401(k) Plans: Other Countries' Experiences Offer Lessons in Policies and Oversight of Spend-down Options
Published: 2013-11-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: American workers are primarily saving for retirement through their 401(k) plans and will likely need assistance making complicated decisions about how to spend their money throughout retirement. Other countries with defined contribution (DC) systems are also dealing with this spend-down challenge. To identify lessons for the U.S. from the experiences of other countries, GAO examined selected countries' (1) approaches to offering retirement spend-down options; (2) strategies to help participants make sound decisions; and (3) approaches to regulating and overseeing options. An initial review of countries with established DC systems indicated that some countries including the six GAO selected--Australia, Canada, Chile, Singapore, Switzerland, and the United Kingdom--have developed innovative spend-down policies that have the potential to yield useful lessons for the U.S. experience. GAO reviewed reports on DC plans; and interviewed experts and government officials in the U.S. and selected countries.
section_title: What GAO Found
paragraphs: The six countries GAO reviewed can offer U.S. regulators lessons on how to expand access to a mix of spend-down options for 401(k) participants that meet various retirement needs. Five of the six countries generally ensure that participants can choose among three main plan options: a lump sum payment, a programmed withdrawal of participants' savings, or an annuity. In the last several decades, all the countries took steps to increase participant access to multiple spend-down options, with some first conducting reviews of participants' retirement needs that resulted in policy changes, as shown below. In the United States, 401(k) plans typically offer only lump sums, leaving some participants at risk of outliving their savings. The U.S. Departments of Labor (DOL) and the Treasury (Treasury) have begun to explore the possibility of expanding options for participants, but have not yet helped plan sponsors address key challenges to offering a mix of options through their plan.
Countries reviewed used various strategies to increase participants' knowledge and understanding of spend-down options, which may be useful to DOL in its ongoing efforts. Strategies used by other countries include (1) communicating spend-down options to participants in an understandable and timely manner, and (2) helping participants see how their savings would translate into a stream of income in retirement by providing them with projections of retirement income in their annual benefit statements. Currently, 401(k) participants have difficulty predicting how long their savings will last because most benefit statements do not focus on the stream of income it can generate. DOL is currently considering including income projections in statements, which may help participants better understand what their balance could provide on a monthly basis once they retire.
Regulators in the countries GAO reviewed employed several approaches to overseeing the spend-down phase aimed at helping participants sustain an income throughout retirement. For example, most of the countries used withdrawal rules and restrictions for lump sums and programmed withdrawals to help protect participants from outliving their savings. With respect to annuities, DOL continues to consider current regulatory barriers that may prevent 401(k) plan sponsors from offering annuities, which do not exist in other countries. Looking at what other countries require may help DOL in its efforts.
section_title: What GAO Recommends
paragraphs: GAO recommends that DOL and Treasury, as part of their ongoing efforts, consider other countries' approaches in helping 401(k) plan sponsors expand access to a mix of spend-down options for participants. GAO also recommends that DOL consider other countries' approaches in providing information about options and regulating the selection of annuities within DC plans. In response, DOL generally agreed with GAO's recommendations and will evaluate approaches.

section_title: Letter
paragraphs: American workers are primarily saving for retirement through 401(k)  plans, which have become the dominant type of plan private sector  employers are offering in the United States. Since the inception of 401(k)  plans, regulators have focused their efforts on ensuring that plan  participants accumulate savings for retirement. With many participants  who have had defined contribution (DC) plans throughout their career  nearing retirement, regulators have begun to focus on the decumulation  phase, or the spending down of retirement savings, because of the real  possibility that some retirees may  outlive their savings. Unlike  participants in traditional defined benefit (DB) plans who are offered a  specific periodic benefit for life at retirement, 401(k) plan participants must  take responsibility for the complex decisions required in the spend-down  phase. By 2015, participants whose retirement savings will be primarily  made up of what they accumulated in their 401(k) plans, which were  introduced in 1978, will be eligible to retire. Typically, 401(k) plan  participants receive benefits as a lump sum payment and are thus  primarily left on their own to manage their money in a way that ensures  they do not outlive their retirement savings. Current regulatory efforts by  the Department of Labor (DOL) and the Department of the Treasury  (Treasury) have begun to focus on the spend-down phase as it has  become clearer that workers in the United States are increasingly subject  to financial risks in retirement that can cause them to either outlive their  savings or to lower their standard of living.
The United States is not alone in facing this growing concern for retirees.  Other countries with retirement systems dominated by DC plans similar to  401(k) plans face the same problem of ensuring that plan participants  effectively manage the spending of their retirement savings, whether  under a mandatory or voluntary system. This is particularly important  given the common challenges of low average balances of DC plan  participants and the longer average life expectancies. Some countries  have developed innovative approaches and strategies that can help  participants better manage their DC plan savings throughout their lives,  while the United States has just begun to explore ways to help 401(k)  plan participants. As DOL and Treasury move forward, you expressed  interest in potential lessons learned from countries that have addressed  these issues. This report addresses the following questions:  1.  What approaches have other countries with DC plans taken to offer  participants certain retirement spend-down options?  2.  What key strategies are used in other countries with DC plans to help  participants make sound spend-down decisions to improve retirement  outcomes?  3.  What approaches have other countries used to regulate and oversee  spend-down options?
To answer these questions, we selected six countries with extensive or  growing DC systems in which to conduct in-depth reviews of retirement  spend-down phase strategies: Australia, Canada, Chile, Singapore,  Switzerland, and the United Kingdom (U.K.). We selected these  countries from an initial review of countries with well-developed account  based retirement systems. In selecting these six countries, we considered  if the country had (1) developed innovative spend-down phase policies or  options; (2) a clearly defined and well-established oversight structure for  the DC plan spend-down phase and providers, such as insurance  companies, that offer spend-down products; and (3) an approach to the  spend-down phase that was different from the other countries we  selected. As part of our initial review, we interviewed and obtained  comparative studies of DC systems published by academics, the  Organisation for Economic Co-operation and Development, The World  Bank, and other industry experts, such as international benefits consulting  firms, as well as our prior work. We then examined the characteristics of  each country’s DC system for policies, practices, and requirements  related to retirement spend-down options. On the basis of this initial  review, we determined that the six countries selected could potentially  provide lessons for the United States given their experience and unique  approach to the spend-down phase. For each of the six countries  selected, we reviewed publicly available research and reports about each  country’s spend-down options, oversight framework, and initiatives to  educate participants about options. We also interviewed pension experts,  service providers, regulatory agencies and other government officials  from the countries selected. We did not conduct an independent legal  analysis to verify the information provided about the laws, regulations, or  policies of the foreign countries selected for this study. Instead, we relied  on appropriate secondary sources, interviews with relevant officials, and  other sources to support our work. We submitted key report excerpts to  agency officials in each country for their review and verification, and we  incorporated their technical corrections as necessary. To provide context  for various spend-down options and illustrate some of the factors that can  affect retirement income we designed a retirement model and  hypothetical scenarios. To create this, we consulted with actuaries to  develop a formula for pricing annuities based on benchmarks typically  used by insurance companies in U.S. retail markets. We also reviewed  data from the Federal Reserve Economic Database, including 10-year  Treasury constant maturity rates, and Thrift Savings Plan to establish  historical ranges for interest rates, inflation, and investment returns on  401(k) accounts. Appendix I provides additional information on our scope  and methodology.
We conducted this performance audit from June 2012 through November  2013 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: U.S. 401(k) Plans and Their Oversight Framework
paragraphs: Employers can sponsor two broad types of retirement plans, referred to in  the Employee Retirement Income Security Act of 1974 (ERISA) as  pension plans: (1) DB plans, which promise to provide benefits generally  based on an employee’s years of service and frequently are based on  salary, regardless of the performance of the plans’ investments, and (2)  DC plans, in which benefits are based on contributions and the  performance of the investments in participants’ individual accounts. Since  the inception of ERISA, employers have shifted away from sponsoring DB  plans and moved toward sponsoring DC plans. The dominant type of DC  plan is a 401(k) plan. In 2011, U.S. employers sponsored over 510,000  401(k) plans covering more than 61 million workers with more than $3.1  trillion in plan assets. Unlike DB plans, in which plan participants are  eligible for a specific payment for life, 401(k) plan participants typically  must make their own, sometimes complex, choices about their account  balance both before and during retirement. For example, participants  need to decide how much to contribute, how to invest, and how to spend  down savings in retirement.
In the United States, 401(k) plans are subject to provisions of ERISA,  which are generally enforced by DOL’s Employee Benefits Security  Administration (EBSA) and Treasury’s Internal Revenue Service (IRS).  To carry out its responsibilities under ERISA, EBSA issues regulations  and other guidance. The IRS, under Title II of ERISA, and subsequent  amendments to the Internal Revenue Code, generally is responsible for  ensuring that plans meet certain requirements for tax qualification, among  other things. Tax advantages are intended to encourage employers to  establish and maintain pension plans and encourage employees to  participate in the plans. For example, employer contributions to qualified  plans are, within limits, tax deductible and, in general, contributions and  investment earnings are not taxed as income until the employee  withdraws them from the plan.
