Retirement Income: Ensuring Income throughout Retirement Requires Difficult Choices
Published: 2011-06-07T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: As life expectancy increases, the risk that retirees will outlive their assets is a growing challenge. The shift from defined benefit (DB) pension plans to defined contribution (DC) plans also increases the responsibility for workers and retirees to make difficult decisions and manage their pension and other financial assets so that they have income throughout retirement. GAO was asked to review (1) strategies that experts recommend retirees employ to ensure income throughout retirement, (2) choices retirees have made for managing their pension and financial assets for generating income, and (3) policy options available to ensure income throughout retirement and their advantages and disadvantages. GAO interviewed experts about strategies retirees should take, including strategies for five households from different quintiles of net wealth (assets less debt); analyzed nationally representative data and studies about retirees' decisions; and interviewed experts and reviewed documents about related policy options.
section_title: What GAO Found
paragraphs: Financial experts GAO interviewed typically recommended that retirees systematically draw down their savings and convert a portion of their savings into an income annuity to cover necessary expenses, or opt for the annuity provided by an employer-sponsored DB pension instead of a lump sum withdrawal. Experts also recommended that individuals delay receipt of Social Security benefits until reaching at least full retirement age and, in some cases, continue to work and save, if possible. For example, for the two middle net-wealth households GAO profiled with about $350,000 to $375,000 in net wealth, experts recommended purchase of annuities with a portion of savings, drawdown of savings at an annual rate, such as 4 percent of the initial balance, use of lifetime income from the DB plan, if applicable, and delay of Social Security. To navigate the difficult choices on income throughout retirement, they noted strategies depend on an individual's circumstances, such as anticipated expenses, income level, health, and each household's tolerance for risks, such as investment and longevity risk. Regarding the choices retirees have made, GAO found that most retirees rely primarily on Social Security and pass up opportunities for additional lifetime retirement income. Taking Social Security benefits when they turned 62, many retirees born in 1943, for example, passed up increases of at least 33 percent in their monthly inflation-adjusted Social Security benefit levels available at full retirement age of 66. Most retirees who left jobs with a DB pension received or deferred lifetime benefits, but only 6 percent of those with a DC plan chose or purchased an annuity at retirement. Those in the middle income group who had savings typically drew down those savings gradually. Nonetheless, an estimated 3.4 million people (9 percent) aged 65 or older in 2009 had incomes (excluding any noncash assistance) below the poverty level. Among people of all ages the poverty rate was 14.3 percent. To help people make these often difficult choices, policy options proposed by various groups concerning income throughout retirement include encouraging the availability of annuities in DC plans and promoting financial literacy. Certain proposed policies seek to increase access to annuities in DC plans, which may be able to provide them at lower cost for some individuals. However, some pension plan sponsors are reluctant to offer annuities for fear that their choice of annuity provider could make them vulnerable to litigation should problems occur. Other proposed options aim to improve individuals' financial literacy, especially to better understand risks and available choices for managing income throughout retirement in addition to the current emphasis on saving for retirement. Proposed options include additional federal publications and interactive tools, sponsor notices to plan participants on financial risks and choices they face during retirement, and estimates on lifetime annuity income on participants' benefit statements.

section_title: Letter
paragraphs: As the life expectancy of U.S. residents continues to increase, the risk that  retirees will outlive their assets is a growing challenge. Today, a husband  and wife both aged 65 have approximately a 47 percent chance that at  least one of them will live to his or her 90th birthday and a 20 percent  chance of living to his or her 95th birthday. In addition to the risk of  outliving one’s assets, the sharp declines in financial markets and home  equity during the last few years and the continued increase in health care  costs have intensified workers’ concerns about having enough savings and  how to best manage those savings in retirement.
In addition, the shift among employer-sponsored pension plans from  defined benefit (DB) to defined contribution (DC) plans heightens the  responsibility for workers and retirees to manage their pension and other  financial assets so that their assets last throughout retirement. In  “traditional” DB plans, a retiree is entitled to receive a specified, periodic  annuity benefit for life, usually based on years of service and other factors,  whereas workers in DC plans accumulate balances in individual accounts  with employer or employee contributions (or frequently both) plus  accrued earnings. In DC plans, participants are typically responsible for  investing and assuming investment risk.
The Department of Labor (Labor) and the Department of the Treasury  (Treasury) regulate employer-sponsored pension plans in the private  sector. In light of the shift from DB to DC plans, which moves  responsibility to retirees for ensuring that assets provide income  throughout retirement, Labor and Treasury issued a public request for  information (RFI) in 2010 on options for facilitating access to and the use  of lifetime retirement income sources, including lifetime annuities, in  employer-sponsored plans and individual retirement arrangements (IRA).
Given your interest in these retirement income options, we examined the  following:  1.  What strategies do experts recommend retirees employ to ensure  income throughout retirement? 2.  What choices have retirees made for managing their pensions and  financial assets for generating income? 3.  What policy options are available to ensure income throughout  retirement and what are their advantages and disadvantages for  retirees?
To identify the strategies that experts recommend retirees employ to  ensure income throughout retirement, we interviewed a judgmental  sample of a range of financial planners and other financial experts from  different academic and industry organizations and a retiree interest group,  which were from different geographic areas of the country. (See app. I.)  We focused our discussion on five households that we randomly selected  from the Health and Retirement Study (HRS) in the lowest, middle, and  highest net wealth quintiles with different combinations of pension plans  in the middle and highest quintiles. See financial and nonfinancial  characteristics by quintile in appendix II, and the selected households’  summary financial data in appendix III. We also reviewed company  specific financial product documentation and studies of retirement income  strategies such as those describing systematic withdrawals from  retirement savings. To review the choices retirees have made for managing  their pension and financial assets for generating income, we analyzed data  from the HRS, reviewed others’ research, and analyzed data from the  Social Security Administration (SSA). We reviewed additional data from  the Employee Benefit Research Institute (EBRI), the Census Bureau and  the Bureau of Labor Statistics (BLS). To identify policy options that are  available to ensure income throughout retirement, as well as their  advantages and disadvantages, we reviewed information from a variety of  academic, consumer, industry, and government sources. This included  selected submissions in response to the Labor and Treasury RFI, other  publications, and interviews with academic, consumer, industry, and  government officials. We conducted this performance audit from January  2010 through June 2011 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. For  more information on our scope and methodology, see appendix I.
