities can add  significant costs to a plan (see GAO-12-325).
Industry stakeholders also told us that a fixed immediate annuity is the  most straightforward and simple annuity that plans can offer participants  because they are typically purchased in one transaction at retirement and  provide a specified benefit. Further, one stakeholder noted that fixed  immediate annuities are relatively standardized and that their simplicity  facilitates comparisons of providers’ products. Several record keepers  noted that products that are easier for participants to understand and for  record keepers to implement, such as fixed immediate annuities, are  more likely to be adopted by plans.
Small and mid-sized plans also represented nearly all of the plans from  our record keeper questionnaire that adopted GMWBs, a more  complicated product introduced in recent years to the in-plan market.  Similar to fixed immediate annuities, some stakeholders told us that  GMWBs may be more prevalent among smaller plans because insurers,  many of whom offer their own GMWB product, often perform  recordkeeping and administrative functions for smaller plans and make  their own product readily available. Industry stakeholders told us that  because GMWBs are a hybrid investment and insurance product, they  can provide unique benefits, but can also be difficult to understand. Some  stakeholders told us that GMWBs can be beneficial for plans that focus  on helping participants accumulate their savings because the product  allows participants to remain invested in the stock and bond markets and  benefit from potential returns while guaranteeing income against market  downturns. Because GMWBs allow participants to benefit from potential  returns, the levels of guaranteed minimum withdrawal payments may also  increase. In contrast, some other stakeholders indicated that the features  of GMWBs that make it a flexible annuity option result in higher costs as  compared with other types of annuities. See Appendix II for an illustration  of the ownership phases of a typical GMWB.
Despite recent agency actions to help facilitate the use of some types of  deferred annuities, plan adoption of this form of annuity is limited. Record  keepers reported that less than 1 percent of plans covered by our record  keeper questionnaire had adopted any deferred annuity option. Treasury  recently promulgated regulations on the use by plans of QLACs, a type of  deferred annuity. Two insurers told us that they have begun to offer  QLACs to plans, but the products are relatively new to the market.  Accordingly, record keepers reported that that no plans covered under  our questionnaire had adopted QLACs as an in-plan option. Similarly,  DOL recently affirmed that a deferred annuity embedded in a target date  fund (TDF) can be used as a qualified default investment alternative  (QDIA), but industry stakeholders told us that few service providers  have developed these products and, plan adoption has been very limited.  Industry stakeholders also told us that they expect adoption of deferred  annuities, such as QLACs and deferred annuities embedded in target  date funds, to increase in the future as more providers introduce their  products to the in-plan market and more plans adopt them as a default  solution.
Record keepers reported that less than 1 percent of plans covered by our  questionnaire adopted an annuity shopping platform to help participants  select and buy an annuity outside the plan using rollover funds. Annuity  shopping platforms allow participants to compare and shop for annuities  from competing insurers. They can be offered in-plan, but one provider  told us that they generally are not because of sponsors’ concerns about  the fiduciary responsibilities associated with insurer selection. The  provider also suggested that the annuity shopping platform to select and  buy an annuity outside the plan using rollover funds is the easiest option  for plans to facilitate participant access to guaranteed lifetime income  options because, among other reasons, sponsors do not have to assume  the fiduciary responsibilities associated with insurer selection.
section_title: According to Stakeholders, Many Plans Do Not Allow Partial Annuitization
paragraphs: Industry stakeholders and Treasury officials indicated that many plans  lack partial annuitization options, which means many participants who  have access to an annuity option through their plan must either annuitize  their entire account balance or none of it. Agency officials and industry  stakeholders have said that allowing participants to partially annuitize  their account balance helps participants to combine multiple lifetime  income options and purchase only the amount of annuity that they need.  Partial annuitization also allows participants to purchase an amount of  annuity that makes sense for their situation in consideration of not only  their plan savings but also income sources outside the plan, such as from  Social Security or the resources of a spouse. Research has also shown  that when offered, partial annuitization increases both the percentage of  people who annuitize and the average percentage of balances that are  annuitized. An industry stakeholder noted the increase in the purchase  of annuities through the Federal Thrift Savings Plan (TSP) after partial  annuitization was introduced. When the TSP began in 1986, the annuity  option was an “all or nothing” choice. In 2004, TSP amended the plan to  include partial annuitization and saw an increased use of annuities. For  example, although the take up of TSP annuities in general remains low,  more participants annuitized after TSP introduced partial annuitization.  According to the insurer that has been the exclusive annuity provider to  the TSP since its inception, 784 annuities were purchased in 2003.  From 2004 to 2008, after partial annuitization was implemented, the  number of annuity purchases—including partial or full annuitization— increased to an average of 1,645 per year, a 110 percent increase in the  number of participants annuitizing at least a portion of their account  balances. In addition, the insurer noted that the average purchase  amount of annuities increased 60 percent from $66,000 to $106,000.
All-or-nothing decisions to annuitize can have adverse effects on  participants. When annuity purchase decisions are framed as an “all-or- nothing” choice, most participants will bypass the annuity option and opt  for a lump sum, which does not allow them to benefit from in-plan options  that could help secure lifetime income. On the other hand, industry  stakeholders noted that full annuitization using 100 percent of a plan  account balance may not be suitable because it does not leave savings  that may be necessary for emergencies, such as for healthcare  expenses, or for other purposes, such as bequest motives. Similarly, they  noted that full annuitization may also be inappropriate for most individuals  because they may already have sufficient income through Social Security  and other retirement benefits that provide an annuity benefit, such as a  defined benefit plan.
DOL is responsible for assisting and educating plan sponsors to help  ensure the retirement security of plan participants. According to a  Treasury fact sheet on retirement security, all-or-nothing choices may  lead many participants to decline a plan’s annuity option, leading some  plan sponsors to perceive participant demand to be low and the option to  be unnecessary. Treasury noted one of its goals is to make it easier for  plans to offer participants a combination of retirement income options that  avoid an all-or-nothing choice. However, 401(k) plans are not required to  offer partial annuitization and our interviews with industry stakeholders  and agency officials indicate that plan sponsors are not incentivized to  offer partial annuitization and may not be aware of the benefits to  participants. Recent collaborations by Treasury and DOL have tried to  encourage plans to allow participants the ability to combine multiple  options to receive their retirement benefits. For example, the actions  taken by Treasury approving the use of QLACs and by DOL facilitating  the use of deferred annuity contracts embedded within a target date fund  have made it easier for plans to offer partial annuitization options.  However, partial annuitization is not encouraged broadly through general  guidance applicable to all 401(k) plans, such as DOL’s Meeting Your  Fiduciary Responsibilities publication. Agency officials have told us that  many plans continue to frame annuity purchases as an “all-or-nothing”  choice even though one Treasury official said that there is nothing  prohibiting plans from offering partial annuitization. With DOL guidance  encouraging plans to allow partial annuitization and enabling their  participants to purchase the amount of annuity that they need,  participants will be able to make annuity purchases that are most  appropriate for their individual circumstances and support their lifetime  income needs.
section_title: Concerns about Legal Risk may Deter Plan Sponsors from Offering Annuities, and Record Keeper Limitations may Constrain the Options Plans Can Make Available
subsections: section_title: Fear of Legal Liability May Deter Plan Sponsors from Offering Annuities
paragraphs: Plan Sponsor Survey Respondent on Legal  Risk  “There is a not a single bit of upside to me as  a plan sponsor in offering an option that  participants don’t want, particularly when it is  a complex offering with lots of room for 20/20  hindsight by plaintiff’s counsel, and one that  tends to be more expensive. I care about our  participants, but I have to balance that against  my personal liability, as well as that of my  employer.”
Industry associations and other stakeholders told us that concerns about  legal liability are the primary barrier deterring plan sponsors from offering  annuities to participants. Of the 54 plan sponsors responding to our  survey, 39 did not offer an annuity, and 26 of them said their decision was  influenced by the resources required to obtain liability relief. In 2008, DOL  promulgated a “safe harbor” rule that sets out procedures 401(k) plan  sponsors can follow to satisfy their fiduciary duties when selecting an  annuity provider. To obtain fiduciary relief under the safe harbor rule, for  example, plan sponsors must perform an analytical search for annuity  providers and consider the provider’s ability to pay claims in the future, in  addition to the costs and benefits of the annuity. According to the rule,  plan sponsors and other fiduciaries following the safe harbor when  selecting an annuity provider fulfill their fiduciary duty and should,  therefore, not be subject to corporate or personal liability for that  selection.
Stakeholders we interviewed indicated that the safe harbor for selecting  an annuity provider is not helpful and the primary challenges stem from  the requirements that plan sponsors appropriately:
Consider information sufficient to assess the ability of the annuity  provider to make all future payments under the annuity contract.
Conclude that, at the time of the selection, the annuity provider is  financially able to make all future payments under the annuity  contract. Plan sponsors must also periodically review the  appropriateness of the conclusion over time as the provider continues  to issue annuity contracts.