In recent years, EBSA and IRS have increased their focus on the  decumulation phase of 401(k) plans, exploring ways to facilitate access to  lifetime retirement income products, such as annuities. For example, in  2008, EBSA issued a new safe harbor regulation for selecting annuity  providers as an optional way for sponsors and other plan fiduciaries of  DC plans to satisfy their responsibilities under ERISA to act prudently and  in the interest of the plan’s participants and their beneficiaries.  Subsequently, in 2010, EBSA and IRS sought public comments to aid the  agencies in thinking about how they might facilitate access to and the use  of lifetime income streams after retirement. More recently, IRS proposed  a new regulation in February 2012 to encourage retirement plans to offer  a longevity annuity option, also referred to by some as deeply deferred  annuities, in which payments initiate at an advanced age, such as age  80. This regulation has not been finalized.
In addition, other entities play a role in overseeing and monitoring  insurance companies that sell annuities—guaranteed income payments  for life or a specified term—either through 401(k) plans or in the retail  market to individual investors. For example, state insurance regulators  are responsible for enforcing state insurance laws and regulations,  including those covering the licensing of agents, reviewing insurance  products (including annuities) and their rates, and examining insurers’  financial solvency and market conduct. In addition to state insurance  regulators, the National Association of Insurance Commissioners  (NAIC)—a voluntary association of the heads of insurance departments  from the 50 states, the District of Columbia, and five U.S. territories— plays a role in insurance regulation. Although NAIC is not a regulator, it  provides guidance and services designed to more efficiently coordinate  interactions between insurers and state regulators. Additionally,  although the Federal Insurance Office (FIO) is not directly involved in the  supervision of private and public pension plans, it has a role in  coordinating and developing insurance policies. FIO advises the  Secretary of the Treasury on domestic and international insurance policy  issues; and consults with states regarding insurance matters of national  and international importance. FIO also coordinates federal efforts and  develops federal policy on prudential aspects of international insurance  matters. For example, FIO has been working with international regulators  to develop a methodology and indicators for identifying global  systemically important insurers, meaning that their failure might threaten  global financial stability.
section_title: Key Aspects of DC Systems in the United States and Selected Countries
paragraphs: In addition to the United States, the selected countries for this review— Australia, Canada, Chile, Singapore, Switzerland, and the United  Kingdom—each have extensive or growing DC retirement systems. As  shown in table 1, the key features of each country’s predominant DC plan  vary.
At retirement, participants in DC plans enter the distribution, or spend- down phase, during which they use their savings to meet their retirement  needs. DC participants are typically offered one or more of three main  types of spend-down options at retirement, although the availability of  these options and the rules related to their use vary by country:
Lump sum payments are a single distribution of some or all of a  participant’s retirement savings. For example, in the United States,  participants generally only have the option to withdraw all or part of  their account balance, which can, at the participant’s discretion, then  be used to invest in retail financial markets, among other things.
Programmed withdrawals are a series of fixed or variable payments  from a participant’s account and may be administered either within a  plan or in retail financial markets. Programmed withdrawals attempt  to produce relatively stable annual income for the lifetime of the  retiree. For example, a participant could set up their own programmed  withdrawal strategy and decide to draw down a certain percentage of  their assets each month or year to meet their retirement needs.  Governments could also set minimum and maximum drawdown limits.
Annuities are guaranteed payments that are normally secured  through a contract with an insurance company for either a set period  or for the participant’s lifetime. Annuities come in a variety of forms.  For example, deferred annuities allow participants to delay the start  date of payments to a later point in retirement. Variable annuity  payments are not guaranteed and vary based on the performance of  underlying investments selected by the participant.
Factors that affect annuity payment calculations can vary by country  Annuity payment amounts may depend on a number of factors beyond simply the amount  of retirement savings a participant can use to purchase the annuity less fees charged by  insurers. These factors vary by country and may, depending on the country, include such  factors as:  Age: Participants can generally expect to receive higher payments the higher the age  at which payments commence.
Gender: Men typically receive higher payments compared to women of the same age,  since studies have shown that women tend to live longer than men. This may not  apply, however, in countries and market sectors that require annuities to be offered  on a gender-neutral basis—such as for an annuity offered through a plan in the  United States.
Health: Participants with certain health conditions or lifestyle habits such as smoking  can in some cases obtain higher payments.  Interest rates: Participants who purchase annuities during periods of low interest rates  may lock in lower payments than if they had purchased during a period of higher  interest rates.
Participants face trade-offs in choosing among spend-down options  because no single option protects against all the various risks participants  may encounter in retirement, such as longevity and inflation risk. To  choose suitable options, participants approaching retirement must weigh  the strengths and shortcomings of each against their own unique  retirement needs. They also need to consider their other sources of  retirement income, including government benefits and personal savings.  Table 2 illustrates some of the trade-offs participants face in choosing  among spend-down options.
To effectively weigh the trade-offs between spend-down options,  participants have to understand how interest rates, investment returns,  and inflation, among other key factors, can affect their retirement income.  Figure 1 below illustrates how investment returns can affect the  retirement income a programmed withdrawal provides. In contrast, an  annuity, once purchased, protects against investment risk over the course  of retirement.  Purchasing an annuity, however, may be irreversible,  thereby potentially limiting the ability to leave an inheritance or cover  unforeseen costs in retirement. And interest rates at the date of purchase  can affect the size of payments from an annuity. In all cases, even  modest inflation can erode the purchasing power of retirement income  over the course of an extended retirement.
In the last decade, some experts have emphasized an aspect of  behavioral economics to help improve retirement outcomes for  participants in 401(k) plans. In these plans, individuals face greater  responsibility and risks in managing their retirement income needs both  during the accumulation and spend-down phases, such as having  insufficient savings to support a comfortable retirement and not having  the right tools to make sound financial decisions about how to use what  they have accumulated. Our prior work found literature arguing that  information or financial education, including improving financial literacy, is  not necessarily the best or only approach to ensuring good retirement  outcomes. They have proposed alternative strategies, sometimes in  combination with information and financial education, that aim to help  participants reach financial goals by making use of insights from  behavioral economics—which blends economics and psychology—that  indicate people are often prone to inertia and procrastination, and have  difficulty processing complex information. For example, participants in  401(k) plans do not always receive timely, clear information to help them  understand their options, as well as the risks and trade-offs of managing  income throughout retirement. Even when such information is available,  participants do not always make choices that are in their best interest.  Insights from behavioral economics have led to strategies that use inertia  to bolster or facilitate positive policy outcomes, such as default enrollment  in 401(k) plans to increase retirement savings. Researchers and  practitioners have proposed similar interventions for the spend-down  phase, such as encouraging or “nudging” some participants toward  annuitizing a portion of their retirement wealth.
section_title: Countries Used Multiple Approaches to Broaden Participants’ Retirement Options for the Spend-down Phase
subsections: section_title: Instituting Multiple Spend- down Options Helped Participants Address Varied and Changing Risks
paragraphs: Although DC systems in countries we reviewed often varied in their  features, structure, and regulatory oversight, all six countries ensured  that participants have institutionally-facilitated access to a mix of spend- down options through their plans to help them manage retirement risks.  Five of the six countries make the three main spend-down options—lump  sum payments that offer participants flexibility to access and use their  retirement savings, programmed withdrawals that allow participants to  keep their account balances invested and draw on savings as needed,  and annuities that offer guaranteed retirement income and protection  against investment risk—explicitly available to DC participants. The  countries we reviewed also allow participants to combine spend-down  options to meet changing needs over the course of an extended  retirement. For example, within certain conditions, participants in  Singapore can take a partial lump sum after age 55 and purchase an  annuity that guarantees them some amount of retirement income for life.
Other sources of retirement income, such as those from national pension  systems, can address some retirement risks, but all the countries we  reviewed recognize the importance of their DC system in improving  retirement outcomes and have taken steps to increase participant access  to multiple spend-down options. For example, Switzerland has a national  pension system that provides some level of guaranteed retirement  income, similar to the annuity option available to participants through their  plan. Even with this system in place, in 2005 Switzerland required plans  to offer participants at least 25 percent of their account balance as a lump  sum payment, an option that had previously only been made at the  discretion of the plan. One financial advisor we spoke with told us this  policy change benefits participants who decide they already have  sufficient retirement income and would accept lower annuity payments  through their plan in exchange for more access to their savings at  retirement.
National pension system in Switzerland  Switzerland’s national pension system has two components: an earnings-related public  pension funded mainly by payroll contributions and an income-tested supplementary  benefit funded by general revenues. Payment amounts for the earnings-related benefit are  based on lifetime earnings. Payments in retirement are indexed to prices and earnings.  For information about the national pension systems in the other countries we reviewed,  see appendix II.