subsections: section_title: Background
paragraphs: While income in retirement varies widely by source, Social Security  benefits are the foundation of income for nearly all retiree households. In  aggregate, Social Security is the largest source of retirement income for  households with someone aged 65 or older, but other financial assets such  as pension income from DB and DC plans, private savings, and assets such  as home equity are important sources of retirement income for many.  (See fig. 1.) In 2008, the most recent year for which data were available,  among households with someone aged 55 to 60, the median net wealth for  the middle quintile of net wealth was $339,000. The median household  income for the middle net wealth quintile was about $70,000 in the  preceding year, according to the Health and Retirement Study. (See app.  II.) Earnings from work can be an important source of income for some  households with a member aged 65 or older because, for example, a  spouse younger than 65 may be working. Yet many people aged 65 or older  also work. In 2010, 29.1 percent of people aged 65 to 69 worked at least  part-time and 6.9 percent of people aged 75 or older were employed.
Social Security benefits provide annually inflation-adjusted income for  life—and in 2008 were on average the source of 64.8 percent of total  income for recipient households with someone aged 65 or older. Under  changes legislated in 1983, the retirement age for an unreduced benefit  (the full retirement age) is gradually increasing from age 65, beginning  with retirees born in 1938, and will reach age 67 for those born in 1960 or  later.
Despite these changes, the cost of Social Security benefits is projected to  exceed sources of funding, and the program is projected to be unable to  pay a portion of scheduled benefits by 2036. In 2010, for the first time  since 1983, the Social Security trust funds began paying out more in  benefits than they received through payroll tax revenue, although trust  fund interest income more than covers the difference, according to the  2011 report of the Social Security trust funds’ Board of Trustees.  However, changes to Social Security could eliminate or reduce the size of  this projected long-term shortfall.
At retirement, DB plan participants are eligible for a specified payment for  life (either immediately or deferred, and with or without benefits for a  surviving spouse), but some DB plans also give participants a choice,  sometimes a difficult choice, to forego a lifetime annuity and instead take  a lump sum cash settlement (distribution) or roll over funds to an IRA. DC  participants face a number of difficult choices regarding their account  balances, such as leaving money in the plan, purchasing an annuity, or  transferring or rolling over their balance into an IRA. Employers who  sponsor qualified plans and enable departing participants to receive lump  sum distributions must also give participants the option to have these  amounts directly rolled over into an IRA or another employer’s tax- qualified plan.
Workers entering retirement today typically face greater responsibilities  for managing their retirement savings than those who retired in the past.  Social Security continues to provide a foundation of inflation-adjusted  income for life, but fewer retirees today have defined benefit plans  providing lifetime income. DC plans have become much more common  and they generally do not offer annuities, so retirees are left with  increasingly important decisions about managing their retirement  savings. Participants in DB plans also face similar decisions when the  plan offers a lump sum option, including not only whether to take the  annuity or lump sum, but decisions about managing these savings if a lump  sum is elected.
For households with someone aged 65 or older with income from assets,  such as interest and dividends, the estimated median amount of asset  income for households in the third (middle) income quintile was $1,022 in  2008. For those in the highest income quintile the median was $8,050.  Financial assets provide income, but can also provide flexibility to draw  down funds as needed during retirement. For workers with a self-directed  lump sum or other retirement savings, the money can be taken in periodic  distributions for which there are strategies to help reduce the chance that  a retiree does not outlive his or her money. For example, retirees could  draw down a portion of their balance as a form of regular income to  supplement Social Security and possibly DB pension income, investing the  balance of savings in a diversified portfolio of mutual funds containing  equities and fixed income securities.
An alternative to self-managing periodic distributions from savings is to  use one’s savings to purchase an immediate annuity from an insurance  company that guarantees income for life. An immediate annuity can help  to protect a retiree against the risk of underperforming investments, the  risk of outliving one’s assets (longevity risk) and, when an inflation- adjusted annuity is purchased, the risk of inflation diminishing one’s  purchasing power. Researchers have concluded that annuities have  important benefits. For example, according to one association of  actuaries, it is more efficient to pool the risk of outliving one’s assets than  to self-insure by accumulating enough assets to provide enough income in  case one lives to a very old age. Annuities provide income at a rate that  can help retirees avoid overspending their assets and provide a floor of  guaranteed income to prevent unnecessarily spending too little for fear of  outliving assets, according to one association. Annuities can also relieve  retirees of some of the burden of managing their investments at older ages  when their capacity to do so may diminish, which may also make them  susceptible to fraudulent sales. On the other hand, annuities may be  inappropriate or expensive for people who have predictably shorter-than- normal life expectancies. Likewise, funds used to purchase immediate  annuities are no longer available to cover large unplanned expenses. Also,  immediate annuities that provide for bequests have higher costs.
There is little consensus about how much income constitutes “enough”  retirement income. Retirement income adequacy may be defined relative  to a standard of minimum needs, such as the poverty rate, or to the level of  spending households experienced during working years. Some economists  and financial advisors consider retirement income adequate if the ratio of  retirement income to preretirement income—called the replacement  rate—is from 65 to 85 percent, although some retirees may need  considerably less or more than this. Typically, however, retirees do not  need to replace 100 percent of preretirement income to maintain living  standards for several reasons. For example, retirees will no longer need to  save for retirement and their payroll and income tax liability will likely fall.  However, some researchers cite uncertainties about health and long-term  care costs as reasons a higher replacement rate may be necessary. Table  1 shows replacement rates from Social Security benefits for low and high  earners retiring in 2011, as well as the remaining amount of preretirement  income from other sources necessary to achieve a 75 percent replacement  rate.