To facilitate the availability of annuity options in 401(k) plans, the 2005  ERISA Advisory Council Working Group on Retirement Distributions and  Options recommended DOL change sponsor responsibilities for selecting  an annuity provider. The Pension Protection Act of 2006 (PPA), required  DOL to promulgate regulations clarifying the fiduciary standards  applicable to the selection of an annuity contract as a form of distribution  for a DC plan. In 2007, in the preamble to the proposed safe harbor  rule, developed in response to the PPA requirement, DOL stated that plan  sponsors had frequently cited their fiduciary liability as a reason for not  offering an annuity spend down option. However, by DOL’s own  estimates, the safe harbor was unlikely to make plan sponsors  substantially more willing to offer annuities because it estimated when it  proposed the rule that the safe harbor would increase the share of  participants offered an annuity by only 1 percentage point.
Assessing the future financial health of an insurer can be a difficult task  for a plan sponsor, and many plan sponsors responding to our survey  indicated they would be more likely to offer an annuity if the benefits of  the safe harbor were more readily attainable. Members of Congress in  both parties introduced legislation that would have, among other things,  amended ERISA to permit plan sponsors and fiduciaries to rely more  heavily on state regulators when selecting an annuity provider.  Additionally, the Director of the Federal Insurance Office told us plan  sponsors should not be expected to look at an insurer’s annual report to  assess its financial liabilities or know more about an insurer than the  research and metrics a rating agency or other entity might make publicly  available. Officials we spoke with at the National Association of Insurance  Commissioners (NAIC) also told us the safe harbor should have verifiable  criteria. For example, the plan sponsors responding to our survey who did  not offer annuities responded that any single criterion provided would  make them more likely to offer them, as shown in table 4.
DOL is responsible for educating and assisting plan sponsors to help  ensure the retirement security of workers and their families. However, the  annuity selection safe harbor can only translate into increased retirement  security if it is used, and it does not provide sufficiently detailed criteria  that plan sponsors feel they can use to obtain the liability protection it  offers. The safe harbor requires plan sponsors to consider “sufficient”  information to “appropriately” reach a conclusion about the annuity  provider’s future solvency without defining the terms “sufficient” and  “appropriate.” In 2010, a DOL official told us the agency was considering  addressing industry concerns that plan sponsors have to second-guess  state insurance regulators to assess insurers’ financial viability, and in  2014, DOL published information indicating that it would be developing  proposed amendments to the safe harbor to provide plan fiduciaries with  more certainty that they have discharged their obligations when  contracting to provide an annuity option. DOL officials told us one  advantage of revising the annuity selection safe harbor would be that it  could provide greater clarity for plan sponsors and thus lead to more  annuity options for participants. NAIC officials mentioned a standard  proposed by an association of insurers, which would include, among  other criteria, that the insurer be licensed in at least 26 states. RFI  responses from two participant advocates suggested that annuity  providers should also be licensed in states with strong regulatory  protections. A DOL official told us that because the ERISA standard of  prudence requires plan fiduciaries to exercise some degree of judgement  in making the annuity provider selection, it precludes development of a  simple and easily verifiable checklist. However, clarifying how to comply  with the annuity selection safe harbor to the greatest extent possible may  help encourage plan sponsors to offer plan participants an annuity option.
section_title: Concern about Legal Liability May Deter Plan Sponsors from Offering a Mix of Lifetime Income Options
paragraphs: According to researchers we spoke to, participants should have multiple  lifetime income options because no one solution works for everyone.  Treasury officials told us that participants can benefit by combining  options to diversify their sources of lifetime income and help them  manage multiple risks in retirement. For example, participants could use a  portion of their savings to purchase an annuity and leave the balance  invested in their plan for a withdrawal option.
A variety of products and services could be offered in the plan  environment to provide participants with a mix of annuity and withdrawal  options. For example, managed payout funds provide for automated  withdrawals, and annuity providers offer a wide variety of guaranteed  income options. Furthermore, plans can also offer participants access to  an online annuity shopping platform, and with it, comparable information  on multiple products from multiple providers. See Appendix IV for further  details.
However, there is no agency guidance available to help plan sponsors  minimize their legal risks when offering participants a mix of annuity and  withdrawal options within a plan. The current safe harbor for the selection  of an annuity provider is available to plan sponsors only offering an  annuity product from a single annuity provider. Based on our analysis, a  plan sponsor could increase its risk of legal liability for each option it  offers. For example, a plan sponsor that offers an in-plan annuity  increases its risk by adding withdrawal options. Of the 12 plan sponsors  responding to our survey who did not offer withdrawal options, 8  responded that the fiduciary responsibilities for managing participant  assets in the draw-down phase influenced their decision.
The results of our record keeper questionnaire indicate that most plan  sponsors are not offering a mix of lifetime income options. In contrast,  plan sponsors are required to diversify the plan investments they offer.  In addition, when 401(k) plans permit participants to exercise control over  their investment choices and, among other things, offer participants a  broad range of investment alternatives, plan sponsors or other fiduciaries  are not liable for any losses that result solely from a participant’s exercise  of that control.
DOL has not provided an incentive for plan sponsors to provide  participants a mix of lifetime income options and information about them.  EBSA’s mission is to assure the security of the retirement, health, and  other workplace-related benefits of America’s workers and their families,  and without lifetime income options in workplace 401(k) plans, those  benefits may not remain secure throughout retirement. Accordingly, DOL  is engaged in an initiative with Treasury to encourage plan sponsors to  offer prudent lifetime income options. Currently, each additional lifetime  income option plan sponsors offer potentially exposes them to additional  legal risk, unless that option is an annuity selected in a process pursuant  to the safe harbor for annuity selection. DOL has not established a  process plan sponsors can use to prudently select an appropriately  diverse mix of annuity and withdrawal options offered to participants.  Consequently, DOL has not determined the types of products—such as  those on an online annuity shopping platform—that might appropriately  be included in such a mix. DOL officials told us the decision to offer any  lifetime income option is still a fiduciary one, and that even if they  provided such relief, plan sponsors would still have some fiduciary  responsibility associated with providing participants lifetime income.  However, if plan sponsors and others are protected from liability when  participants exercise control choosing among lifetime income options in a  way comparable to how they are protected when participants exercise  control in choosing investments to accumulate retirement savings,  sponsors may be more likely to offer a mix of lifetime income options from  which participants can choose in their plan.
section_title: Plan Sponsors May Cause Participants to Lose Lifetime Income When They Change Record Keepers or Annuity Providers
paragraphs: Another deterrent to plan sponsors offering annuities, according to  representatives of annuity providers, is the possibility of plan participants  having to lose lifetime income guarantees when the plan sponsor  changes service providers. To serve the best interests of participants,  plan sponsors may at times be required to change service providers,  including annuity providers and record keepers. Plan sponsors have a  legal obligation to establish and follow a formal review process at  reasonable intervals to decide whether to continue to use a service  provider or look for replacements. However, lifetime guarantees— insurance policies offering lifetime income—can be difficult to transfer.
When participants contribute over time to a guaranteed lifetime income  product such as a deferred income annuity or a GMWB, they are  purchasing both an investment product and a guarantee of lifetime  income. Purchasing an annuity in small amounts over time can have  certain advantages, such as managing interest rate risk (see app V).  When the plan sponsor changes record keepers or annuity providers, the  investment will transfer, but the lifetime income guarantee may not. Some  products might charge a guarantee fee of 1 percent or more every year  and, as such, there is the potential for participants to have committed  substantial resources to the guarantee before losing it due to a service  provider change (see fig. 8). For example, a guarantee fee of 100 basis  points (1 percent) for a GMWB may not be unrealistic. A representative of  one plan sponsor told us that the plan’s Request for Proposals from  401(k) service providers for a GMWB did not return a single bid for less  than 100 basis points per year.
Representatives of one service provider told us that in general it is difficult  to transfer annuities among annuity providers because it is difficult for  providers to absorb the risk of another provider’s insurance products. For  a product with a lifetime income guarantee to transfer from one record  keeper to another, the new record keeper’s platform must either have the  capacity to support the annuity product, or use third party software to  allow a link to product information on the platform. Representatives of  one annuity provider told us that given the complexities in effectively  managing such a situation and the confusion about whether those efforts  would be successful, many plan sponsors may be reluctant to offer  annuities.
According to examples provided by industry officials, options needed to  protect participants already exist, whether by refunding, preserving, or  transferring their lifetime income guarantees, and some annuity providers  and record keepers have taken steps to preserve participant benefits  when plans change record keepers or annuity providers. For example, an  association of defined contribution plans’ record keepers has developed  common data standards for tracking annuity products, which are intended  to simplify the transfer of annuity data among record keepers. In another  example, one annuity provider representative offers participants a refund  of fees if they lose their lifetime income guarantee, returning to them  some value that could replace the lost lifetime income. Further, another  annuity provider representative told us his company paid the lifetime  income guaranteed by another annuity provider’s product, effectively  transferring the annuities from provider to provider. An additional  approach to preserving such benefits would be to allow participants to roll  over their 401(k) plan annuity into an IRA version of the annuity provider’s  product in the retail market if it would otherwise be lost. However, such  distributions would move some 401(k) plan benefits while leaving others,  increasing the likelihood of participants having to manage benefits in  multiple places, which we previously reported can be challenging for  participants. Figure 9 shows how steps similar to those already taken by  some providers could preserve participant benefits despite service  provider changes.