Historically, five of the six countries tended toward one spend-down  option, but all have more recently expanded access to additional  options, in some cases substantially altering the retirement decisions of  participants, as shown in figure 2. For example, Canada had traditionally  “locked in” participants’ assets for the purpose of securing a stream of  retirement income, which participants could previously only do by  purchasing an annuity. In the 1990s, however, Canada expanded the  spend-down options that would meet this locking-in requirement to  include programmed withdrawals. Government officials and a financial  professional in Canada told us this was done in response to participants’  reluctance to lose access to their assets and their desire to leave an  inheritance. Programmed withdrawals have since become the most  widely used spend-down option in Canada.
While each of the six countries we reviewed has multiple spend-down  options to help DC plan participants tailor a retirement income strategy to  fit their unique circumstances, in the United States, 401(k) plans generally  only offer participants one option—a lump sum payment—leaving  participants on their own to identify and develop strategies to manage  retirement risks. Although some 401(k) plan sponsors may offer all three  of these options to participants, most do not offer annuities or  programmed withdrawals similar to the systematic or formalized options  offered in other countries. As a result, U.S. plan participants typically  take a lump sum payment, and then have to make difficult choices in  order for their financial assets to last throughout retirement.
section_title: Countries Undertook Reviews of the Spend- down Phase to Help Address Participants’ Retirement Needs
paragraphs: We also found that three of the six countries conducted reviews of  participants’ retirement needs and concerns in the spend-down phase,  which resulted in governments taking actions that led to additional spend- down options to meet those specific needs. For example, in 2007 and  2008, Singapore conducted a review of its retirement phase and  determined a programmed withdrawal option designed to last  approximately 20 years was not adequate to meet the needs of many  participants based on their increasing longevity (see fig. 3 for the key  steps taken.) Singapore consulted with a broad spectrum of  stakeholders, including working adults, community and social sector  leaders, and insurance companies and industry associations, in designing  a new spend-down option to better meet participants’ needs. Singapore  concluded from this consultation that Singaporeans wanted an annuity  scheme that provided an income for life and that would replace the  programmed withdrawal option, where payouts stop completely after  about 20 years. As a result, in 2009 Singapore began offering  government-managed annuities, known as the Central Provident Fund  Lifelong Income Scheme for the Elderly (CPF LIFE), on an opt-in basis. In  2013, Singapore set one of these CPF LIFE annuities as the default  option for certain participants.
Similarly, the United Kingdom undertook a review to address concerns  with the spend-down phase, which resulted in policy changes that  provided increased flexibility for participants to choose how to spend  down their account assets. Specifically, the United Kingdom determined  that its long-standing rules that effectively required individuals to  purchase an annuity by the age of 75 were  too restrictive for an  increasing number of participants—who were both living longer and  working longer—and for some was acting as a barrier to saving in DC  plans. As part of the review, the United Kingdom consulted with a range  of stakeholders, including individuals, service providers, and industry and  consumer representatives, on how to ensure that participants make  appropriate spend-down choices in the absence of the annuity  requirement. Based on this review, the United Kingdom removed its  annuitization requirement in 2011, making this option voluntary, and  expanded access to programmed withdrawals in order to give participants  more flexibility to choose spend-down options that best suit them. As a  result, participants can remain invested in their plans and manage the  timing and amount of withdrawals from their plans, within certain  limitations, or delay the purchase of an annuity until interest rates are  more favorable. Government officials and experts we spoke to agreed  that most participants at present have not accumulated sufficient  retirement savings to be eligible for and make full use of programmed  withdrawals as a spend-down option. According to government officials  and one financial service provider, annuities remain the most widespread  form of distribution from DC plans in the United Kingdom. Despite  current low rates of saving, the structure is in place to give workers more  flexibility in planning for retirement as the DC system in the United  Kingdom matures and workers accumulate larger account balances.
section_title: U.S. Regulators Have Begun to Explore the Spend-down Phase, but Have Not Yet Strengthened Access to a Mix of Spend- down Options
paragraphs: In the United States, as shown in figure 4, similar to the steps taken by  some of the other countries, DOL and Treasury have recently begun to  explore the possibility of expanding 401(k) participants’ access to spend- down options through their plans that offer lifetime income, but they have  not yet made a concerted effort to help plan sponsors offer a mix of  options to their participants. Most 401(k) plans typically only offer  participants the option to take their benefits as lump sum payments,  which leaves participants on their own, or to the retail market, to ensure  their savings last throughout retirement. In recognition of the potential risk  workers face under current conditions, DOL and Treasury undertook  efforts in 2010 to collect detailed information from the public to determine  what, if any, steps they could take to enhance the retirement security of  401(k) plan participants by facilitating access to, and use of, options  designed to provide a stream of lifetime income after retirement.  Through this process, DOL and Treasury received feedback from  financial service providers and other stakeholders on the challenges plan  sponsors face in offering a mix of spend-down options to participants  through their respective plans. But the feedback also highlighted some  existing flexibilities 401(k) plan sponsors have to offer multiple spend- down options. One large service provider described a range of spend- down options it offers participants, including programmed withdrawals  and investment strategies that generate retirement income, such as  mutual funds designed with built-in payment streams. Another service  provider discussed how technology enables sponsors to offer participants  access to competitive online annuity markets that can provide the benefit  of competition and improved pricing at a reasonable cost.
Since 2010, DOL and Treasury have begun taking steps to improve the  information participants receive about the spend-down phase and expand  access to spend-down options. For example, in May 2013, DOL proposed  rules that would require 401(k) participants’ benefits statements to show  how their account balances would translate into a stream of lifetime  income payments. And in February 2012, Treasury proposed rules that  would make it easier to purchase deeply deferred annuities. However, in  contrast to the steps taken by other countries, DOL and Treasury have  not yet used the information they collected to develop and implement a  strategy that would help 401(k) plan sponsors leverage existing  flexibilities and address challenges in offering their participants a mix of  spend-down options that meet varying retirement needs. Without  additional steps by U.S. regulators to help ensure sponsors are providing  participants with access to a mix of options, most 401(k) plan participants  are likely to continue taking a lump sum payment at retirement,  regardless of whether this option is the most appropriate to meet their  particular needs. By doing so, participants are at risk of either spending  their assets too quickly and outliving their savings, or being too  conservative with their assets, forcing them to accept a lower standard of  living than necessary. Low rates of saving for retirement in the United  States highlight the need to make the most of participants’ 401(k) account  balances. Simulations conducted by the Employee Benefit Research  Institute in 2010 indicate that nearly half of workers in the United States  above the age of 35 may be at risk of not having enough retirement  income to meet their needs. Moreover, this problem may be more acute  for those with lower incomes. When ranked by pre-retirement income,  households in the lowest one-third may be at risk more than 70 percent of  the time. Although all of the countries we reviewed are similarly coping  with the challenge of small account balances, we found that offering a mix  of options allows participants to select options that can best meet their  unique circumstances.
section_title: Strategies Used by the Countries We Studied Helped Participants Make More Informed Decisions
subsections: section_title: Several Approaches Used by Other Countries to Increase Participants’ Knowledge and Understanding of Spend- down Options Could Help DOL’s Efforts to Provide Information
paragraphs: Most of the countries we reviewed used various mechanisms such as  communicating simple and consistent information in a timely manner to  help participants make more informed spend-down decisions. For  example, in Australia, the government developed a booklet for  participants that lays out the various spend-down options as they  approach retirement with simple illustrative examples, together with the  benefits and drawbacks of each, as shown in figure 5. As a result,  participants have access to information to plan for retirement by weighing  the pros and cons of different ways to manage and make the most of their  retirement savings.
Additionally, in the United Kingdom, plans are required to send a “wake  up” information pack to participants 4 to 6 months before their retirement  date that explains the key spend-down options, which has helped  participants better understand their options. The pack is also used to  help plans meet the requirement to inform participants of their right to buy  an annuity from a provider other than the one that holds their pension  savings. In consultation with the government, the Association of British  Insurers (ABI) developed a code of conduct, which requires its  members—insurance companies—to communicate certain information to  participants. According to ABI’s code of conduct, as shown in figure 6,  the information in the pack should be in plain, clear language and include  a cover letter detailing the participant’s options and additional literature,  such as a brochure on retirement facts by the U.K. government. It points  participants to sources of advice and support, such as regulated advisers  and independent advice organizations. In addition, the U.K. financial  regulator requires that plans send participants a follow-up pack 6 to 10  weeks prior to retirement, which emphasizes the need to make a  decision, among other things. ABI expects its members, who are service  plan providers, to send participants communications that are in line with  these practices. U.K. pension regulators told us that they also expects  trust-based plan communications to meet the standards developed by the  ABI, so participants in plans administered by trusts and insurance  companies receive comparable information. According to a 2009 ABI  study, the wake up pack increased the proportion of participants feeling  quite or very comfortable about understanding their retirement options  from 70 to 80 percent. Their study also found that participants generally  thought the information in the pack was relevant to their situations. In  addition, a 2013 ABI study found that 85 percent of people who read pre- retirement information agreed that information from their provider made  them more aware of their options at retirement.