The Employee Retirement Income Security Act of 1974 (ERISA) is the  primary statute governing private pension plans, including DB and DC  plans. It seeks to protect the interests of employee benefit plan  participants and their beneficiaries. Title I of ERISA, enforced by Labor,  sets standards of conduct and requires accountability for the people who  run or provide investment advice to plans, known as plan fiduciaries, and  requires administrators to provide participants with certain disclosures,  including periodic benefit statements as well as a summary plan  description. Title IV of ERISA created the Pension Benefit Guaranty  Corporation (PBGC) as a U.S. government corporation to provide plan  termination insurance for certain DB pension plans that are unable to pay  promised benefits. The Internal Revenue Service (IRS), under Title II of  ERISA, and subsequent amendments to the Internal Revenue Code (the  Code), generally is responsible for ensuring that plans meet certain  requirements for tax qualification and for interpreting rules in Title I of  ERISA regarding participation, vesting, benefit accrual, and minimum  funding. Tax qualification enables employers to make tax-deductible  contributions and the plan to earn interest on a tax-deferred basis. The tax  advantages are intended to encourage employers to establish and maintain  pension plans for their employees and advance other public policy  objectives. For example, certain provisions of the Code set required  minimum distributions from tax-deferred accounts, such as traditional  IRAs and qualified plans, generally by April 1 in the year following the year  in which the account holder reaches age 70 ½. These required minimum  distributions help to ensure that account holders withdraw tax-deferred  savings in retirement rather than accumulate savings for their estate.
Once an individual withdraws his or her funds from either a DB or DC  plan, a myriad of laws and regulations typically applies, depending on the  investment decisions that the individual makes with those funds. In this  instance, the individual is no longer a plan participant governed by ERISA,  but is now essentially a retail investor governed by the laws and  regulations that are pertinent to the particular product or asset in which  he or she chooses to invest, and whether or not the funds are in an IRA.  The different laws, regulations, and agencies that may come into play vary  depending on the type of assets held.
Various other federal and state agencies may regulate the investment or  insurance products offered in pension plans or outside of plans on the  retail market. For example, the Securities and Exchange Commission  (SEC) regulates mutual funds, which are pooled investments in a portfolio  of securities. In addition, certain types of annuities may be regulated by  states, while other types may also be subject to federal securities laws and  thus regulation by the SEC. For example, the SEC, among others, regulates  variable annuities, including regulation of disclosure and sales practices.  (See app. V on selected retirement income arrangements and products.)  Insurance company annuities are generally regulated by state insurance  departments, which set reserve requirements for the insurance companies  offering annuities. More recently, states are also regulating sales and  marketing practices and policy terms and conditions to ensure that  consumers are treated fairly when they purchase insurance products and  file claims. Although each state has its own insurance regulator and laws,  the National Association of Insurance Commissioners (NAIC) provides a  national forum for addressing and resolving major insurance issues and  for allowing regulators to develop consistent policies on the regulation of  insurance when consistency is deemed appropriate.
State guaranty associations protect individuals with annuities up to  specified limits in the event of insurer insolvency. If an insurance company  becomes insolvent, guaranty associations assess solvent insurers to pay  covered claims to affected policyholders. However, the associations are  not state agencies, and their specified limits and the extent of coverage  vary across states.
section_title: Experts Recommend Retirees Balance Draw Down of Savings and Use of Lifetime Retirement Income Options
paragraphs: Experts we interviewed tended to recommend that retirees draw down  their savings strategically and systematically and that they convert a  portion of their savings into an income annuity to cover necessary  expenses or opt for the annuity provided by an employer-sponsored DB  pension, rather than take a lump sum. The experts also frequently  recommended that retirees delay receipt of Social Security benefits until  they reach at least full retirement age. However, according to the experts,  the combination of these strategies depends on an individual’s household  circumstances, such as the standard of living the household seeks, its  financial resources, and its tolerance for risks such as investment,  inflation, and longevity risk.
To learn what these experts recommend, we presented them with the  financial profiles of five actual near-retirement households whose data we  drew from the HRS as of 2008. We randomly selected households from  the lowest, middle, and highest net wealth quintiles and households with  varying types of pensions. See table 2 for a summary of their  recommendations for each of these households and appendix III for a  more detailed description of each household’s financial characteristics.
subsections: section_title: Draw Down a Portion of Savings Systematically for Income, Liquidity, and Inflation Protection
paragraphs: Experts we interviewed recommend that when retirees use their savings  or other assets to supplement other sources of retirement income, they  draw down a portion of these reserves at a systematic rate. The drawdown  rate should preserve some liquidity—immediately available funds—in case  of unexpected events such as high medical costs. Such a drawdown  should be part of a larger strategy that includes a certain amount of  lifetime retirement income (such as Social Security, defined benefit, and  annuity income). Drawdowns should be taken from assets invested in a  broadly diversified portfolio comprised of medium exposure to stocks and  the balance in bonds and cash. However, drawing down assets invested in  stocks and bonds was recommended with the caveat that holding stocks  and bonds leaves households exposed to the uncertainty in financial  markets over an unknown number of retirement years.
The systematic drawdown of financial assets can be based on a “smooth”  and sustainable level of income throughout retirement or on a retiree’s  remaining life expectancy. The smooth drawdown approach takes annual  withdrawals based on assumptions about one’s life expectancy and future  investment return. According to the Congressional Research Service  (CRS), an approach based on a retiree’s remaining life expectancy could  involve withdrawing amounts in light of the retiree’s remaining life  expectancy in the year that a withdrawal occurs. One example, under the  Code, would be required minimum distributions, which help to ensure that  account holders withdraw tax-deferred retirement savings in retirement  rather than for estate planning. The minimum distributions are calculated  based partly on life expectancy.
The experts we spoke to recommended a smooth systematic drawdown  from retiree investments, but their recommendations varied on the rate of  drawdown, depending on retirees’ acceptance of the risk of running out of  money and the experts’ own assumptions about future investment returns.  For example, those we spoke to recommended annual withdrawals of 3 to  6 percent of the value of the investments in the first year of retirement,  with adjustments for inflation in subsequent years. These rates generally  comport with CRS estimates for assuring a lifelong source of income.
Using historical rates of investment return on a limited selection of stocks  and bonds, CRS estimated that a drawdown rate of 4 percent on an  investment portfolio with 35 percent U.S. stocks and 65 percent in  corporate bonds would be 89.4 percent likely to last 35 years or more.  (See additional probabilities from the CRS estimates in table 3.)  Importantly, drawdown rates identified by CRS are based on historical  rates of return, and there is no assurance that future investment returns  will match historical returns.