DOL is responsible for educating and assisting plan sponsors to help  ensure the retirement security of workers and their families. Federal  internal control standards also state that management should ensure  there are adequate means of communicating with external stakeholders  that may have a significant impact on an agency achieving its goals.  Representatives of one annuity provider told us service provider changes  have already caused some participants to lose lifetime guarantees. DOL  officials told us on this subject that some plan fiduciaries may not  examine insurance contract details as closely as the details of investment  vehicles, and in such situations, they need to be more careful. However,  DOL has not issued guidance encouraging plan sponsors to consider  whether a service provider contract ensures future service provider  changes do not cause participants to lose the value of lifetime income  guarantees. While options to prevent lifetime income guarantee loses  may exist, it is not clear how widespread they are in practice. However,  by following such guidance from DOL, plan sponsors could make such  options more widespread by requesting them, and they may be more  willing to allow participants to accumulate in plan annuities in the future, if  they are confident that a service provider change will not amount to a  benefit reduction for participants.
section_title: Plans’ Access to Annuities May be Limited by Their Record Keeper
paragraphs: Industry stakeholders we interviewed told us that plan sponsor access to  annuity options is often dependent on the options their record keeper  makes available. Plan sponsors make annuity options available in their  plans similar to the way they make investment options available. For  example, plan sponsors who want to offer an annuity option may work  with a number of service providers to determine the appropriate annuity  options to offer their participants. However, several industry stakeholders,  including some record keepers, told us that sponsors’ choices of annuity  options may be limited because of cost considerations and business  affiliations.
Cost. Industry stakeholders told us that, among other things, it is  costly to integrate plan record keeper systems with those of an  insurer, especially for complex and non-standardized annuity products  like GMWBs, which require daily transmittal of information between  systems. In contrast, stakeholders indicated that fixed immediate  annuities may be the least costly annuity option that plan sponsors  can adopt because they are simple and straightforward for record  keepers to implement. Stakeholders also told us that some record  keepers may offer an open record keeping platform that either already  supports competing annuity products or can be customized at the  sponsor’s request to do so. However, a number of record keepers told  us that even for providers that offer an open platform, the process of  integrating the systems for annuity products like GMWBs can be  costly absent strong demand for them from plan sponsors.
Business affiliation. Industry stakeholders told us that many record  keepers are affiliated with specific insurers, financial service  providers, and investment managers. In such instances, the services  or products offered by their respective affiliates may influence the  annuity products that the record keeper platform supports. Some  stakeholders also told us that financial services companies that are  focused on the retail annuity and investment markets may not want  their affiliated record keeper to make in-plan annuity options available  because their business is either based on or is comprised significantly  of participants rolling over their savings into a retail IRA. Similarly,  some stakeholders indicated that record keepers may not offer  annuities because some record keepers are also investment  managers who may be compensated based on assets managed,  which decrease with annuity purchases. Some stakeholders also said  that insurers that have proprietary annuity products, especially  GMWBs, have an interest in only offering their own products on their  affiliated record keeping platform. As a result, plan sponsors that want  to offer an annuity option generally must choose their record keeper’s  product or forego the option altogether.
In general, plans’ ability to persuade their record keepers to make annuity  options available can be limited, similar to investment management  services as we previously reported. Industry stakeholders have  indicated that larger sponsors are generally more likely to have the  leverage or resources to persuade their record keeper to support  competing products and services from multiple providers on their  recordkeeping platform. Smaller sponsors may not be able to affect this  change and may need to select a different record keeper to implement  their desired annuity option or forego adopting an annuity option  altogether. While our record keeper questionnaire suggests that small  plans are more likely to offer some form of lifetime income option, this  data may be a reflection of a greater likelihood that smaller plans are  administered by an insurance company that offers annuities.
Nearly all the plans covered by our record keeper questionnaire that  offered GMWBs were either small or mid-size. Stakeholders told us that  because GMWBs have more features than other types of annuities, they  are generally more expensive. Due to the complexity of the product,  participants who do not fully understand GMWBs risk making withdrawal  decisions that could decrease benefits.
One of DOL’s roles is to enforce Title I of ERISA by educating fiduciaries  on how to carry out their responsibilities, which include selecting service  providers. DOL’s guidance in its Meeting Your Fiduciary Responsibilities  publication recommends that, to ensure a meaningful selection, plan  fiduciaries should survey a number of potential service providers before  hiring one, but the guidance does not specifically include or discuss  consideration or adoption of annuities or lifetime income options. The  guidance specifies that diversifying plan investments—which can include  annuities—and paying only reasonable plan expenses for service  providers and plan investments are among a sponsor’s fiduciary  responsibilities. DOL also underscores the importance of plan fiduciaries’  responsibility to compare potential providers’ services to appropriately  assess their reasonableness. However, DOL’s guidance does not  encourage plan fiduciaries to use a record keeper that supports products  from competing providers. While factors like cost and business affiliation  may prevent some record keepers from supporting a variety of products,  DOL officials told us participants would benefit from their plans having the  ability to access non-proprietary products along with proprietary products.  We previously recommended that DOL provide guidance to plan  sponsors that addresses, among other things, the importance of  considering multiple providers when choosing a managed account  provider, and the importance of requesting from record keepers a choice  of more than one provider. By considering similar guidance encouraging  plan sponsors to use a record keeper that supports competing annuity  product providers on its platform, plan sponsors could be more likely to  find options that serve their participants and adopt them.
section_title: Participants May Not Have the Information, Education, or Adviser Needed to Make Informed Decisions about Lifetime Income Options
subsections: section_title: Participants Currently May Not Have Information That Can Help Them Understand How Much Income Their Savings Will Provide in Retirement, which DOL Is Taking Steps to Address
paragraphs: Lifetime income illustrations show participants a projection of the monthly  or annual income their 401(k) savings may generate for retirement, but  industry research indicates most plan sponsors do not use them.  According to representatives of one service provider, showing participants  a projection of their account balance as monthly income helps them  determine how much they need to save to cover anticipated expenses in  retirement. Similarly, representatives of another service provider said  showing participants a projection of their account balance as annual  income helps them determine how much they need to save to replace  their current annual salary. In contrast, showing an account balance as a  lump sum payment does not give participants a way to compare their  savings to their monthly expenses or annual salary. Service providers can  give plan sponsors the ability to present lifetime income illustrations in  ways that can help participants think about how to use their 401(k)  savings in conjunction with other sources of retirement income. For  example, figure 10 shows how one record keeper can incorporate into a  401(k) plan’s benefit statements an estimate of a participant’s Social  Security benefit, as well as information about a defined benefit plan if the  participant has one.
Industry stakeholders also said it is beneficial for participants to see  information that helps them set lifetime income goals and address  shortfalls through a “gap” analysis that compares their goal against the  anticipated results of their current savings behavior. As shown in figure  11, service providers can use such an analysis to help participants think  of their account in terms of either monthly or annual retirement income.  Representatives of four service providers told us they have the capacity  to generate a lifetime income goal for their participants using  recordkeeping data. Participants we surveyed in coordination with a  research firm reported that two important things to know for retirement  planning are how much money they will need in retirement and how much  lifetime income they can expect their savings to generate—information  that lifetime income goals and a gap analysis are designed to  communicate. One service provider told us their historical testing  indicates that one out of five participants who used their tool for  developing lifetime income goals subsequently increased their  contributions by an average of 5 percent to address savings shortfalls.  Despite its benefits, industry research indicates that only a limited number  of plans communicate these types of information to participants. For  example, according to one industry survey, at most about 48 percent of  plan sponsors make a gap analysis available to their participants.