Countries we reviewed did not rely solely on the disclosure of information  but also found ways to show how the information provided to participants  applied to their particular circumstances. In particular, two of the six  countries—Chile and the United Kingdom—help participants see how  their savings would translate into a stream of retirement income by  requiring plans to provide participants with monthly or yearly projections  in their benefit statements, a comparison which can be useful for making  retirement decisions. Since 2005, Chile has required pension plans to  estimate retirement income in the annual statements using multiple  assumptions about the participant’s expected retirement date, as shown  in figure 7. For older participants about 10 years from retirement, one  estimate assumes the participant stops working at the normal retirement  age, while a second estimate assumes that the participant postpones  retirement and continues to make contributions for 3 more years.  According to Chilean pension officials, the aim of these scenarios is to  help participants compare their current income to expected future  retirement income and to encourage them to make additional voluntary  contributions in case their retirement income looks low. In fact, a 2011  study of the impact of providing these personalized pension projections to  Chilean participants suggests that the receipt of this information resulted  in participants making additional contributions to improve their retirement  prospects.
Finally, enabling participants to compare across various spend-down  options and products within an option also helps them to plan for  retirement. For example, we found that two of the six countries—Chile  and the United Kingdom—provide electronic quotations to help near- retirees make informed decisions.
The Chilean government introduced its central electronic quotation  system (SCOMP) in 2004, which lowers participant search costs and  gives them easy access to transparent, reliable information by  showing different spend-down options in a comparable format. The  SCOMP offers individuals who are ready to retire comparable  quotations for the programmed withdrawals and annuity options in a  single document replacing the traditional way people looked for and  bought retirement products through brokers. The SCOMP has  enabled participants to more easily receive a larger amount of quality  information by making all possible offers available to them without the  need to hire financial intermediaries such as sales agents and  brokers.
A similar benefit is available in the United Kingdom through the Money  Advice Service set up by the government, which allows participants  to compare a range of illustrative annuity quotes on a voluntary basis.  This service offers free and unbiased advice on financial matters.  Specifically, Money Advice Service’s website provides comparable  annuity quotes from participating insurance companies, once an  individual answers a set of standard questions. The individual is then  presented with a table listing insurance companies and his or her  annuity quotes, both in monthly, quarterly, and yearly amounts. The  U.K. developed the service to provide those who do not know how to  or cannot afford to get advice about annuities from other sources,  particularly those with relatively small account balances. U.K.  regulators told us that although participants may benefit from seeing  quotes, most participants’ plan balances are too small for the service  to be useful for them. However, this service may become more  important as more workers are automatically enrolled in plans and  assets grow.
In the United States, plans must provide participants certain disclosures  related to their benefits and options under the plan. For example, benefit  statements with the individual’s account balance are required to be  provided to 401(k) plan participants at least quarterly. However, the  disclosures do not require that participants receive information about their  spend-down options before they make a decision. As a result, 401(k) plan  participants may lack key information, such as the benefits and  drawbacks of various spend-down options, needed to make an informed  decision, and which could affect their retirement outcomes. In addition,  although plan sponsors are permitted to provide information and  education to participants, there is no specific guidance for sponsors to  provide participants approaching retirement with information on spend- down options. Consequently, some plan sponsors may not provide  participants with sufficient information, which may result in participants  potentially making decisions that fail to sustain their incomes throughout  retirement.
DOL has begun to consider including lifetime income projections in  benefit statements, which may yield positive outcomes for participants.  Currently, 401(k) plan benefit statements generally only show a  participant’s account balance, and according to DOL officials participants  may have difficulty predicting how long their savings will last. An April  2013 study funded by DOL found that more than half of a sample of plan  statements did not include projections of the participant’s balance at  retirement, estimates of the retirement income they might be able to  expect at retirement, or the “relationship between future outcomes and  current savings or investment behavior.” In May 2013, DOL announced  that it was considering developing proposed regulations regarding DC  plan benefit statements, and solicited public comments to inform its  thinking as it considers possible regulatory proposals. One idea is to  show a participant’s current account balance and an estimated lifetime  stream of payments based on such balance, assuming the participant is  at normal retirement age as of the date of the statement, even if he or she  is younger. The second idea is aimed at participants who have not yet  reached normal retirement age, which shows a projected account balance  at normal retirement age and then converts to an estimated lifetime  stream of payments. As shown in Chile, including lifetime income  projections on plan statements, similar to those being considered by DOL,  can help participants envision and understand the lifetime monthly  income that can be generated from an account balance.
section_title: Most of the Countries We Reviewed Use Incentives to Encourage Certain Kinds of Participant Behavior
paragraphs: Recognizing that disclosure of information alone is not always sufficient to  ensure good retirement outcomes, several countries also use subtle  incentives or nudges to promote particular kinds of behavior. In particular,  two countries we reviewed—Singapore and Switzerland—use defaults to  exploit inertia and promote a specific option. In Switzerland, for  example, some plans use annuities as the default spend-down option  allowing for the possibility of opting out. One study suggests the take-up  rate of annuities is higher in such plans relative to those where the lump  sum option is the default. In contrast, the United Kingdom is attempting  to address participants’ inertia in shopping for annuities. Until recently,  most participants purchased an annuity from their existing service  provider, partly because the wake up pack they received shortly before  retiring included an application for an annuity with that provider, although  it might not have offered the best rate. Working together, the U.K.  government and ABI agreed that to promote the search for better annuity  rates providers should not include an annuity application in the pack.
In addition, tax incentives are also used to encourage or deter the use of  certain spend-down options. For example, in 2007, the Australian  government removed the favorable tax treatment enjoyed by annuities,  which caused the relatively small market for life annuities to virtually  disappear, and negatively affected the market for term annuities as well,  according to researchers. In addition, researchers found that a series of  reforms between 2005 and 2007 contributed to the rapid increase in the  demand for programmed withdrawals. For example, the reforms  exempted from taxes all earnings or investment returns on assets kept in  superannuation funds to support programmed withdrawals, provided that  minimum age-based annual drawdowns are satisfied. A report by the  Australian pension regulators showed an increase in the proportion of  retirement income taken as programmed withdrawals from one third in  2005 to one half by 2012. Over the same period, the proportion of  superannuation funds offering programmed withdrawals increased from  35 percent to 80 percent.
section_title: Countries Also Assist Participants Who Rely on Financial Advisors
paragraphs: Three of the countries we reviewed implemented policies to strengthen  safeguards regarding financial advisors, so that DC plan participants  seeking professional advice have the opportunity to receive fair and  objective information that enables them to better manage their retirement  income. These countries recognized that spend-down decisions can be  complex for participants, who may choose to rely on the assistance of a  financial advisor to help make appropriate choices. As a result, countries  such as the United Kingdom have taken steps to protect DC participants  against inappropriate fees and unscrupulous advice in making spend- down decisions. For example, since January 1, 2013, financial advisors in  the United Kingdom are prohibited from receiving commissions on  products they sell in order to reduce the sale of costly and unfit products  and minimize conflicts of interest. Instead, they now have to explain to  participants how much advice will cost and reach agreement with the  participant on a price and method of payment, such as an upfront fee or  installments. Since 2008, Chile requires that those who previously worked  as annuity brokers broaden their knowledge to all aspects of pensions  before being registered as advisors. This knowledge enables them to  provide participants and their beneficiaries with comprehensive  information needed to make informed decisions about their benefits  based on their needs and interests.
section_title: Countries’ Regulation and Oversight of Spend-down Options Offer Lessons for U.S. Regulators
subsections: section_title: Most of the Countries We Reviewed Used Withdrawal Rules to Help Protect Participants from Outliving Their Savings
paragraphs: Most of the countries we reviewed imposed income requirements or  withdrawal limits on lump sum payments to help those who take this  option mitigate retirement risks. For example, in three of the six  countries, participants must meet retirement income requirements if they  wish to withdraw all or part of their DC plan assets as a lump sum.  Specifically, in order for participants in Chile to be eligible to access part  of their account, they would need to accumulate enough income to  finance 100 percent of the maximum pension with a government  supplement and a 70 percent or higher replacement rate based on the  last 10 years of their salaries. According to the Chilean pensions  regulator, participants who meet these conditions can withdraw any  amount in excess of the amount needed to meet the minimum. Under  these rules, relatively few participants have taken partial lump sum  payments and, of those who did, the amounts were generally quite small.  In contrast, Australia does not place an upper limit on the amount  participants can withdraw as a lump sum. According to researchers and  government officials, participants in Australia who choose this option may  run the risk of outliving their savings and becoming solely reliant on  government benefits for retirement income. However, some researchers  and government officials we spoke with said retirees in Australia may  actually be overly cautious in spending down their assets and face the  opposite risk of accepting a lower standard of living than is necessary to  meet their retirement needs. In the United States, lump sum distributions  from 401(k) plans are subject to few restrictions. During our 2011 review  of the choices retirees make in managing their assets, we found that  some U.S. plan participants prefer to have access to their full 401(k) plan  retirement savings, such as by rolling their assets over into an individual  retirement account (IRA) or withdrawing them when they retire. At  retirement, 401(k) plan participants may withdraw their full account  balance as a lump sum and may be required to pay federal and state  income taxes on that amount.