According to the experts we spoke to and literature we reviewed, another  factor that can affect the success of drawdown strategies is the sequence  of investment returns: if the drawdowns begin after the value of the  investments has declined, the income drawn would deplete a greater  proportion of the investments than if growth had occurred before the  income were drawn. If, for example, annual investment returns on  retirement savings are up 7 percent in the first year, then down 13 percent  in the following year, and then up 27 percent, with subsequent returns  throughout retirement a repetition of the first 3 years, the average return  would be 7 percent. If the sequence of returns in the second and third year  were reversed, holding all else constant, the average annual return would  be the same; yet if withdrawals are made each year, savings would be  depleted sooner with the first sequence of returns (see fig. 2).
section_title: Lifetime Retirement Income Sources and Increased Social Security Benefits Can Provide Additional Income Security
paragraphs: Experts we spoke to generally recommended lifetime retirement income  from DB plans, when DB plans are available to workers, and income  annuities, in conjunction with systematic drawdown of other savings, to  provide a greater level of retirement income security. Furthermore, they  frequently recommend retirees delay Social Security to boost inflation- adjusted lifetime retirement income.
subsections: section_title: Lifetime Retirement Income from DB Plans
paragraphs: When the choice of taking a lump sum in exchange for lifetime retirement  income from a DB plan is available, the experts we spoke with generally  recommended that retirees take lifetime retirement income because it  would reduce their exposure to investment and longevity risks. However,  private sector DB plans do not typically provide inflation protection.  Without inflation protection, the value of the income may be greatly  diminished over a long retirement. For example, income of $1,000 per  month in 1980 would have purchasing power closer to $385 a month 30  years later in 2009. When a DB income stream does not adjust with  inflation, many experts recommended investing other savings in stocks  and bonds, which have on average returned above the rate of inflation.  Nevertheless, for retirees who want guaranteed income, experts we spoke  to considered lifetime retirement income from DB plans preferable over  purchasing an annuity with a lump sum distribution, since DB plans may  be able to provide payments at a higher rate than is available through an  insurance annuity outside of the plan.
section_title: Lifetime Retirement Income from Annuities
paragraphs: The experts we spoke with also recommended that retirees enhance their  guaranteed income by purchasing an annuity with some limited portion of  their savings. The income needed from an annuity depends, in part, on the  amount of living expenses not covered by other sources of guaranteed  income such as Social Security or a DB pension. For those that want a  higher level of predictable income, an annuity can reduce the uncertainty  that comes with managing a portfolio of investments and systematically  drawing down income. The experts noted that retirees may have more  difficulty managing a portfolio of investments as they age.
With regard to our sample of near-retirement households, the experts we  spoke to recommended that the middle quintile households purchase  annuities with a portion of their savings, but that the lowest quintile  household accumulate some precautionary cash savings before purchasing  an annuity or investing in securities. Furthermore, they suggested that the  two households in the highest quintile had sufficient resources to go  without annuities, unless the individuals were very risk averse and felt the  need for additional protection for longevity. With regard to the middle  quintile household without a DB plan, experts specified that they should  consider using a portion, such as half, of their $191,000 in financial assets  to purchase an inflation-adjusted annuity. Based on current annuity rates,  a premium valued at half of $191,000 would provide an additional $355 per  month ($4,262 in the first year) until the death of the last surviving spouse,  and include annual increases tied to the Consumer Price Index. A  monthly payment in the first year at this rate would provide slightly more  than the annual income provided by a 4 percent drawdown. By  purchasing an annuity, this household would reduce its exposure to the  risks inherent in a drawdown strategy—namely, the risks of longevity,  inflation, and market volatility. This household would also have some  liquidity by having kept half of its initial savings available to cover  unexpected expenses or to leave for a bequest.
For all the advantages of annuities, however, some of the experts we  spoke to noted that there is commonly a psychological hurdle involved in  the difficult decision to exchange a large principal payment for an  unknown number of small monthly payments. In addition, some planners  tempered their recommendations for annuities, given what they viewed as  the credit risk of annuity insurance companies or the risk of defaulting on  their obligation to make annuity payments. On the other hand, an  economist and an actuary we spoke to—who do not work for insurance  companies—maintain that the credit risk is small relative to the risks  inherent in holding stocks and bonds.
Annuities also carry some disadvantages with regard to estate and tax  planning. Regarding a retiree’s estate, annuities are typically not  refundable upon death, whereas any funds that remain with the deceased’s  systematic drawdown strategy could be left to beneficiaries. With regard  to taxes, the income from annuities purchased with nonqualified funds is  taxed as ordinary income, whereas part of the investment return from a  systematic drawdown strategy of nonqualified savings is often taxed at  lower capital gains or dividend tax rates.
section_title: Delay Social Security
paragraphs: Financial experts we spoke to recommended that retirees delay their  receipt of Social Security benefits in order to increase the amount they  receive from this guaranteed inflation-adjusted retirement income,  particularly since Social Security benefits are the foundation of income for  nearly all retiree households. Although, the experts cited factors to  consider before choosing to delay Social Security benefits, such as one’s  health and personal life expectancy and the availability of other sources of  income.
Under market conditions at the time of the drafting of this report, we  found that by delaying Social Security benefits an individual can gain  additional retirement income at a lower cost than from an immediate  annuity. While individuals may choose reduced Social Security benefits at  the early eligibility age of 62, the payments they will receive at full  retirement age (age 66 for those born from 1943 to 1954) will be higher,  and continue to increase incrementally the longer they wait, up to age 70.  The total estimated amount of benefits collected by electing to delay  receipt of benefits from age 62 up to age 70 is intended to be  approximately actuarially equivalent, but determinations of actuarial  equivalence at any particular time depend on assumptions as to current  and projected interest and mortality rates. The amount of money that a  retiree would forego by waiting to start benefits until age 66 is less than  the amount needed to purchase an annuity that would provide the  additional monthly income available by waiting until full retirement age. If,  for example, a person collects $12,000 per year at age 62 and every year  thereafter (with yearly adjustments for inflation), they could wait until age  66 and collect $16,000 per year (33 percent more with additional  adjustments for inflation from age 62 to 66) and every year thereafter. By  beginning to collect benefits at age 62 they would have collected a total of  $48,000 by age 66, and could then purchase an inflation-adjusted annuity to  provide income to make up the difference. However, the cost of the  annuity for a single male would be 47.4 percent more than the $48,000 they  could collect from age 62 through 65. (See fig. 3.)