Recognizing the value of providing 401(k) participants with income  projections, DOL issued an Advance Notice of Proposed Rulemaking in  2013 to address the low adoption of lifetime income illustrations by plan  sponsors. The rule being considered would require plan sponsors to  include lifetime income illustrations alongside the account balance in  participant benefit statements. DOL officials told us they were considering  this requirement based on the experience of the Thrift Savings Plan, the  defined contribution plan for federal employees that is similar to 401(k)  plans. According to DOL officials, contributions to the Thrift Savings Plan  increased substantially once participants saw how much lifetime income  they could expect in retirement based on their current savings behavior.  Research has shown similar increases in participant contributions in other  circumstances in response to the introduction of lifetime income  illustrations. We previously reported on research suggesting that  participants in Chile’s defined contribution retirement system made  additional contributions to improve their retirement prospects after Chile  required that plans include projections of retirement income in  participants’ annual statements starting in 2005. Researchers reported  that these projections helped individuals better align their savings  behavior with lifetime income goals. In a separate study, researchers  found that participants in defined contribution plans similar to 401(k) plans  who received lifetime income illustrations increased contributions by more  than those who did not.
section_title: Information Participants Receive May Not Sufficiently Educate Them about Lifetime Income Options
paragraphs: The materials plan sponsors provide participants to educate them about  lifetime income options may in many cases not be adequate to help them  learn to make informed use of their plans’ withdrawal options and  annuities. Although participants we surveyed in coordination with a  research organization cited separation packets some plan sponsors send  to participants in or near retirement as a key source of education about  lifetime income options, we reviewed 16 plans’ separation packets and  found they were missing most of the elements we identified as critical in  helping participants learn about their options at retirement (see fig. 12).  For example, we identified education on the possible advantages and  disadvantages of each available lifetime income option as important  because it helps participants weigh the pros and cons of different  options. Although a majority of the packets we reviewed provided  descriptions of available options at retirement, few included discussions  of the advantages and disadvantages of these options. We also found  that most packets were not written in a way that participants can easily  and clearly understand.
DOL has acknowledged the importance of educating participants on,  among other things, how to estimate their future retirement income needs  and make informed selections from among plan offerings. According to  DOL, this kind of education is particularly important because more  participants are in defined contribution plans that require them to make  decisions about what to do with their savings. Additionally, DOL officials  told us education on lifetime income options needs to be in place before  more plans begin offering these options.
section_title: Participants in Our Review Cited Investment Advice as a Key Factor in Implementing a Sound Retirement Strategy, but Access to Advice through Plans is Limited
paragraphs: Participants we surveyed in coordination with a research organization  cited obtaining advice as a key step in selecting lifetime income options  offered by a 401(k) plan. We asked participants to check all the steps  they would take to assess what lifetime income options are right for them,  and almost 50 percent of respondents reported they would seek advice.  Our surveys also found that participants preferred to obtain financial  advice through their plans as opposed to other sources. We asked  participants to select from a list the types of individuals they would consult  in selecting among a plan’s lifetime income options. Fifty-nine percent of  respondents selected a financial adviser provided by the plan. In  comparison, fewer than 40 percent of respondents selected a tax  professional or lawyer (39 percent) or a financial advisor outside of a plan  (about 36 percent).
Retirement planning decisions can create substantial challenges for  participants who lack access to an adviser. One study of lifetime income  options notes that participants must make decisions about how to deploy  their savings in the context of other important retirement considerations  such as when to claim Social Security; when to stop working; and home  equity, taxes, and longevity. Additionally, providers of a managed account  service told us participants need to consider not just how, but also when  and where they deploy their savings. Specifically, the order in which  participants draw on their various sources of income, as well as tax laws  in the state where they live, can affect how much they pay in taxes during  retirement.
Determining how long their savings will last can also be challenging for  participants. Research shows that without access to an adviser,  participants tend to underestimate how long they may live and may spend  down their savings too quickly. One researcher warned that participants  tend to look to potentially misleading regulatory cues to inform retirement  planning decisions. For example, they might interpret statutory provisions  providing that the tax penalty on premature 401(k) distributions cease at  age 59 ½ as a signal to start drawing down their savings at this age  even if they would be better served by staying invested in their plan until a  later date. Participants also tend to overestimate their ability to generate  investment returns and underestimate the value of longevity protection.
Our survey in coordination with a research firm also found that  participants had competing priorities for their retirement savings, which  can ultimately drive them towards complex products. As shown in figure  13, participants cited both securing easy access to savings and protecting  from the risk of outliving their savings as top priorities. Service providers  told us that options like GMWBs that embody both these characteristics  are among the most complex and difficult for participants to understand.  One insurance company told us they had to remove some features from  their GMWB because it was too confusing for participants. A few possible  consequences of not fully understanding such a product include losing  longevity protection for failure to abide by withdrawal restrictions and  paying fees for benefits not received.
Despite broad recognition of the need for participants to consult an  adviser on lifetime income options before they make any decisions,  industry research indicates only a minority of plan sponsors make  advisers available to plan participants. In a 2013 survey of more than 600  plan sponsors, less than one-third reported offering access to any kind of  advice to participants. One industry stakeholder told us plan sponsors  are reluctant to provide access to investment advice, in part because of  concerns about the costs. One survey reported this is true even though  participants can get advice on withdrawal options through their plan for  less than half the cost they would pay on their own. In addition, legal  liability may also be a concern for plan sponsors. Lawyers representing  401(k) plans told us they counsel their clients against providing access to  advice because of legal liability.
Industry research indicates that service providers already have some  capacity to offer participants the opportunity to work with an investment  adviser. According to one survey, over 35 percent of plans offered  participants access to advice through a financial adviser affiliated with  their plan provider, with the most widespread use among smaller plans.  About twenty-six percent provided advice through a registered investment  adviser (RIA). Further, a majority of sponsors who make advice  available to participants choose to do so through one-on-one meetings in  person with an adviser. One record keeper operates a call center  participants can use to speak with an adviser and obtain advice about  their plan’s withdrawal options and annuities, depending on their needs. A  plan consultant we spoke with uses a network of financial advisers who  will spend a week at their client’s business meeting with participants.  Participants opting for a managed account can also get advice through  that service.
DOL is responsible for educating and assisting plan sponsors to help  ensure the retirement security of workers and their families. DOL officials  told us it was a good idea to encourage sponsors to offer participants  access to investment advisers in-plan, though sponsors should diligently  vet prospective advisers before they are allowed to make open  presentations to participants. However, in DOL’s publication Meeting Your  Fiduciary Responsibilities, plan fiduciaries are not encouraged to provide  access to an investment adviser knowledgeable about lifetime income  strategies. Despite the absence of such guidance, some plan sponsors  have already ensured that their participants have the chance to speak  with an investment adviser about their plans’ annuities and withdrawal  options, enabling participants to talk to professionals before they leave  their plan or make a decision that can jeopardize their retirement security.  Without guidance about the importance of providing their participants  access to an adviser at the point of retirement to discuss in-plan lifetime  income options, plan sponsors may continue to not offer such a service.
section_title: For Participants Who Do Not Choose a Lifetime Income Option for Retirement, Default Lifetime Income May Be Beneficial
paragraphs: Even with better information and an opportunity to receive advice, there  are some participants for whom lifetime income decisions can be  overwhelming or of no interest. As a result, they may disengage from  making decisions regarding their income stream in retirement. We  previously reported that about 17 percent of employees who lack a  retirement plan have access to one but do not enroll. Sponsors have  used automatic enrollment as a way to help ensure adequate retirement  savings for employees, sometimes because other efforts, such as e-mails  and educational materials, were not effective. Some participants did not  enroll thinking they were ineligible, but researchers have noted many fail  to enroll because of a behavioral tendency to follow the path that does not  require an active decision. In six automatic enrollment studies we  reviewed in 2009, automatic enrollment in a plan increased participation  by at least 18 percent.
The results of our record keeper questionnaire suggest relying on  participants to make proactive decisions to ensure lifetime income has  resulted in few participants selecting such options. Less than 1 percent of  participants in plans covered by our record keeper questionnaire chose  annuities, and less than 1 percent of participants chose systematic  withdrawals. We previously reported that because people are prone to  inertia and procrastination, a default option often becomes the most  common choice when making financial decisions.
Although default contributions for participants who do not make such  decisions during the accumulation phase are allowed, provided certain  requirements are met, little has been done to facilitate lifetime income  defaults. Several industry representatives we spoke to, and others who  reported to DOL and Treasury in 2010, indicated that defaults can lead  participants to use lifetime income options. Over 70 percent of  participants we surveyed in coordination with a research organization for  this report indicated that if their employer automatically invested a small  percentage of their future contributions in a competitively priced  guaranteed retirement income product, they would stay invested in the  product. Figure 14 illustrates deferred annuity payments (deferred  annuities begin payments later than the time of purchase), showing how  such a default can hypothetically guarantee some income and longevity  protection while leaving most of the account available for other purposes.
DOL has previously acted to encourage defaults that provide retirement  income. DOL clarified in a 2014 letter to Treasury that a deferred annuity  embedded in a target date fund qualifies as a qualified default investment  alternative (QDIA). Accumulating an annuity over time in such a way  has certain advantages, as detailed in Appendix V. The DOL letter  describes a circumstance where each fund available to participants age  55 or older holds deferred annuity contracts and funds available to  participants under age 55 do not. As participants age, a larger portion of  their assets are devoted to annuities, and at the target date, fund  members receive an annuity that provides lifetime income payments.