Of the five countries that offer programmed withdrawals, four countries  regulate them to help prevent participants from spending their savings too  quickly. For example, Chile’s 2008 pension reforms introduced an  additional actuarial factor in the government calculation of the maximum  withdrawal amount to account for longevity risks. The maximum  withdrawal amount is calculated so payments do not drop below a certain  floor, 30 percent of the first payment, by the time participants reaches the  age of 98. As a result of these reforms, a retiree’s benefits can vary year  to year based on life expectancy estimates and projected returns on  investments, but will not fall below a certain amount. Canada also limits  the annual amount a participant can withdraw from programmed  withdrawal products. Regulators in some Canadian jurisdictions impose  an annual maximum withdrawal, which helps to ensure participants have  a regular income up to age 90.
Most 401(k) plan participants in the United States do not have access to  programmed withdrawal products through their plans similar to the ones  we found in other countries. The primary programmed withdrawal option  that U.S. plan participants may be aware of is the required minimum  distributions in tax-deferred plans, such as 401(k) plans, when a  participant reaches 70 ½. If a plan offers a systematic withdrawal and  the participant designs and manages their programmed withdrawal, the  extent to which their strategy is successful at providing income throughout  retirement depends on a number of factors, such as the rate of  drawdown, future investment returns, inflation, and longevity. For an  illustration about how some of these factors may affect retirement income,  see the additional materials at http://www.gao.gov/products/GAO-14-9.
section_title: DOL Continues to Look at Barriers Plan Sponsors Face in Offering Annuities to 401(k) Plan Participants, Which Do Not Exist in the Countries We Reviewed
paragraphs: DOL is in the process of reviewing regulatory barriers that may prevent or  discourage 401(k) plan sponsors from offering annuities to participants. In  the United States, 401(k) plan sponsors who offer an annuity to their  participants through their plan are subject to fiduciary standards in their  selection of an annuity provider, which require them to act solely in the  interest of the plan’s participants and their beneficiaries. In 2008, DOL  issued new final regulations, in the form of a safe harbor, for the selection  of annuity providers to help plans prudently choose them and to some  extent encourage plans to offer annuities. In proposing the safe harbor  DOL speculated that an annuity option would give more participants the  opportunity to annuitize their savings, while not impeding them from  choosing other options. Even with this safe harbor, according to some  U.S. retirement experts and plan service providers, sponsors of 401(k)  plans may be hesitant to offer an annuity to their participants because of  the additional burden and the potential liability sponsors may incur. In  2010, some respondents to DOL’s request for information on lifetime  income options, which included some questions related to the existing  safe harbor provision, suggested that DOL revise one condition of the  safe harbor that requires sponsors to assess the ability of an insurance  company to make all future payments under an annuity contract.  Respondents in favor of DOL revising the condition noted that it could  help ease some DC plan sponsors’ concerns about offering an annuity as  a spend-down option. Additionally, this could help participants who would  otherwise purchase an annuity in the retail market gain access to group  prices, which are typically lower than individual prices. In December  2012, the ERISA Advisory Council reported on the importance to the  retirement community that DOL develop guidance designed to provide  meaningful assistance to plan sponsors and participants by modifying the  existing safe harbor provision that governs the selection of an annuity  provider. In its report, the ERISA Advisory Council also encouraged DOL  to partner with NAIC to help with its effort to develop a more workable  safe harbor for the selection of annuities and other lifetime income  products. In 2012, DOL began working with the NAIC ERISA Retirement  Income Working Group as they consider possible options for easing plan  sponsor concerns with the financial soundness of annuity providers as  related to the DOL safe harbor for the selection of an annuity provider and  fiduciary responsibilities.
In the countries we reviewed, employers are not expected to assess an  annuity provider’s ability to make future payments before contracting with  them to offer an annuity through their plans. According to regulators in  each of the countries we reviewed, there are no requirements for  employers to assess the financial stability of an insurer and countries  generally rely on insurance regulations and industry standards to oversee  and monitor insurance companies, including those that sell annuities.
For example, in Canada, regulators told us that insurers must meet  solvency requirements and financial market conduct standards, and all  insurers are members of an association that promotes consistent  insurance practices and standards by issuing guidelines to its members.  Moreover, in four of the six countries regulators and industry practitioners  told us that the main responsibility of employers is to contribute to the  plan during accumulation, and their obligations typically cease at  retirement. In the United Kingdom, where plans are required to inform  participants of their right to shop around for an annuity, there are no  requirements to assess the potential annuity provider the participant may  select through the plan. According to U.K. government officials, plan  trustees and participants do not have the expertise to assess the  solvency of an annuity provider and are not expected to do so.  Furthermore, they noted that this responsibility lies with the bank and  insurance company regulators, so plans offering and participants  purchasing an annuity are assured of the provider’s solvency.  Additionally, because plans do not need to take steps to assess annuity  providers, there are no additional administrative costs associated with  offering an annuity through the plan. As some of the countries we  reviewed illustrate, the absence of a requirement for plan sponsors to  assess annuity providers allows plans to more easily provide participants  a way to annuitize their retirement savings, if they so choose.
section_title: Conclusions
paragraphs: The DC systems in the countries we reviewed differ from the United  States in a number of ways, and not all the lessons they have to offer  would apply here, but their experiences illustrate additional steps DOL  and Treasury could consider to help 401(k) plan sponsors make the most  of existing flexibilities to offer multiple spend-down options through their  plan and broaden participants’ retirement options. By 2015, participants  whose retirement savings will be primarily made up of what they  accumulated in their 401(k) plans will either be eligible to retire or  approaching retirement and many will be faced with the challenge of  ensuring they do not outlive their retirement savings. Yet, most of these  participants’ 401(k) plans will offer lump sum payments as the primary  spend-down option for participants, leaving them to their own devices to  figure out how to make their savings meet their needs and last throughout  their retirement. Some participants may prefer having complete access to  their retirement savings upon retirement. Others, however, could benefit  from knowing that there are options offered through the plan—other than  a lump sum payment—that might be optimal for them. The experiences of  other countries have shown that participants benefit from being able to  select among multiple, competitively priced and easily accessible options  to address their diverse and changing retirement needs. Although DOL  and Treasury have taken some initial steps to explore how the United  States might expand the options available to 401(k) participants at  retirement, they could do more to ensure that plan sponsors offer flexible  options to participants, enabling them to choose the spend-down option  that best fits their particular circumstances.
Our work also shows that information provided in an easy to understand  format at appropriate times before a participant retires can help  participants think about and plan for the amount they will need on a  monthly basis during retirement. Receiving information on projected  income with their account statements helps workers develop and focus on  retirement income targets, which in turn can lead to positive changes in  participant behavior, such as working longer to improve their prospects  for a successful retirement. Comparing available spend-down options and  longevity risk can also help participants understand the advantages and  disadvantages of each option available to them. In addition, as illustrated  in our interactive retirement model, learning to understand the effects of  interest rates, inflation, and returns on each type of spend-down option  can help participants begin to interpret financial information that can  impact their retirement income. Given that DOL is considering various  approaches to improve 401(k) plan participants’ understanding of  retirement income, it is clear that including information about spend-down  options and estimated income can further help participants make more  sound decisions about their retirement income.
Finally, unlike within 401(k) plans in the United States, in the countries we  reviewed annuities were generally an option available to participants  through their plans. Because few 401(k) plans in the United States  choose to offer annuities to participants, they may be missing a beneficial  spend-down option that can provide lifetime income at discounted group  prices. As DOL continues to look at the barriers to 401(k) plans offering  annuities, the lack of requirements for plan sponsors in other countries to  assess an annuity provider’s ability to make future payments—relying  instead on the adequacy of insurance regulation—may be something to  explore. Our work shows that offering annuities to participants can be  done in an easy cost-effective manner enabling participants, if they prefer  to consider this spend-down option and not dismiss it as being too  expensive to obtain.
section_title: Recommendations for Executive Action
paragraphs: As DOL and Treasury continue their efforts to determine the actions  needed to enhance the retirement security of 401(k) plan participants, we  recommend they consider the approaches taken by other countries to  formalize access to multiple spend-down options for U.S. plan  participants that address varying retirement risks and needs. To the  extent possible, lessons from other countries should be used to help DOL  and Treasury ensure plan sponsors have information about their  flexibilities and the ability to facilitate access to a mix of appropriate  options for 401(k) plan participants.