section_title: Many Retirees Forego Options to Secure Additional Lifetime Retirement Income
paragraphs: Most of today’s retirees have taken early (and therefore, reduced) Social  Security benefits, though increasing numbers of people of retirement age  are also working. While most with DB pensions are receiving lifetime  retirement income, few have purchased annuities with DC or other assets.  Retirement age investors generally have limited allocations in stocks.  Though most retirees tap their financial assets gradually, some exhaust  their resources and many, particularly those in the oldest age group, live in  poverty.
subsections: section_title: Most Retirees Have Chosen Reduced Social Security Benefits, though Increasing Numbers of Retirement Age Individuals Work
paragraphs: The experts we talked with frequently recommend that retirees delay  taking Social Security to increase their lifetime retirement income, but  most of today’s retirees took Social Security before their full retirement  age, which has committed many to substantially lower monthly benefits  than if they had waited. Among those who were eligible to take benefits  within 1 month after their 62nd birthday from 1997 through 2005, 43.1  percent did so, according to Social Security administrative data compiled  by the Office of the Chief Actuary. An estimated 72.8 percent took  benefits before age 65, and only 14.1 percent took benefits the month they  reached their full retirement age, which varied from age 65 to age 66  depending on birth year. In addition, only about 2.8 percent took benefits  after their 66th birthday. By taking the benefits on or before their 63rd  birthday, 49.5 percent of beneficiaries born in 1943 passed up increases of  at least 25 to 33 percent in monthly inflation-adjusted benefits that would  have been available, had they waited until their full retirement age. (See  fig. 4.)
This early retirement pattern changed little over the 1997 to 2009 period,  while under law enacted in 1983, the Social Security full retirement age  shifted by birth year from age 65 to 66 for those born 1938 to 1943. The  proportion of those who took benefits the first month they were eligible  declined from 47.2 percent to 39.4 percent, but the percentage of those  who waited until the month they reached their respective full retirement  age also decreased—from 17.4 to 13.9 percent.
While most people who are collecting Social Security retirement benefits  do not work, many do continue working at an older age. As shown in  figure 5, the proportion of older adults in the workforce has increased over  the last several years.
These increases in labor force participation may, in part, have arisen in  response to changes in the Social Security law effective in 2000 that  eliminated penalties for earning wages while collecting Social Security  benefits after their full retirement age. With these changes, more people  who are eligible or receiving benefits are working.
section_title: Most Workers Leaving Employment with a DB Pension and Retiring Received Lifetime Annuities
paragraphs: Experts we spoke to generally recommend taking lifetime retirement  income, and most workers leaving employment with a DB pension and  retiring received lifetime retirement income from their DB annuity. An  estimated 67.8 percent of workers who left employment and retired with a  DB pension from 2000 through 2006 commenced the DB annuity; fewer  deferred benefits. (See fig. 6.) Limited data suggest that among retiring  workers who indicated they had an option to take a cash settlement, IRA  rollover, or an annuity, an estimated 8.6 percent took a cash settlement,  and 10.3 percent rolled over funds to an IRA. (See app. IV, table 14.)
As most retirees leaving employment with a DB pension and retiring  receive an annuity benefit, many households with retirees have some  pension or annuity income (apart from Social Security). In 2008, an  estimated 40.7 percent of households with a member aged 65 or older  received pension or other annuity income.
section_title: Few with DC Plans Choose or Purchase an Annuity
paragraphs: The experts we spoke with recommended that retirees enhance their  guaranteed income by purchasing an annuity with some limited portion of  their savings, yet few workers leaving employment with DC pensions and  retiring (6.1 percent) converted their funds or a portion of the money to an  annuity. (See fig. 7.) An estimated 38.8 percent that reported leaving  employment with a DC pension and retiring during the 2000 to 2006 period  left funds in the account, and 30.3 percent rolled them over to an IRA.  Fewer chose to take a withdrawal (15.8 percent). This analysis, however,  only reveals the decisions that retirees made immediately or soon after  leaving employment. In some cases some of the retirees may have  purchased annuities at a later time.
Although traditional insured life annuities provide predictable lifetime  retirement income, the amounts of income they provided retirees has been  modest. The vast majority of annuity sales are sales of deferred  annuities—annuities that provide purchasers investment opportunities to  increase savings while deferring federal income taxes with an option to  draw a guaranteed lifetime retirement income stream at a later time.  However, purchasers of these annuities typically do not convert them to  an income stream. In 2009, 94.4 percent of annuity sales were deferred  annuities ($225 billion of the $239 billion). In contrast, sales of traditional  fixed immediate annuities purchased to provide lifetime retirement  income totaled about $7.5 billion (3.1 percent of total sales). This  represents a small portion of retirees’ assets (an estimated 1.5 percent of  the IRA and nonpension financial assets held by those aged 66 in 2008, for  example). If this amount had been used to purchase 100 percent joint and  survivor immediate annuities for all those aged 66, these annuities would  provide only an estimated 0.26 percent of this group’s aggregate total  household income. Annuities can be purchased with either pension  assets on which income taxes have been deferred (tax qualified) or with  other assets. In 2009, more than half (57.9 percent) of the amount of  annuities purchased came from tax-qualified sources.
section_title: In Order to Reduce Market Risks, Investors Approaching Retirement Generally Have Chosen to Reduce Allocations to Stocks
paragraphs: Although experts we spoke to recommended a moderate exposure to  stocks to support a retirement income drawdown strategy, households  near retirement had a wide range of allocations to stocks (equities),  according to analysis by EBRI. In the volatile stock market from 2005 to  2009, allocations to equities declined among older 401(k) investors (those  in their 60s). While some of the decrease in allocations to equities may  have resulted from the decline in stock prices relative to bond prices,  some reflects investors’ decisions to reduce allocations to stocks. During  2008, for example, investors withdrew a net total of $234 billion from stock  funds and added a net $28 billion to their bond fund holdings, according to  the Investment Company Institute. The proportion of 401(k) investors  with no allocations to equities changed little, but the proportion with  allocations of 80 percent or more of their assets to equities fell from 32.6  percent to 22.3 percent. (See fig. 8.)