On September 15, 2015, President Obama directed executive branch  agencies to give particular consideration to selecting and setting default  options. One option already in place that can provide a default for  participants in 401(k) plans is the provision of required minimum  distributions (RMD). A plan can be disqualified under the Internal  Revenue Code if they do not follow the RMD provisions. Under these  provisions, participants are required to begin receiving at least minimum  payments starting after the participant retires and reaches the age of 70  ½. RMD calculations based on life expectancy provide lifetime income by  design. Some plan sponsors are willing to administer RMDs as lifetime  income by providing the minimum distribution to the participant in the plan  rather than requiring participants to take a lump sum. As a result,  participants who do not proactively commit to a lifetime income strategy  may still get lifetime income through a plan that complies with RMD  provisions by making distributions on the regulated minimum schedule.  Default income based on RMD provisions can also begin when a  participant retires and is in need of income, even though a distribution is  generally not required until after the participant turns 70 1/2. For example,  the Thrift Savings Plan for federal employees offers a series of monthly  payments computed by the TSP based on IRS life expectancy tables.
President Obama’s executive order directs agencies to specifically  consider using default options, and RMDs can function as such for  lifetime income. However, DOL does not communicate that the RMD  methodology can be used this way in its Meeting Your Fiduciary  Responsibilities publication. Currently, the only default option for lifetime  income that DOL has formally supported is a deferred annuity, which was  offered by less than 1 percent of the plans represented by record keepers  who responded to our questionnaire. In contrast, many record keepers  already know how to administer RMDs, so DOL could leverage that  experience by providing guidance on how to use the methodology to  produce lifetime income for participants. DOL officials told us they had not  considered this approach and would need time to do so. However,  without leveraging a default that is widely available in plans, few  participants are likely to be impacted, and RMDs are essentially the only  type of distributions that all 401(k) plans are required to make. Unless  DOL begins encouraging plan sponsors to consider providing RMD-based  default income, many retirees who do not select a lifetime income option  may continue to receive a single lump sum payout that may not be used  for lifetime income.
section_title: Conclusions
paragraphs: Since the enactment of section 401(k) of the Internal Revenue Code in  1978, 401(k) plans have become the most common retirement savings  vehicle in the United States. As a growing number of 401(k) participants  retire, agencies have begun to realize the importance of helping those  retirees create lifetime income from their 401(k) plan savings.
DOL can take action to address fiduciary barriers that deter plan sponsors  from offering lifetime income options to participants. First, most plan  sponsors are unlikely to be equipped to judge the long-term viability of an  insurer, yet they currently must do so under the existing safe harbor.  Providing clearer criteria for making this determination likely would  encourage more sponsors to seek fiduciary relief for offering annuities.  Second, DOL offers fiduciary relief when savings are accumulated in an  appropriate mix of investments, but it offers no such relief for plans  offering a mix of lifetime income options. Extending this relief to plan  sponsors could encourage more plans to make a mix of options available  and, therefore, allow participants to create a better retirement strategy by  selecting and combining annuity and withdrawal options.
DOL can also provide additional guidance, in its Meeting Your Fiduciary  Responsibilities publication or elsewhere, for fiduciaries as they consider  how their participants’ account balance will translate into retirement  income. DOL guidance can encourage plan sponsors to use a record  keeper that includes annuities from other providers on its record keeping  platform and increase the likelihood the plan sponsor will have access to  annuities that the plan sponsor considers to be in the best interest of the  plan participants. DOL guidance can encourage fiduciaries to offer  participants the option to partially annuitize their account balance,  allowing participants to purchase the amount of guaranteed lifetime  income most appropriate for them. DOL guidance can also help plan  sponsors plan for future service provider changes when offering an  annuity. The fear of causing participants to lose annuity guarantees due  to a service provider switch may cause plan sponsors to stay in a less  than ideal service provider relationship or not offer an annuity. Guidance  can encourage plan fiduciaries to consider whether a lifetime income  contract could cause participants to lose lifetime income guarantees  under such a circumstance before entering into the contract. DOL  guidance can also encourage plan sponsors to provide an expert in  retirement income strategies for participants to talk to about the plan’s  distribution options. Enabling participants to receive advice about in-plan  lifetime income options given their individual circumstances will better  ensure they make retirement income decisions that can be directly  applied to their specific circumstances.
Lastly, DOL can encourage participants who have not chosen a lifetime  income option at retirement toward income security with defaults. These  participants may be less likely to take advantage of advice when offered.  RMD-based default income can stretch out the account balances of these  participants throughout retirement if sponsors and participants understand  how they can be administered and used. Unless DOL encourages plan  sponsors to consider providing RMD-based default income, many retirees  who do not select a lifetime income option may continue to receive a  single lump sum payout that may not be used for lifetime income.
section_title: Recommendations for Executive Action
paragraphs: We are making seven recommendations to the Secretary of Labor.
We recommend the Secretary of the Department of Labor (DOL) help  encourage plan sponsors to offer lifetime income options by:  1.  Clarifying the safe harbor from liability for selecting an annuity  provider by providing sufficiently detailed criteria to better enable plan  sponsors to comply with the safe harbor requirements related to  assessing a provider’s long-term solvency.  2.  Considering providing legal relief for plan fiduciaries offering an  appropriate mix of annuity and withdrawal options, upon adequately  informing participants about the options, before participants choose to  direct their investments into them.
To guide fiduciaries as they consider how the account balances of their  participants will translate into financial security in retirement, DOL should  modify its Meeting Your Fiduciary Responsibilities publication or issue  new guidance to encourage plan sponsors to:  3.  Use a record keeper that includes annuities from multiple providers on  their record keeping platform.  4.  Offer participants the option to partially annuitize their account  balance by allowing them the ability to purchase the amount of  guaranteed lifetime income most appropriate for them.  5.  Consider whether a contract with a service provider ensures future  service provider changes do not cause participants to lose the value  of their lifetime income guarantees.  6.  Include participant access to advice on the plan’s lifetime income  options from an expert in retirement income strategies.  7.  Consider providing RMD-based default income–plan distributions as a  default stream of lifetime income based on the RMD methodology– beginning, unless they opt-out, when retirement-age participants  separate from employment, rather than after age 70 ½.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Department of Labor and the  Department of the Treasury. The agencies provided technical comments,  which we have incorporated where appropriate. DOL also provided  written comments, which are reproduced in Appendix VI.
In its written comments, DOL agreed that today workers face greater  responsibility for managing their assets for retirement, both while  employed and during their retirement years. As we note in our report and  DOL stated in its comments, DOL is committed to continuing to explore  steps to advance lifetime income options in individual account retirement  plans, such as 401(k) plans. DOL expressed reservations about GAO’s  recommendations but described actions consistent with their intent, as  discussed below. Regarding the recommendation to clarify the steps a  plan sponsor must take to assess the long term solvency of an annuity  provider when selecting one in accordance with DOL’s safe harbor, DOL  stated that a clarification might erode consumer protections by degrading  the oversight of fiduciaries making such selections. We commend DOL  for placing a high value on consumer protections and wanting to uphold  the requirements placed on fiduciaries. However, our report notes on  page 26 the relatively challenging process for plan sponsors prudently  offering an in-plan annuity. DOL’s suggested alternative is that the plan  fiduciaries outsource these decisions to a financial institution as an  investment manager under Section 3(38) of ERISA. We agree with DOL  that it has identified a promising strategy, and commend DOL for doing so  transparently. However, this strategy relies on a plan having access to  something rather specific, which is a deferred annuity embedded in a  target date fund. While they may be used more often in the future, as our  report notes on page 52, less than 1 percent of plans covered by our  record keeper survey offered deferred annuities. At this time, we are not  confident that relying on a strategy available to so few plans will  effectively resolve the challenges posed by the current version of the  annuity provider selection safe harbor. While we agree that outsourcing  can bring helpful expertise to the complex fiduciary task of selecting an  insurer, it is not clear whether such a service would be available and  affordable to the bulk of 401(k) plan sponsors. For example, we report on  page 27 that a large consulting firm told us they do not select annuity  providers for plan sponsors because the costs and liability risks of doing  so are prohibitive.
Regarding the recommendation to consider providing fiduciary relief to  plan fiduciaries offering an appropriate mix of annuity and withdrawal  options, DOL expressed concern that it could shift the responsibility for  annuity selection from the fiduciary to the participant. However, we  believe that a concern is unwarranted, and the change would not  adversely affect participants. DOL already offers certain fiduciary relief  under section 404(c) related to the investments offered under a plan.  Once plans have performed their fiduciary duty in selecting a broad range  of at least three investment alternatives with differing characteristics and  provided participants with educational information on them, the participant  bears the risk of selecting from among them. Analogously, we believe it  would be appropriate for DOL to provide, once plans have exercised their  fiduciary duty to select an appropriate mix of annuity and withdrawal  options, for participants to bear the risk of selecting from among them.  While it raised these concerns, DOL stated in its letter that it is open to  considering alternative regulatory approaches. DOL also noted that it has  an active regulatory agenda but will include the recommendations as part  of its ongoing development and prioritization of its agenda.