In addition, as DOL considers changes to participant benefit statements  and other disclosures, we recommend that the Secretary of DOL consider  strategies other countries have employed to help participants make sound  decisions, such as providing timely information at or before retirement  about available spend-down options and projections of future retirement  income.
We also recommend that as DOL continues to review regulatory barriers  to lifetime income options for 401(k) plan participants it consider other  countries’ approaches to plans offering annuities, such as their reliance  on existing solvency requirements and insurance industry standards to  provide assurances rather than place responsibility on plan sponsors to  make an assessment of an annuity provider’s financial stability. As DOL  considers the approaches of other countries and continues to work with  NAIC, which facilitates interactions between insurance companies and  state insurance regulators, DOL may wish to consult with the Federal  Insurance Office, which coordinates federal efforts on prudential aspects  of international insurance matters.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOL and Treasury for comment. Both  agencies provided technical comments that were incorporated, as  appropriate. DOL also provided written comments, which are reproduced  in appendix III. In its written response, DOL generally agreed with our  recommendations and stated that it will take steps to address these  recommendations in its ongoing efforts. Moreover, DOL will be focusing  on two areas for further consideration that we highlighted in our report,  participant education and providing regulatory assistance to plan  sponsors considering an annuity option in defined contribution plans.
Regarding our recommendation that DOL and Treasury consider the  approaches of other countries to formalize access to multiple spend-down  options for 401(k) plan participants, DOL commented that expanding  access to additional options involves plan design features, which  historically have not been subject to DOL’s regulatory authority under  Title I of ERISA. DOL noted that it will evaluate whether there are  available regulatory approaches to address this recommendation. As we  addressed in the report, participants can benefit from having access to a  mix of options allows participants to select options that can best meet  their unique circumstances. Therefore, we support DOL’s efforts to look  into available regulatory approaches to address our recommendation and  would encourage the agency to fully consider the steps it could take  within the scope of its current authority.
With respect to our recommendation to consider the strategies of other  countries to help participants make sound retirement decisions, DOL  agreed that participants should have timely information at or before  retirement about available spend-down options and projections of future  retirement income and stated that they will explore their options for  actions. As we illustrated in our report, having timely information and  projections of future income can help plan participants make more  informed retirement saving decisions. We would again encourage DOL to  fully consider what steps it could take within the scope of its current  authority.
Finally, with respect to our third recommendation that DOL consider other  countries’ approaches as it reviews regulatory barriers to lifetime income  options to 401(k) plan participants, DOL stated that it will evaluate the  available regulatory approaches to address our recommendation. We  also suggested that DOL consult with NAIC and FIO in its efforts. DOL  commented that it began working with a NAIC Working Group to consider  possible options for easing plan sponsor concerns with the financial  soundness of annuity providers in connection with DOL’s safe harbor for  the selection of annuity providers and fiduciary responsibilities. DOL  noted that the NAIC Working Group plans on providing EBSA with a list of  “best practices” for fiduciaries when asking states for information about  insurers, and that it will continue to work with NAIC, Treasury, FIO, and  others as it evaluates regulatory approaches to address our  recommendation. In response to DOL’s comment, we revised our draft to  reflect the status of DOL’s efforts to collaborate with NAIC on the safe  harbor for the selection of annuity providers. We commend DOL for its  initiative to develop a more workable safe harbor, but continue to  encourage DOL to review alternative approaches taken by other  countries, such as their reliance on existing solvency requirements and  insurance standards. As shown in our report, these approaches can ease  the burden on plan sponsors. As a result of DOL’s review and potential  action, 401(k) plans could more easily offer annuities to plan participants,  which allow them greater flexibility to choose spend-down options that  meet their needs and preferences.
As arranged with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days from the  date of this letter. At that time, we will send copies to the Secretary of  Labor, the Secretary of the Treasury, and other interested parties. In  addition, the report is 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 IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives for this review were to examine selected countries’ (1)  approaches to offering retirement spend-down options; (2) key strategies  to help participants make sound decisions; and (3) approaches to  regulating and overseeing options.
To address these objectives, we conducted in-depth reviews of retirement  spend-down phase strategies in countries with extensive or growing  defined contribution (DC) systems to determine lessons for the United  States based on best practices used in other countries. We selected the  following countries for this review: Australia, Canada, Chile, Singapore,  Switzerland, and the United Kingdom (U.K.). In selecting the six  countries, we considered if the country had (1) developed innovative  spend-down phase policies or options; (2) a clearly defined and well- established oversight structure for the DC plan spend-down phase and  providers, such as insurance companies; and (3) if the country’s  approach to the spend-down phase was uniquely different from the other  countries in our scope. To determine which countries to include, we  conducted an initial review of the universe of countries with well- developed account based retirement systems. We reviewed comparative  studies of DC systems published by GAO, academics, the Organisation  for Economic Co-operation and Development (OECD), The World Bank,  and other industry experts, such as international benefits consulting firms,  to determine which countries have extensive or growing DC systems and  if those countries had developed innovative spend-down policies or  options. We solicited recommendations on countries with innovative  spend-down phase approaches or options from representatives of the  OECD, The World Bank, U.S. government officials, academics, and  industry practitioners who work with multi-national companies that  operate in other countries with DC plans. We then examined the  characteristics of each country’s DC system for policies, practices, and  requirements related to retirement spend-down options. Based on our  initial review, we excluded countries in which the DC plan is structured in  a substantially different manner from that of U.S. 401(k) plans or not well- developed relative to other pension options, or in which the spend-down  phase was not well-defined. We also determined that the six countries  selected could potentially provide lessons for the United States given their  experience and unique approach to the spend-down phase.
For each of the six countries we selected, we reviewed publicly available  research and reports about each country’s pension systems—particularly  information on spend-down options, oversight framework, and initiatives  to educate participants about options. We also interviewed pension  experts, service providers, regulatory agencies and other government  officials from the countries selected. We did not conduct an independent  legal analysis to verify the information provided about the laws,  regulations, or policies of the countries selected for this study. Instead, we  relied on appropriate secondary sources, interviews with relevant officials,  and other sources to support our work. We submitted key report excerpts  to agency officials in each country for their review and verification, and we  incorporated their technical corrections as necessary.
In addition to addressing these objectives, we also developed a  retirement model to help provide contextual information on spend-down  options and certain factors that may affect retirement income from these  options. The retirement model to allow users to view retirement income  under a range of circumstances provided by three main spend-down  options: (1) a lump sum payment of their account balance; (2) a  programmed withdrawal with payments that are either fixed or set as a  proportion of the remaining account balance; and (3) an immediate  annuity that makes level payments with no joint or survivor benefit. We  developed, in consultation with GAO’s Chief Actuary and an external  actuary with expertise in annuity pricing, a formula that was calibrated to  approximate annuity payments similar to those found in U.S. retail annuity  markets in July, 2013. We simulated retail annuity prices because  participants in most 401(k) plans do not have access to institutionally  priced annuities within plans. For instance, to purchase an annuity, these  participants would instead have to roll over a lump sum payment of their  account balance into an IRA and purchase an annuity as an individual  investor in U.S. retail markets. To set the ranges within which users can  adjust assumptions about interest rates, investment returns and inflation,  we analyzed historical data on economic indicators from the Federal  Reserve Economic Database, including 10-year Treasury constant  maturity rates, and investment returns from Thrift Savings Plan funds that  track broad stock, fixed income, and government securities indices. To  ensure the annuity rates generated from our model reflected U.S. retail  market rates as of July 31, 2013, we calibrated rates using quotes from  ImmediateAnnuities.com. We did not assess the reliability of data used to  set ranges or calibrate rates, mainly because the information generated  from the interactive tool provides illustrative context for the report and is  not material to findings, conclusions, or recommendations. In addition,  retirement income depicted in the interactive tool does not reflect any  federal income taxes on distributions from tax-deferred 401(k) accounts.  Dollar amounts in the interactive tool are for illustrative purposes only and  should not be considered as quotes for spend-down products or taken as  financial advice.
We conducted this performance audit from June 2012 to November 2013  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.
section_title: Appendix II: Key Features of DC Pension Systems in Australia, Canada, Chile, Singapore, Switzerland, and the United Kingdom
subsections: section_title: At a glance Since 1992, Australia has had a mandatory defined contribution (DC) pension system, known as the superannuation guarantee. Employees generally designate a plan, known as a superannuation fund, to which the employer is required to direct contributions. Employees who do not designate a fund are placed in a default accumulation option, known from 2013 as MySuper. In 2010, Australia announced plans to gradually increase mandatory contributions from 9 to 12 percent of workers’ wages by 2022. The average account balance at normal retirement age is about AUD 119,000 (approximately $110,000) as of 2012.
paragraphs: DC Spend-down options
Lump sums: Participants may take some or all of their account  balance as a lump sum payment.