By the end of 2009, smaller proportions of 401(k) investors in their 60s  held high proportions of their balances in equities than younger investors.  Although certain experts we spoke with recommended that some retirees  hold between 40 and 60 percent of financial assets in stocks, about one- fifth (20.3 percent) of 401(k) investors aged 60 to 69 had such allocations,  according to EBRI’s analysis. (See fig. 9.)
section_title: Most Retirees with Financial Assets Have Tapped Them Gradually, but Others Have Few Assets and Outlive Them
paragraphs: Although many retirees lack substantial savings, most have some savings  and have typically drawn on those savings gradually, as the experts we  spoke to recommend. According to Urban Institute researchers’ analysis of  associations between household assets, age and income data from HRS  survey responses gathered over the 1998 to 2006 period, individuals in the  highest income quintile typically accumulated wealth, at least until their  eighties. Those in the middle income quintile typically started to spend  down wealth at somewhat earlier ages, but, as the experts we spoke to  recommended, gradually enough to likely have assets when they die.  Those in the lowest income quintile typically have few nonannuitized  assets and spend them fairly quickly.
Economists’ analysis of U.S. Census survey data from 1997, 1998, 2001,  2002, 2004, and 2005 indicate a comparatively modest rate of withdrawals  prior to the age at which the Code required minimum distribution  requirements apply. Also, as a household gradually draws down and  consumes the principal of their savings, their living expenses, rising with  inflation, will be an ever bigger portion of their declining principal.
Although many retirees draw on resources gradually, some older people  are at risk of outliving their financial assets, particularly if a significant  adverse health event occurs. Our analysis of HRS data indicates that  among individuals born in 1930 or earlier that had net household financial  assets of $15,000 or more in 1998, an estimated 7.3 percent of those alive in  2008 had net financial assets of $2,000 or less.
Entering a nursing home is associated with substantial declines in  household wealth for households with a person aged 70 or older.  Although several experts we spoke to recommended it, few retirees  purchase long-term care insurance to protect themselves from some of the  risk that they will be impoverished by having to pay for nursing home  services and certain assisted living services, as premiums can be  expensive.
Apart from whether individuals outlive their assets, millions of retirees live  in poverty late in life. Even with the widespread availability of Social  Security, Medicare, and Medicaid benefits, in 2009 an estimated 3.4 million  people aged 65 or older lived in poverty. The poverty rate for this age  group (8.9 percent), however, was lower than for all U.S. residents (14.3  percent). On the other hand, poverty among women aged 75 and older is  much greater than for men. During the 2005 to 2009 period, the Census  Bureau estimated that 13.5 percent of women in this age group had  incomes below the poverty line in the previous year compared with 7.7  percent of men.
In the future, it is unclear to what extent similar patterns will hold for  retirees. For example, investment returns may differ from historical rates  of return. Also, DB plans and the lifetime retirement income that retirees  frequently received were more common for current retirees. The shift  away from DB plans toward DC plans may mean that increased retirement  savings and other options for generating retirement income from savings,  such as annuities, might become more important for retirees in the future.
section_title: Various Proposed Policies Would Seek to Promote Access to Annuities through Defined Contribution Plans and Improve Financial Literacy about Retirement Income
subsections: section_title: Proposed Options for Promoting Access to Annuities through Employer DC Plans Take Many Forms
paragraphs: Multiple experts told us about increasing lifetime retirement income by  purchasing an annuity, but DC plans typically do not offer access to  annuities and their participants infrequently use annuities when leaving  employment and retiring. The February 2010 Labor/Treasury RFI asked  about ways to facilitate access to lifetime retirement income products  such as annuities in DC plans, and a number of policy options were  proposed by respondents. (See table 4.) These policy options in  responses to the RFI came from industry, consumer, academic, and other  groups.
According to several respondents who favored this option, revising the  safe harbor provision would have an advantage of helping to ease  concerns of some sponsors of DC plans about offering an annuity as a  payout choice. In turn, the availability of an annuity to plan participants  could possibly increase the number of retirees who consider it as a way to  withdraw pension benefits for predictable lifetime retirement income.  Additionally, this could help participants who would otherwise purchase  an annuity in the retail market on terms that might not be as favorable. For  example, annuities, especially in larger plans, might be available at  institutional prices and thus at lower prices than on the retail market.  Annuities at group rates typically have lower prices than individual  annuities. Participants might also benefit from the fact that the plan  fiduciaries are required to fulfill fiduciary responsibilities for the annuity  selection, including the prudent selection and monitoring of products and  providers offered in the plan. Individuals on their own might be less  likely to be in a position or to have experience to conduct as thorough and  analytical a selection as the plan fiduciary, who is required to conduct a  diligent analysis as a fiduciary.
However, revising the safe harbor provision could expose participants to  additional risks, including the risk that the insurance company providing  annuities becomes insolvent and unable to make promised payments.  Depending on the specific features of a policy change in this area, it could  have the effect of lessening protections and recourse for participants, as  compared to the current regulation. For example, some industry  respondents proposed eliminating, modifying, or providing specific criteria  for the condition in the safe harbor that requires sponsors to assess the  ability of an insurance company to make all future payments under an  annuity contract. Labor officials said that protecting participants against  the risk of insurer insolvency is a key issue as they consider revisions to  the safe harbor regulation, given that retirees may depend on annuities for  decades. The insolvency of Executive Life Insurance Company in the early  1990s is a case in point. While states are generally responsible for  insurance regulation including the solvency of insurers, the degree of  regulation can vary in some aspects. There is also variation in the  protections of state guaranty associations to cover policyholders. For  example, all state guaranty associations generally protect an annuity’s  value up to at least $100,000. According to an official from the National  Organization of Life and Health Insurance Guaranty Associations, as of  May 2011, roughly two-thirds of the associations provide coverage of  $250,000 or more, and roughly one-third have limits of at least $100,000 for  annuities. Given such variation, some respondents raised the possibility  of providing a federal guarantee to help states protect policyholders in  cases of insurer insolvency.