Finally, with respect to the recommendations to provide guidance to  fiduciaries on how the account balances of their participants will translate  into financial security in retirement, DOL stated that it will review its  publications along the lines of the recommendations to explore ways in  which to encourage use of products and arrangements designed to  provide participants and beneficiaries a lifetime income stream after  retirement, and take steps to better educate participants and plan  sponsors about the need to think about retirement savings as lifetime  income. DOL also noted that the Meeting Your Fiduciary Responsibilities  publication may not be the appropriate vehicle for addressing some of the  subject matter in the recommendations. However, the recommendation  also states that DOL could alternatively issue new guidance. We  specifically cited the Meeting Your Fiduciary Responsibilities publication  because it covers a wide range of topics and may reach a wider audience  than other forms of guidance. Further, as stated in the publication, while  some decisions are plan design decisions and not fiduciary decisions,  there may still be fiduciary responsibilities involved in carrying them out.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Secretary of Labor,  Secretary of the Treasury, and other interested parties. In addition, the  report will be available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-7215 or jeszeckc@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in Appendix VII.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to examine 1) the adoption of lifetime income options  in 401(k) plans; 2) the barriers, if any, that deter plan sponsors from  offering lifetime income options; 3) the challenges participants face, if  any, in learning to make informed decisions about lifetime income  options; and 4) the defaults that exist for participants who do not choose  an option.
To address these objectives, we reviewed relevant research, responses  to the Request for Information (RFI) by the Department of Labor (DOL)  and the Department of the Treasury (Treasury) in 2010, federal laws,  regulations, and guidance on lifetime income options. We identified  relevant research to review with the help of a GAO librarian, through  stakeholder interviews, by reviewing the sources cited in documents we  obtained, and through limited internet searches driven by stakeholder and  documentary evidence. We shared key studies with a GAO actuary for  review. We reviewed the 2010 RFI responses, when available, of  stakeholders we interviewed or were considering interviewing. We  interviewed a non-generalizable sample of 29 service providers to 401(k)  plans including record keepers, insurance companies, asset managers,  managed account service providers, lawyers and advisers to plan  sponsors. We also interviewed representatives of industry advocacy  groups, researchers, and officials from DOL’s Employee Benefits Security  Administration (EBSA) and Treasury’s Office of Tax Policy, Federal  Insurance Office, and Internal Revenue Service (IRS) as well as  representatives of the National Association of Insurance Commissioners  (NAIC). We worked with a GAO methodologist to select stakeholders to  interview. We selected industry stakeholders to interview who could  provide information on a large number of participants or assets, who  offered unique products and services facilitating 401(k) plan lifetime  income, or were in roles working closely and directly with plan sponsors  or participants. We selected researchers and participant advocates to  interview with published work on retirement income. We included  questions in a generalizable survey of defined contribution plan  participants conducted by an independent research firm. We also  conducted a non-generalizable online survey of 54 plan sponsors. We  collected and analyzed data on plan sponsor adoption and participant use  of lifetime income options from 11 record keepers to 401(k) plans. We  assessed a non-generalizable sample of 16 separation packets that some  plan sponsors make available to participants at or near retirement. We  obtained and reviewed examples of information, such as lifetime income  illustrations, that some service providers make available for plan sponsors  to include in participant benefit statements or on plan websites to help  participants plan for retirement. Lastly, we developed two interactive  retirement models to illustrate the factors, such as inflation, that can affect  the amount of retirement income a participant’s savings may generate  and depict ways in which participants can use their 401(k) savings in  coordination with other sources of retirement income, such as Social  Security.
We conducted this performance audit from July 2014 to August 2016 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Surveys of Defined Contribution Participants
paragraphs: Boston Research Technologies agreed to include questions we wrote to  collect data for this report in a survey of plan participants conducted in  April 2015. We are reporting survey results from that survey as well as a  second survey of participants conducted by Boston Research  Technologies at the same time. We reviewed the methodologies of these  surveys and concluded they were suitable for our purposes. The first  survey included questions we provided about participants’ experiences  with lifetime income options offered through their plan and had 5,804  completed responses. The target population of this survey was full-time  workers who participate in a defined contribution plan. The second  survey, with 3,594 completed responses, included questions about  managing retirement savings in multiple accounts. The target population  of this survey was full-time, part-time, and contract workers whose current  employer offers a defined contribution plan. Since both surveys represent  only a sample of the potential population, they are subject to sampling  error. For the first survey, we estimate that the sampling error is  approximately 1.7 percent at the 95 percent confidence interval. We  estimate that the sampling error for the second survey is 1.5 percent at  the 95 percent confidence interval. While Boston Research Technologies  took great efforts to ensure the sample population correctly represented  the true population, we do not have an exact response rate and therefore  cannot directly calculate non-sampling error, which could occur if survey  responses differed in some systematic way from the true population.  Additionally, each survey included a few respondents who reported  participating in other types of defined contribution plans such as 457  plans, which are for state and local governments and tax-exempt  organizations. Participants in these types of plans may exhibit different  behavior with respect to lifetime income options than that of 401(k)  participants. For these reasons, to determine whether we considered the  survey population, sample and question results reflective of the larger  population, we compared sample demographic characteristics and  selected survey responses against data from other large samples of  401(k) participants and found the population broadly similar in  characteristics such as participant age and job tenure. As a result, we  generalize the survey responses as the views of the broader population of  401(k) participants.
section_title: Survey of Plan Sponsors
paragraphs: We created a web-based survey of plan sponsors on 401(k) lifetime  income and conducted it between May 18th and July 24th, 2015. We  received 54 completed responses. We publicized the survey to the  membership of industry organizations such as PLANSPONSOR, the Plan  Sponsor Council of America, the National Association of Plan  Administrators, BenefitsLink, and Pensions and Investments. These  organizations distributed the survey to their members, but they did not  collect survey responses, which were sent directly to GAO. To develop  the questions and answer sets, we analyzed information gathered  through stakeholder interviews and our review of relevant regulations and  legislation. We pre-tested questions with stakeholders external to GAO  with the assistance of GAO methodologists. We provided text fields to  allow respondents to elaborate qualitatively or provide additional insights.  Data collected through the survey are not generalizable and reflect the  views and experiences of the respondents and not the entire population  of 401(k) plan sponsors. Responses may be more indicative of the  practices of larger plans. Of the plans represented in the survey, 16 plans  had fewer than 100 participants, and 32 had 500 participants or more.  Also, 401(k) plans voluntarily participating may be more proactively  managed than others.
section_title: 401(k) Plan Record Keeper Questionnaire
paragraphs: We collected data on plan adoption and participant use of lifetime income  options in 401(k) plans from 11 record keepers who together represent  about 42 percent of the 401(k) market as measured by assets, 46 percent  as measured by participants, and 26 percent as measured by plans. To  ensure our analysis reflected the broadest possible range of participants  in differing circumstances, we obtained data from a variety of different  types of record keepers serving different portions of the 401(k) market.  For example, we obtained data from record keeping platforms operated  by both insurance companies and mutual fund companies. We also  obtained data from record keepers that focus on serving smaller plans as  well as those that principally serve large plans. We collected data on the  number of plans that offered different withdrawal options and annuities,  though some record keeper respondents did not provide data for some  products and services. We aggregated and analyzed the responses we  received to determine plan adoption of each individual withdrawal or  annuity option. Plans that made multiple withdrawal or annuity options  available would be included in the totals for more than one option. We did  not independently verify the systems used to produce record keepers’  data. However, we met with representatives from 10 of the 11 record  keepers to discuss the lifetime income options they currently make  available to plans and determined the data the record keepers provided  accorded with these discussions. We concluded that record keeper data  were reliable for our purposes and provide a reasonably accurate  depiction of a non-generalizable sample of plans in the 401(k) market.
section_title: Assessment of Separation Packets Provided to Participants
paragraphs: We assessed a non-generalizable sample of 16 separation packets that  some 401(k) plan sponsors provide to participants near or in retirement.  We obtained separation packets from participants and industry  stakeholders we interviewed, as well as from publicly available sources  such as plan websites. In some instances, we obtained separation  packets for specific plans while in other instances we received templates  that service providers make available to their plan sponsor clients. As  shown in table 5, the separation packets we reviewed represented a  broad range of plans as measured by characteristics like plan assets and  average account balance. We cannot determine the extent to which the  separation packets we assessed are reflective of all separation packets  that some plan sponsors make available to their participants. However,  given the variety of plans represented in our sample, our assessment can  provide valuable insights on the extent to which separation packets  include factors we identified that can help participants make informed  choices among lifetime income options.