Programmed withdrawals: Participants have the flexibility to  structure the timing and amount of withdrawals subject only to annual  required minimum withdrawals. These options are known as account- based income streams or account-based pensions.
Annuities: Only a small number of annuities are purchased annually,  and most are term annuities that provide payments over a fixed period  rather than lifetime annuities that guarantee payments for the  participant’s life.
Providers  Spend-down options may be provided by employers or a group of  employers, banks, insurance companies, or financial service providers.
Regulators
The Australian Prudential Regulatory Authority (APRA) is
Total system assets:  AUD 1.4 trillion ($1.3 trillion) as  of 2012 with DC accounts: not  available during our review   responsible for prudential regulation of all superannuation funds  except for self-managed superannuation funds and some public sector  schemes. Reforms implemented in July 2013 will enhance APRA’s  ability to set and enforce prudential standards. According to officials,  APRA’s authority prior to this had largely been limited to issuing,  setting conditions on, and revoking licenses to operate superannuation  funds. APRA is also responsible for the prudential regulation of other  financial services entities, such as banks and insurance companies.
Types of plans  Industry funds are generally non- profit entities established by a  single employer or group of  employers. Industry funds  generally offer 5 to 15 investment  options designed to meet most  participants’ needs and in recent  years many have become available  to the public rather than being  restricted to the employees of  particular employers.
The Australian Securities and Investments Commission licenses  and monitors financial services businesses to ensure they operate  efficiently, honestly, and fairly. This includes superannuation trustees  who hold a license with the commission. It also operates a website  that provides consumers information to help them make smart choices  about their personal finances, including spend-down decisions,  www.moneysmart.gov.au.
The Australian Taxation Office is responsible for regulating self- managed superannuation funds, which it does by providing information  to trustees on how to set up and manage their fund, checking that the  fund complies with standards and laws, and taking enforcement  actions to correct breaches of the law.
Australia (cont.)
National pension system  Australia’s Age Pension is a pay-as-you-go public pension funded out of  general revenues. The Age Pension is designed to provide biweekly  retirement income equal to about 28 percent of average wages, as well  as other benefits such as assistance for health care and transportation, to  residents of Australia age 65 and older. The Age Pension is means  tested for both income and assets, so accumulations in superannuation  will reduce biweekly payments from the Age Pension. According to APRA  officials, the Age Pension is essentially a “safety-net” provided for those  unable to provide for themselves.
Retail funds are for-profit entities  usually run by banks or investment  companies. They often have a  large number of mid to higher  priced investment options and are  open to anyone.
At a glance  Although, most private voluntary  occupational pension plans have  been DB, almost all new plans are  DC, and a typical DC plan would  require employee contributions of  5 percent of earnings and matching  employer contribution.
Types of plans  Voluntary private plans are known  as registered private pension plans  and can either be DC plans or DB  plans. In general, money payable  to a member of a plan can only be  used to provide retirement income,  even if a member leaves the plan.  Once benefits are vested, they are  usually “locked-in,” which helps to  ensure that a member will have  regular income at retirement, and  creditors cannot seize locked-in  pension benefits. market. The most common form is a single life pension with a  minimum guarantee of 5 or 10 years of payments. A plan administrator  must purchase an annuity for a participant of a DC plan if the member  does not elect to exercise of their options. According to regulators, the  take-up rate for annuities is relatively low.
Providers  Programmed withdrawal products are generally offered by financial  institutions, such as banks and trustee companies. Private insurance  companies offer annuities.
Regulators  Plans are generally regulated at the provincial level, so policies vary by  province and the federal level. At the federal level, the Office of the  Superintendent of Financial Institutions regulates and supervises private  pension plans in federally regulated areas of employment, such as  banking, telecommunications and inter-provincial transportation. It is also  the regulator for pension plans established with respect to employment in  the Yukon, the Northwest Territories, and Nunavut.
Canada (cont.)
National pension system  Canada has a two-tier social security system that provides the majority of  retirement income for the average worker. The system includes the Old  Age Security program, which provides monthly payment to residents who  are 65 years of age and over as well as a guaranteed income  supplement—a family income-tested benefit—to low-income pensioners;  and the Canada Pension Plan, which pays a monthly retirement pension  to people who have worked and contributed to the Canada Pension Plan.  The amount of the Canada Pension Plan benefit a person is entitled to  depends on how much and for how long that person contributed to the  plan.
At a glance  Chile instituted a DC pension  system in 1981. Workers who  entered the labor market after that  date are mandated to contribute to  an individual DC account.
Types of plans  Workers are free to choose a  licensed for-profit service provider,  known as an AFP (Administradoras  de Fondos de Pensiones) to  manage their individual accounts.  Currently, there are six AFPs.  New entrants to the labor force  are defaulted to the AFP with the  lowest fee as determined by a  bidding process, which takes place  every 2 years. They are required to  remain in this AFP for 2 years, after  which they can freely choose a  service provider. calculation is based on age and gender-specific life expectancy.  Participants can combine options such as temporary programmed  withdrawals with a deferred annuity, or purchase an immediate annuity  with a portion of their account balance and programmed withdrawals  with the rest. Annuities are inflation-indexed. Annuities are not allowed  if the pension they generate is smaller than the Basic Solidarity  pension, which as of December 2012 was 80,528 Chilean pesos  (about $160) monthly.
Providers
AFPs administer programmed withdrawals. Insurance companies offer  annuities to participants.
Regulators
The Superintendent of Pensions closely supervises and regulates  AFPs, including issuing licenses for them to participate in the system.  On an ongoing basis, the Superintendent of Pensions monitors plan  providers for compliance with investment option guidelines, reserve  requirements, fee structure, and other requirements.
The Superintendent of Securities and Insurance supervises  insurance companies, which includes setting rules and regulations  about solvency principles and monitoring insurance company offers  through the SCOMP system. Together with the Superintendent of  Pensions, it maintains a list of approved pension advisors.
Chile (cont.)
National pension system  Chile has a public pension system with two components targeted at the  poorest 60 percent of the population age 65 and over who meet residency  requirements. There is a Basic Solidarity Pension for individuals who have  not contributed to individual accounts and pass the means test.  Participants who contributed to individual accounts and pass the means  test receive a Pension Solidarity Complement if their monthly pension is  below a threshold amount of 261,758 Chilean pesos (about $520) as of  December 2012.
At a glance  Singapore’s mandatory DC system,  the Central Provident Fund (CPF),  was established in 1955 to provide  financial security for employees in  their retirement. The system is  comprised of individualized  accounts fully funded by both  employer and employees.  Contributions are distributed  among three types of individual  accounts.
Highlights of the spend-down phase  DC Spend-down options
Lump sums: At age 55, participants may withdraw their CPF savings  in excess of the minimum sum of $148,000 SGD (about $116,535) in  their retirement account and a minimum of 40,500 SGD (about  $31,900) in their medisave account. Participants who do not have  savings in excess of the minimums are allowed to withdraw $5,000  SGD (approximately $3,900).
Programmed withdrawals: Prior to 2013, the primary spend-down
Total system assets:  option was a programmed withdrawal administered by the CPF Board  designed to last for approximately 20 years from the participants  “drawdown age,” which is currently 65.
230,158 million Singaporean  dollars (SGD)  (about $181,227 million) as of  2012
Annuities: In 2009, Singapore introduced a new government- with DC accounts: over 80  percent of the resident  workforce   managed life annuity system, known as CPF Lifelong Income Scheme  For the Elderly (CPF LIFE), to address the challenges of increasing life  expectancy and an aging population. From 2013, participants with  retirement account balances of at least 40,000 SGD (about $31,500)  are automatically placed on CPF LIFE. The government offers two  types of annuities, a basic and standard plan. The standard plan is the  default plan for participants. The standard plan provides higher  monthly payments as compared to the basic plan, but leaves a smaller  bequest for the participant’s family and other beneficiaries  Providers  The CPF Board administers the CPF Fund and CPF LIFE. Private  insurance companies offer a variety of annuity products in the retail  market.
Regulators  CPF Board was established by law to be the trustee and administrator of  CPF. The CPF Board is also responsible for investing participants’ savings  in special securities issued by the government. The CPF Board works  closely with the Ministry of Manpower and other relevant Ministries on  policies that affect CPF, even though the power to initiate changes to  provisions on CPF schemes rests with the Minister of Manpower.
Singapore (cont.)
National pension system  CPF is the main source of retirement income for workers. Singapore does  not have a multi-pillar retirement system that is similar to the United  States. There is no state pay-as-you-go social security. However, there is  other government social spending, which indirectly helps retirees with  costs, such as health care and housing.