subsections: section_title: Require Sponsors to Offer an Annuity as a Choice
paragraphs: Some consumer and other groups recommended requiring DC plan  sponsors to offer annuities as a choice to plan participants, which would  require legislative efforts to amend ERISA or the Code. This would make  the availability of lifetime retirement income more widespread, although  the effect such amendments might have on the rate of participants’  adoption of annuities is uncertain. Since its passage in 1974, ERISA has  required DB plans to offer such a choice. Similarly, DC plans could be  required to offer the choice of an annuity for income in retirement.  However, even with greater access to annuities in their plans, participants  frequently have foregone this opportunity for lifetime retirement income  and many may continue not to use this choice for lifetime retirement  income. From the sponsors’ perspective, such a requirement could impose  greater costs and administrative burdens, and possibly increase their  exposure to fiduciary liability. For example, this might involve the  selection and monitoring of an annuity provider, including costs to hire  any experts to assist with these decisions. As we have previously reported,  sponsors may be concerned about being held liable for these decisions and  paying any losses to participants in the event the annuity provider cannot  meet its financial obligations. Also, the requirements for qualified joint  and survivor annuities, including spousal consent to waive the qualified  joint and survivor annuity, present administrative burdens and costs,  according to several industry groups. A few industry or other groups noted  that the administrative burdens or risk of lawsuits could even lead some  employers, such as small employers, not to carry DC plans at all.
section_title: Encourage Sponsors to Offer a Default Annuity
paragraphs: A default arrangement could increase the use of annuities without an  affirmative decision from participants to do so. Certain respondents noted  that, to the extent that participants are unlikely to opt out of the default  annuity, use of annuities would increase. Accordingly, automatic  enrollment and default investments have been adopted in some DC plans  when workers save for retirement, partly to overcome such tendencies as  procrastinating or not making decisions. With the declining availability of  DB plans and the lifetime retirement income they frequently provide, a  default annuity in DC plans could help to promote lifetime retirement  income for more participants.
Other respondents or experts have noted disadvantages with default  annuities, such as irreversibility or financial penalties. Unlike automatic  enrollment or default investments to save for retirement, annuitization by  default may not allow for a subsequent change. For some participants,  default immediate life annuities may not be appropriate given their health  and other circumstances. Other types of annuities, such as deferred  variable annuities, provide more flexibility to reallocate investments or  make withdrawals, yet surrender and other charges and fees may apply.  Another disadvantage to a default annuity would be setting a standard  level of how much to use for the annuity. The appropriate portion to  annuitize may vary among participants, given their particular  circumstances such as other sources of income.
section_title: Modify Tax Law on Minimum Distributions for Deeply Deferred Annuities
paragraphs: Deeply deferred annuities, or “longevity insurance,” which initiate  payments at an advanced age, could provide protection against longevity  risk and could do so at a substantially lower price than a traditional  immediate annuity. For example, according to one association, the cost  of a deeply deferred annuity purchased at age 65 with payments beginning  at age 85 is approximately 10 to 15 percent of the cost of an annuity  providing the same amount of income that begins payments immediately.  Also, longevity insurance provides income at advanced ages, when risks of  poverty or outliving assets among the elderly may rise, and sets a finite  period for systematic or other withdrawals to last. While longevity  insurance is available on the retail market, current provisions for required  minimum distributions make it challenging to offer this product in DC  plans or IRAs, according to certain industry groups. Longevity insurance  purchased with tax-deferred funds can pose problems for taxpayers if the  insurance does not permit annuity payments to be made until a date that is  substantially after minimum distributions must begin—for example, if the  contract provides for no payments to be made until age 85.
On the other hand, questions exist about this newer product, according to  Treasury officials and certain academic experts. For example, it is unclear  to what extent older people might understand and be willing to purchase  deeply deferred annuities whose payments may not begin for decades, if at  all. Further, a proposed exemption from minimum distributions could  potentially reduce revenue to the federal government since a tax  exemption for deeply deferred annuities would result in some foregone  revenue, although the extent of any foregone revenue is unclear. However,  the purpose of the minimum distribution provisions is to ensure that tax- deferred retirement saving is used for retirement rather than estate  planning purposes. Depending on how tax expenditures are structured,  they also may raise questions about fairness, such as the extent to which  low- or high-income individuals would benefit from a proposed exemption.
section_title: Modify Spousal Protection Provisions
paragraphs: According to several industry groups, changes in requirements about  qualified joint and survivor annuities (QJSA), including the procedures to  document the spouse’s consent, could lower administrative burdens and  costs so that sponsors might become more willing to make annuities  available. A QJSA generally guarantees payments for the life of the  participant and the participant’s surviving spouse. Some plans, including  DB plans, are subject to requirements to offer a QJSA as a default and  obtain spousal consent to not elect the joint and survivor annuity. For DC  plans that are subject to the requirements for some or all participants, part  of the procedures to elect a distribution other than the QJSA include  notarized or in-person consent by the spouse, which some industry groups  described as burdensome. However, these procedures have helped to  protect spouses of participants with decisions about lifetime retirement  income. For example, in DB plans, QJSA requirements under the  Retirement Equity Act of 1984 and its implementing regulations sought to  ensure that spouses are aware and consent to a pension distribution other  than a joint annuity that would provide payments throughout their  retirement. The QJSA procedures for DB plans do not apply uniformly to  DC plans, and we have previously reported that spousal protections in DC  plans already have limitations. For example, a plan participant may  withdraw from or roll over an account balance without the consent of his  or her spouse. Women on average continue to live longer and be more  vulnerable to poverty at older ages than men, and reducing QJSA  requirements might further lessen spousal protections in DC plans as  compared to DB plans.
section_title: Proposed Approaches Vary to Improve Individuals’ Understanding about Retirement Income
paragraphs: Improving individuals’ financial literacy can be one important component  in helping them manage retirement income appropriately. Financial  literacy can be described as the ability to make informed judgments and to  take effective actions regarding the current and future use and  management of money. One way of improving consumer financial literacy  is through financial education—that is, the processes whereby individuals  improve their knowledge and understanding of financial products,  services, and concepts. A wide variety of delivery mechanisms exist to  provide financial education, including classroom curricula, print materials,  Web sites, broadcast media, and individual counseling. As we recently  testified, at the federal level, more than 20 federal agencies have  programs or initiatives related to financial literacy and these efforts are  coordinated by the Financial Literacy and Education Commission  (FLEC).