To assess the separation packets, we identified five factors that can help  participants make informed decisions about the use of lifetime income  options and determined the extent to which the packets address them.  We developed these factors from our past work and our review of  relevant literature. We obtained a review of the factors from a GAO  research methodologist and incorporated feedback on them from three  external parties: a researcher who studies the use of lifetime income  options in 401(k) plans and representatives of two firms that help  employers provide their employees with independent financial guidance  and education. To ensure that we applied our factors appropriately to the  16 separation packets, two reviewers independently evaluated the  separation packets against criteria we identified in conjunction with a  GAO methodologist as subjective, and a third analyst arbitrated any  discrepancies between the two reviewers. See table 6 for a more  complete description of the five factors and the results of our assessment.
section_title: Interactive retirement models
paragraphs: We developed two interactive retirement models to provide contextual  information on lifetime income options:
The first interactive retirement model we developed is based on a  similar retirement model we developed for a prior report. The new  version of this interactive retirement model allows users to view  expected retirement income generated by two types of payment  options under a range of circumstances: (1) systematic withdrawal  strategies with payments that are (a) a fixed dollar amount,  unadjusted for inflation; (b) a percentage of the account balance at  retirement, increased annually for inflation; and (c) based on life  expectancy at each age of withdrawal, using factors published by the  IRS for purposes of complying with required minimum distributions  (RMD) and determining substantially equal periodic payments, and (2)  an immediate annuity that makes level payments based on the  lifetime of an individual retiree. We developed, in consultation with  GAO’s actuaries and an external actuary who has expertise in annuity  pricing, a formula that was calibrated to approximate annuity prices  similar to those found in U.S. retail annuity markets in July 2013.  Because we simulated retail annuity prices, the annuity payment  differs by gender. Annuities offered inside a 401(k) plan would not  differentiate pricing by gender and may be rated differently than retail  annuities. All income streams illustrated by the model are presented  in real dollars, which reflects an assumed annual inflation rate of 2.25  percent throughout the projection period. The interest rates and  investment return assumption ranges were based on analysis of  current and historical capital market data and consideration of  professional forecasts of key economic indicators. We also consulted  with GAO’s actuaries and two GAO economists in setting these  ranges. 401(k) account balance options are for illustrative purposes  only, and are not intended to be representative of actual account  balances held by 401(k) plan participants as of publication. As such,  the amount of income illustrated by the model also should not be  considered representative of what actual 401(k) participants could  generate with their savings as of publication.
The second interactive retirement model illustrates potential lifetime  income strategies that combine different options for generating  retirement income, including several Social Security claiming options,  systematic withdrawals from a 401(k) account, and partial  annuitization of a 401(k) account balance. The systematic withdrawal  strategy is structured to provide a level amount of total inflation- adjusted income when combined with Social Security and annuity  income that is purchased with plan savings. The model and the  systematic withdrawal strategy assume that retirees live to age 100,  unused account balances earn 3 percent real return, and inflation  grows at 2.25 percent per year. The model does not reflect the effect  that actual lifespan, investment returns, and inflation could have on  the illustrated retirement strategy. The model allows users to include  or exclude a fixed immediate annuity based on the age of the  illustrated retiree and purchased from the 401(k) account balance in  the illustration. We obtained annuity prices from an annuity shopping  platform provider who provided averaged quotes across multiple  annuity providers as of January 2016. As such, modeled annuity  prices reflect the pricing available through a platform provider and  differ by gender. Annuities offered inside a 401(k) plan would not  differentiate pricing by gender and may be rated differently than other  market segments. The model includes Social Security retirement  benefits, and allows users to defer the age at which benefits are first  claimed if retirement occurs before age 70. Social Security benefit  amounts were obtained from the Social Security Administration’s  Social Security Quick Calculator, using data for the illustrated retiree  as inputs. The model assumes retirement occurs at the end of 2015,  regardless of the retirement age selected. 401(k) account balance  options are for illustrative purposes only and are not intended to be  representative of actual account balances held by 401(k) plan  participants as of publication. As such, the amount of income  illustrated by the model also should not be considered representative  of what 401(k) participants could generate with their savings as of  publication. We also consulted two external stakeholders with  expertise on lifetime income options regarding our model.
The ranges, calibration of the annuity rates, and estimated Social Security  benefits provide illustrative context for the report but are not material to  the findings, conclusions, or recommendations. However, the  assumptions and methodology used to develop the models, as well as  numerous test cases, were reviewed by a GAO actuary. The retirement  income depicted in the interactive retirement models does not reflect  federal or state taxes. Dollar amounts in the interactive retirement models  are for illustrative purposes only, and should not be considered  representative of individual circumstances or the pricing of annuities  available in the market. The model is provided for illustrative purposes  only and modeled results should not be construed or used as financial  advice.
section_title: Appendix II: Accumulation, Withdrawal, and Insured Phases of a Guaranteed Minimum Withdrawal Benefit
paragraphs: The contract terms for guaranteed minimum withdrawal benefits (GMWB)  vary across providers but generally consist of an accumulation,  withdrawal, and insured phase (see fig. 15).
Accumulation: The accumulation phase begins when a participant  purchases a GMWB contract, which establishes the benefit base from  which lifetime withdrawals are made. This benefit base is the amount to  which lifetime withdrawal percentages will be applied to determine  minimum insured lifetime income. The investment account value  represents the total value of the participant’s investments. During this  phase the participant decides how to allocate investment assets among  various options made available. The insurer monitors the participant’s  account value and automatically adjusts or steps-up the benefit base  periodically should additional contributions or investment gains increase  the value of the account. Once a benefit base is stepped up, it typically  does not later decline because of investment losses that may reduce the  participant’s investment account value. However, the benefit base is  separate from the account value, cannot be withdrawn as a lump sum or  annuitized, and is not payable as a death benefit.
Withdrawal: The withdrawal phase starts when a participant begins  taking withdrawals. The maximum withdrawal amount that a participant  can take in a year (without incurring a reduction in their benefit base) is  generally calculated as a percentage of the participant’s benefit base at  the time of the first withdrawal. As in the accumulation phase, the  insurance company will typically increase the benefit base if a  participant’s account value, net of withdrawals and fees, increases above  the existing benefit base, which may in turn increase the minimum  insured lifetime income and the maximum withdrawal that the participant  may take without reducing the benefit base.
Insured: A participant enters the insured phase if their investment  account value has been reduced to zero as a result of withdrawals,  investment losses, or any expenses, fees, or other charges. In such  cases, the participant’s benefit base (the amount to which the withdrawal  percentage is applied) remains unchanged, but the participant’s  investment account value is zero. The funds needed to continue paying  benefits to the participant would then come from the insurance company’s  assets, and participants would receive payments from the insurance  company equal to the minimum insured lifetime income, generally a  percentage of the benefit base determined at the time of the first  withdrawal amount. Once the insurance company begins paying the  agreed-upon insured payment, the fees that the participant had been  paying for that protection would cease, as would any investment  management and other fees paid for other benefits. Once the insured  phase begins, all rights and benefits under a GMWB product terminate  except those related to continuing benefits, and all lifetime withdrawal  benefits will continue to be paid to the participant on the established  schedule and generally cannot be changed.
section_title: Appendix III: Illustration of Plan Funding Mechanisms
section_title: Appendix IV: Online Annuity Shopping Platforms
paragraphs: Annuity shopping platform technology offers certain benefits to 401(k)  participants. Such technology can offer multiple, competing products on a  single interface where participants can comparison shop by price.  Participants may be able to input information about what they are looking  for, allowing them to customize the annuity to fit their financial plan.  Participants may be able to choose how much of their account to devote  to the annuity, their income starting date, and select or unselect features  like death benefits to view the resulting price change. For example, a  participant might choose to set aside an amount as small as $10,000 to  manage longevity and cognitive risk without losing access to the rest of  their savings. An official of one platform compared their platform to the  way technology now allows shoppers in other markets to compare prices  on airplane flights and hotels. An official at another platform told us it sells  annuities for a 1 percent commission as opposed to the 6 or 7 percent  commission stakeholders told us was typical of the retail market.  According to that official, the annuity shopping platform also offers its own  education and advice services apart from those offered by the plan.  Figure 17 shows products available on one platform.
Based on our record keeper questionnaire, less than 1 percent of plans  adopted an annuity shopping platform. According to a representative of  one annuity shopping platform provider, plan sponsors were not using it  as an in-plan option because of concerns about legal risks associated  with selecting annuity providers. The other two annuity shopping  platforms we found to be in operation also appeared to cater exclusively  to the retail market rather than to participants in employer-sponsored  plans.
One online annuity shopping platform offers a means for plan sponsors to  make the platform available to participants in a way that the provider  believes makes it an out-of-plan option. According to a representative of  the platform, at retirement the shopping platform can appear on the  participant’s distribution form as part of a lump sum option labeled  “IRA/Annuity Platform”. When selected, a participant’s funds are rolled  into an IRA and the participant is provided the opportunity to make an  annuity purchase from among choices provided through the platform. In  2010, this annuity shopping platform was available to over a thousand  plans and millions of participants, but 98 percent of plans adopting it were  doing so through this type of arrangement involving an IRA. According to  this provider, because it is an out-of-plan option, employers often require  participants to acknowledge a disclaimer stating that the employer does  not endorse the platform or its choices, which according to the provider  contributes to more than 50 percent of participants exiting the platform  without obtaining an annuity. The provider’s IRA rollover solution was  intended to resolve plan sponsors fiduciary liability concerns in 2005, but  according to that provider, those concerns remain today.
section_title: Appendix V: Lifetime Income Options in 401(k) Plans and Retail Markets
subsections: section_title: In-Plan Options Use a Familiar Environment
paragraphs: Experts have identified the workplace as potentially being a particularly  effective venue for providing financial education and helping individuals  improve their financial decision making. Employers have the potential to  reach large numbers of adults in a cost-effective manner at a place where  they make important financial decisions regarding retirement. Financial  literacy—the ability to use knowledge and skills to manage financial  resources effectively—is becoming increasingly important.