Ordinary account savings can  be used for housing,  investment, and other  approved purposes.  savings that are set aside for  retirement and can be used for  investment in retirement- related financial products.  help CPF members meet their  own or their immediate family’s  hospitalization expenses.
The retirement account is created  for CPF members when they reach  the age of 55. Savings from the  ordinary and special accounts up to  the minimum sum amount (148,000  SGD as of 2013) are transferred to  this account. This amount is set  aside for the purpose of providing  members with steady income post- retirement.
At a glance  Since 1985, Switzerland has had a  mandatory system of occupational  pension plans for workers with  incomes above a certain  threshold. Participants do not have  a choice of plan, but are placed in  their employer’s plan. The  government regulates minimum  contributions, and minimum returns  on contributions during  accumulation. In 2005, Switzerland  extended to some extent coverage  of the mandatory system to low- income and part-time workers.
Highlights of the spend-down phase  DC Spend-down options
Lump sums: Since 2005, plans have been required to offer  participants at least 25 percent of their mandatory retirement savings  as a lump sum payment.
Programmed withdrawals: Programmed withdrawals are not  available to plan participants.
Annuities: Switzerland requires that annuities have disability and  survivor benefits. Pension funds may voluntarily index annuity  payments for inflation if they are financially able to do so. In the  mandatory portion of the DC system, annuities must be the default  option. Although official data are not available, researchers estimate  that participants annuitize about 80 percent of their account balance.
Providers  Spend-down options may be administered by independent foundations  that manage plans.
Regulators
Oberaufsichtskommission (OAK Commission) came into being in  2012 to harmonize regional oversight and regulation of trust-based  pension plans. The Commission also oversees the Guarantee Fund  that protects participants in the event that a pension plan becomes  insolvent, as well as the Substitute Occupational Benefit Institution that  extends coverage to employers who do not meet their pension  obligation and those who are not otherwise covered and who wish to  voluntarily be covered, such as the self-employed, among others.
The Swiss Financial Market Supervisory Authority is responsible  for overseeing insurance companies. It ensures that insurance  companies comply with laws and regulations and fulfill their licensing  requirements.
The Federal Social Office of Insurance plans, manages, and  monitors Switzerland’s social insurance systems to ensure they  function effectively.
Switzerland (cont.)
Types of plans  Mandatory occupational plans  are administered by independent  foundations and may be sponsored  by a single employer or group of  employers. Plans are managed by  boards of trustees with equal  employer and employee  representations. The organization  of plans also varies by degree of  risk coverage with respect to  longevity, premature death or  disability.
National pension system  Switzerland’s old age and survivors’ insurance (AHV/AVS) is a pay-as- you-go public pension that is funded by payroll contributions and general  revenues. The system has two components: an earnings-related public  pension funded mainly by payroll contributions and an income-tested  supplementary benefit funded by general revenues. Payment amounts for  the earnings-related benefit are based on lifetime earnings. Payments in  retirement are indexed to prices and earnings. The government  coordinates benefits between AHV/AVS and occupational pension plans  so that combined, they replace about 60 percent of preretirement income  for workers with lower incomes.
Autonomous plans bear all the  risk.
Autonomous plans with  reinsurance hand over some of  the risk to a reinsurance company.
Semiautonomous plans include  two cases: (1) a plan hands over  only the risk of death or disability to  an insurance company and  consequently still bears the risk of  longevity; and (2) the plan buys the  old-age pensions from the insurer  too.
Fully insured plans are plans in  which all the risks are covered by  an insurance company.
Savings associations by  construction bear no actuarial risks,  because only old-age savings are  accumulated.
At a glance  Voluntary DC plans make up most  of the private pension system in the  U.K. An individual may be a  member of a number of different  pension plans simultaneously.  From October 2012, in a staged  process, employers were required  to automatically enroll their eligible  employees into a pension plan— including a new low-cost DC  pension saving plan called the  National Employment Savings  Trust—and provide a minimum  contribution.
Highlights of the spend-down phase  DC Spend-down options
Lump sums: Participants may take up to 25 percent of plan assets as  a tax-free lump sum, subject overall to 25 percent of the individual’s  lifetime tax-free pension allowance and individual plan rules.
Programmed withdrawals: Under a capped drawdown, participants  have the ability to withdraw up to 120 percent of the value of an  amount equal to what they would get from a level payment single-life  annuity each year. Plan administrators are responsible for reviewing  these withdrawals every 3 years and resetting maximum withdrawal  limits as needed. Participants who can demonstrate secure income of  at least £20,000 (about $30,300) per year may take withdrawals  without limit while leaving the balance of the fund invested. This option  is known as flexible drawdown.
Total system assets:  £385.9 billion  (about $584.70 billion)as of  2010
Annuities: Participants can choose from a number of different options  for single-life and joint-life annuities, including level or escalating  payments, a guarantee period, and impaired or enhanced rates.
Providers  Plan administrators, which may be a trustee or for-profit provider, are  responsible for administering programmed withdrawals. Private insurance  companies offer a variety of annuity products in the retail market.
Regulators
The Pensions Regulator is solely responsible for regulating trust- based plans and coordinates with other entities on regulating contract- based plans. It has the authority to oversee the administration of these  plans and contributions made to them. For DC plans, its statutory  objectives include protecting the benefits of plan participants and  promoting and improving understanding of good administration of  plans.
The Financial Conduct Authority and the Prudential Regulatory  Authority share oversight of contract-based plans and financial  service providers. The Financial Conduct Authority was the successor  to the former authority, the Financial Services Authority. It is  responsible for ensuring fairness in the conduct of firms towards their  employers and participants, overseeing smaller insurers, as well as  asset managers and advisory firms. The Prudential Regulatory  Authority, the smaller of the two new entities, is a subsidiary of the  Bank of England and tasked with monitoring the safety and soundness  of larger insurers, banks, and asset managers.
United Kingdom (cont.)
Types of plans  Trust-based plans (41 percent of  DC participants) These are  employer-sponsored plans and are  usually non-profit entities managed  by a board of trustees that typically  hire one or more service providers  for recordkeeping and investment  management services. The  trustees are responsible for  selecting and vetting the  investment options.
National pension system  The basic state pension is a regular payment from the government once  an individual reaches a certain age. The amount depends on the number  of qualifying years, at least 30 years, individuals have of National  Insurance contributions. As of August 2013, the maximum full basic state  pension is £110.15 per week (about $167). There is also an earnings- related element called the state second pension, which give individuals  who earn lower wages or cannot work as much as other the change to  receive a better state pension. Under current rules, there is a cap on  annual earnings of £40,040 (about $60,700).
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Tamara Cross (Assistant  Director), Tom Moscovitch, Lacy Vong, and Seyda Wentworth made key  contributions to this report. Also contributing to this report were James  Bennett, Alicia Cackley, Grace Cho, Katie Delgado, Holly Dye, Kathy  Leslie, Sheila McCoy, Ernest Powell, Jr., Stephen Sanford, MaryLynn  Sergent, Jessica Smith, Roger Thomas, Frank Todisco, Kathleen van  Gelder, and Walter Vance.
section_title: Related GAO Products
paragraphs: Insurance Markets: Impacts of and Regulatory Response to the 2007- 2009 Financial Crisis, GAO-13-583. Washington: D.C.: June 27, 2013.  401(k) Plans: Labor and IRS Could Improve the Rollover Process for  Participants, GAO-13-30. Washington, D.C.: March 7, 2013.
Retirement Security: Annuities with Guaranteed Lifetime Withdrawals  Have Both Benefits and Risks, but Regulation Varies across States,  GAO-13-75. Washington, D.C.: December 10, 2012.  401(k) Plans: Increased Educational Outreach and Broader Oversight  May Help Reduce Plan Fees, GAO-12-325. Washington, D.C.: April 24,  2012.
Defined Contribution Plans: Approaches in Other Countries Offer  Beneficial Strategies in Several Areas, GAO-12-328. Washington, D.C.:  March 22, 2012.
GAO, Retirement Income: Ensuring Income throughout Retirement  Requires Difficult Choices, GAO-11-400. Washington, D.C.: June 7, 2011.  401(k) Plans: Improved Regulation Could Better Protect Participants from  Conflicts of Interest, GAO-11-119. Washington, D.C.: January 28, 2011.
Private Pensions: Changes Needed to Better Protect Multiemployer  Pension Benefits, GAO-11-79. Washington, D.C.: October 18, 2010.
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.: October  23, 2009.  401(k) Plans: Policy Changes Could Reduce the Long-term Effects of  Leakage on Workers’ Retirement Savings, GAO-09-715. Washington,  D.C.: August 28, 2009.
Private Pensions: Alternative Approaches Could Address Retirement  Risks Faced by Workers but Pose Trade-offs, GAO-09-642. Washington,  D.C.: July 24, 2009.