Participants make decisions about lifetime income options in the same  plan environment in which they have become accustomed to making  decisions to accumulate savings, (e.g., on the plan website or by  submitting a form). The authors of a report on lifetime income options  noted that by simplifying the steps needed to select and combine lifetime  income options, plan sponsors can help participants overcome inertia to  make complex retirement planning decisions about their retirement  income strategies. One way to do this is to integrate the selection of  lifetime income options into the routine tasks participants may perform.  For example, each time participants change their investment allocation  using a plan website designed by one record keeper we interviewed, they  are also given the option to invest some of their savings in a fund that will  gradually and automatically turn into a guaranteed minimum withdrawal  benefit (GMWB) as the participant nears retirement. In a second example,  a managed account service provider told us participants can typically  implement their recommendations on a plan’s lifetime income options at  the click of a button.
In-plan annuities can be offered as an investment option purchased in  smaller amounts over time as the participant nears retirement. For  example, more than 44 percent of the mid-size 401(k) plans represented  in our record keeper questionnaire that adopted GMWBs allow  participants to purchase those benefits over time through periodic  contributions. Figure 18 shows how purchasing annuities in this way can  help participants address, for example, the risk of purchasing a single,  large annuity when interest rates might be unfavorably low (“interest rate  risk”). Breaking up annuity purchases into smaller amounts can also help  participants address the hesitation associated with a single, large  purchase. For example, one independent financial adviser told us splitting  up annuity purchases helps build her clients’ comfort with the idea of  annuitizing a modest portion of their retirement savings. It also gives them  time to react to changes in their health or financial status that could  change their need for annuitization.
section_title: The Protections of In-Plan Options
paragraphs: Most plan sponsors we surveyed cited the potential regulatory protections  provided through ERISA as an additional advantage of in-plan lifetime  income options. We have reported on these protections, including the  requirement that plan fiduciaries act solely in the interest of plan  participants and beneficiaries for the exclusive purpose of providing plan  benefits and defraying the expense of plan administration. Other  protections, as shown in table 7, include the selection and monitoring of  appropriate investment options and holding down and clearly disclosing  fees.
Plan sponsors can typically obtain lower fees for lifetime income options.  We have reported that participants generally pay lower fees through their  plan than they would on their own because plan sponsors can use  participants’ combined savings to negotiate with service providers. An  industry report noted this may benefit participants with smaller balances  because in a 401(k) plan, all participants typically pay the same relative  costs, such as the same annual fee as a percentage of their investment in  a lifetime income option. According to a study of lifetime income options,  under certain conditions participants who remain invested in their plan  can increase retirement income from certain withdrawal options by more  than 20 percent after 20 years. Industry stakeholders also reported that  in-plan annuities are generally less expensive than their retail-market  counterparts in part because plan sponsors can reduce or eliminate the  commissions paid to make annuities available for sale on an individual  basis. Representatives of one 401(k) plan told us that in-plan, they could  access an annuity product for their participants at less than half the cost  of comparable retail options. According to one association of insurance  and financial services companies, assets covered by an in-plan  guarantee totaled $3.6 billion in 2014, while retail annuity sales that same  year totaled more than $235 billion.
section_title: Product Variety, Gender Pricing and Consolidation in 401(k) Plans
paragraphs: Several industry stakeholders reported that retail annuity markets offer a  wider variety of options than are available for use in 401(k) plans.  Additionally, retail versions of annuities may have more sophisticated  features than those available as in-plan options. One insurance company  explained how the retail version of a GMWB they offer allows individuals  to “lock in” positive investment returns on a daily basis. However, this  feature was too complicated for the in-plan version, which instead only  allows participants to lock in investment gains once a year. Similarly, one  researcher told us the withdrawal options currently available to  participants may not be sophisticated enough to adapt to fluctuating  investment returns and other changes in a participant’s circumstances.  One managed account service provider we interviewed told us the service  can help participants develop more responsive withdrawal strategies that  change from year to year depending on participants’ circumstances.
However, as we reported in 2015, managed account services still  represent a small, if growing, portion of the 401(k) market.
We have also reported that annuity pricing in 401(k) plans may create  instances where male participants are better off purchasing an annuity in  retail markets rather than through their plan. Retail annuities typically  vary based on gender. As a result, men, who tend not to live as long as  women, can generally secure higher monthly payments from an annuity  than women with otherwise similar characteristics. In contrast, annuities  offered in 401(k) plans must be priced on a gender-neutral basis. This  requirement stems from a Supreme Court decision ruling that employers  sponsoring plans offering annuities that make smaller monthly payments  to women than to men violate a ban on gender-based employment  discrimination. According to Treasury officials and researchers, the  effects of gender on in-plan annuity prices may be offset by other factors  such as the plan sponsor’s ability to negotiate lower fees. One researcher  added that the potential effects of an annuitant’s gender on the pricing of  in-plan annuities is also limited because prices for opposite sex joint and  survivor annuities take into account both male and female longevity and  so are priced more similarly in institutional and retail markets.
Participants may also have trouble consolidating multiple 401(k) accounts  to manage their retirement savings from a single account. As evidenced  by our survey of defined contribution plan participants in coordination with  a research firm, a vast majority of participants are likely to accumulate  more than one account over their career. The majority of participants we  surveyed reported they would likely pay for a service that consolidates  their accounts into their current plan if their plan sponsor offered one.
Almost all participants we surveyed would view such a service as a  valuable benefit if their plan sponsor made it available, as compared with  other workplace benefits they might receive (see fig. 19).
section_title: Appendix VI: Comments from the U.S. Department of Labor
section_title: Appendix VII: GAO Contact and Staff Acknowledgements
subsections: section_title: GAO Contacts
paragraphs: Charles Jeszeck, (202) 512-7215 or jeszeckc@gao.gov.
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Tamara Cross (Assistant  Director), Tom Moscovitch and Ted Leslie (Analysts-in-Charge), and  David Lin made key contributions to this report. Also contributing to this  report were James Bennett, Ted Burik, Diantha Garms, Gene  Kuehneman, Sheila McCoy, Meredith Moore, Ernest Powell, Joseph  Silvestri, Anne Stevens, Frank Todisco, Kathleen van Gelder, Walter  Vance, and Craig Winslow.
section_title: Related GAO Products
paragraphs: GAO, 401(k) Plans: Clearer Regulations Could Help Plan Sponsors  Choose Investments for Participants, GAO-15-578 (Washington, D.C.:  Aug. 25, 2015).
GAO, Retirement Security: Most Households Approaching Retirement  Have Low Savings, GAO-15-419 (Washington, D.C.: May 12, 2015).
GAO, 401(k) Plans: Improvements Can Be Made to Better Protect  Participants in Managed Accounts, GAO-14-310 (Washington, D.C.: June  25, 2014).
GAO, 401(k) Plans: Labor and IRS Could Improve the Rollover Process  for Participants, GAO-13-30 (Washington, D.C.: Mar. 7, 2013).
GAO, Retirement Security: Annuities with Guaranteed Lifetime  Withdrawals Have Both Benefits and Risks, but Regulation Varies across  States, GAO-13-75 (Washington, D.C.: Dec. 10, 2012).
GAO, Thrift Savings Plan: Adding a Socially Responsible Index Fund  Presents Challenges, GAO-12-664 (Washington, D.C.: June 26, 2012).
GAO, 401(k) Plans: Increased Educational Outreach and Broader  Oversight May Help to Reduce Plan Fees, GAO-12-325 (Washington,  D.C.: Apr. 24, 2012).
GAO, 401(k) Plans: Other Countries’ Experiences Offer Lessons in  Policies and Oversight of Spend-down Options, GAO-14-9 (Washington,  D.C.: Nov. 20, 2013).
GAO, Financial Literacy: A Federal Certification Process for Providers  Would Pose Challenges, GAO-11-614 (Washington, D.C.: June 28,  2011).
GAO, Retirement Income: Ensuring Income throughout Retirement  Requires Difficult Choices, GAO-11-400 (Washington, D.C.: June 7,  2011).
GAO, Defined Contribution Plans: Key Information on Target Date Funds  as Default Investments Should be Provided to Plan Sponsors and  Participants, GAO-11-118 (Washington, D.C.: Jan. 31, 2011).
GAO, Retirement Savings: Automatic Enrollment Shows Promise for  Some Workers, but Proposals to Broaden Retirement Savings for Other  Workers Could Face Challenges, GAO-10-31 (Washington, D.C.: Oct. 23,  2009).