Ensuring the financial literacy of older people has become particularly  important given the transition to a financial account-based retirement  system and the increasing responsibility of individuals to manage their  assets in retirement. According to many respondents as well as experts we  interviewed, education aimed at helping manage retirement income should  cover, in particular, the financial risks faced in retirement, such as  longevity risk, inflation risk, and investment risk, among others.  Appropriate financial education can help prevent individuals from over- estimating their expected investment returns or sustainable withdrawal  rates, which might make it more difficult to maintain their lifestyle in  retirement. It can also serve to help individuals understand various  difficult choices to mitigate these risks as well as how to evaluate or  compare choices, such as what factors to consider. Such education can be  particularly important given the complexity of annuities and other  retirement investment vehicles. Besides annuities, managing a lump sum  distribution and approaches that combine annuities and more liquid assets  are other choices for individuals. Individuals or plan sponsors might not  be aware that they can pursue combinations of income in retirement, such  as annuitizing part of the pension benefit, rather than just all or none of it.  Having adequate information on the variety of options available—and their  corresponding advantages and disadvantages—allows individuals to tailor  their decisions to their particular circumstances.
Various entities proposed policy options that seek to better inform  individuals about income in retirement, and these options use different  approaches, such as financial education or notices involving pensions.  Multiple policy options, such as those offered in response to the RFI or in  reports we reviewed, could work together to improve financial literacy on  income throughout retirement. (See table 5.) Some industry groups or  academic experts stated that financial education alone has its limitations  and is not the only approach for improving consumers’ financial behavior.  Financial education may sometimes be more useful as a complement to  other tools, such as personalized investment advice or policy options like  the use of defaults.
Currently, federal agencies provide some educational resources for the  general public about income in retirement as part of their efforts on  financial education. Certain agencies, such as SSA and Labor, have taken  various steps, as shown in table 6.
We found that few other resources on how to ensure income throughout  retirement were available from the federal government. With federal  financial education, much of the retirement focus has typically been on  saving for retirement.
Although many sources of information are available from the private  sector, the federal government may be in a position to contribute to  financial education on managing pension and other financial assets in  retirement. The federal government can produce objective information  and partner with organizations outside of the government to deliver its  materials, which we have previously reported. Leveraging partnerships  with public and private sector stakeholders, the federal government may  help to reach many target audiences. This could include those without  plan sponsors such as the roughly half of the private sector workforce not  participating in a pension or those who have rolled over pension assets to  an IRA. Meanwhile, certain research suggests that information from  various financial service companies may raise some concerns about  possible limitations or conflicts of interest. Regarding conflicts of  interest, we recently reported that participants in 401(k) plans may be  unaware that service providers, when furnishing education, may have  undisclosed financial interests, including on investment funds in their plan  or products outside the plan from roll-over balances. Older people  without pension plans or who have withdrawn funds from their plans may  receive information on products that are not in their best interest or even  fraudulent.
On the other hand, certain educational materials from the federal  government on income throughout retirement may have some limitations.  For example, Labor officials told us that their educational materials on  this topic may be fairly general, and plan sponsors may be more aware of  participants’ circumstances and could better tailor retirement education  accordingly.
subsections: section_title: Require Sponsors to Provide a Notice for Plan Participants
paragraphs: In 2003, we recommended that Congress consider amending ERISA so that  it specifically requires plan sponsors to provide participants with a notice  on risks that individuals face when managing their income and  expenditures at and during retirement. The notice could be provided at  certain key milestones, including when a participant separates from  service or at retirement. Although this policy option has not been enacted,  ERISA requires sponsors of DC plans to provide participants a notice as  part of their quarterly benefit statements about the benefits of a well- balanced and diversified portfolio as they save for retirement, which  includes a link to a Labor Web site for further information. According to  Labor and Treasury officials, plan sponsors are not required to provide a  notice to participants on managing pension assets in retirement, such as  the general financial risks and choices they face. Once retired or outside  their plan, individuals might be more susceptible to sales of products that  are not in their best interest or even constitute fraud. Without additional  information reinforced over time while participating in the plan,  participants could later make decisions that fail to sustain their incomes  and, as a result, potentially place a heavier burden on public need-based  assistance or other resources.
section_title: Encourage Voluntary Education in Plans by Issuing Clear Guidance
paragraphs: Labor has provided an interpretive bulletin on participant investment  education as distinguished from investment advice in plans, but many  respondents observed that this bulletin and industry efforts generally  focus on saving for retirement, rather than on income throughout  retirement. According to a few industry groups, greater clarity on  education as distinguished from investment advice, as related to income in  retirement, may allay sponsors’ and service providers’ fears of fiduciary  liability by explaining the types of general information on income in  retirement that would not be considered to be investment advice. With  such clarity, more sponsors and service providers may pursue voluntary  efforts to educate plan participants in general on income and expenses in  retirement. Sponsors with assistance from providers could tailor such  education to their plan participants. Some plans already offer such  education.
However, any future guidance from Labor on investment education about  income in retirement, if poorly implemented, could have potential  disadvantages. For example, we recently recommended that Labor  evaluate and revise its interpretive bulletin on investment education,  including the ability to highlight proprietary funds which may result in  greater revenue to the service provider. As Labor officials consider  possible guidance on income in retirement, they said that an inappropriate  balance between education and advice could result in plan participants  receiving so-called “education” from service providers with conflicts of  interest and not having recourse against fiduciaries. According to Labor  officials, education on income throughout retirement may also involve  spending plan assets to varying extents on choices not available in the  plan, which could potentially be challenged as unreasonable expenses  from plan assets under certain circumstances. Further, while guidance  could encourage sponsors to voluntarily provide education, it may not  require it. Some sponsors might not provide education on income  throughout retirement due to reasons other than fiduciary concerns, such  as costs or not viewing it as their role.
section_title: Require Sponsors to Provide an Estimate of Lifetime Annuity Income on Benefit Statements
paragraphs: Given the rise of DC plans which provide pension benefits as an account  balance, many industry, consumer, and academic groups noted that an  estimate on the participant benefit statement could present, or “frame,”  the pension benefit as a stream of income in retirement rather than just an  account balance, which could help to change how participants in DC plans  perceive or ultimately withdraw their benefit at retirement. For example,  the Thrift Savings Plan, a DC plan for federal workers, recently began to  include such an estimate on annual statements for participants, and  representatives of a service provider for other plans told us it does so on  quarterly statements. In addition, including an estimate of annuity income,  as the Lifetime Income Disclosure Act would require if passed, could  improve retirement planning by indicating the estimated income stream  available based on a worker’s account balance. This may be a difficult  calculation for participants, according to certain experts we interviewed.  As workers save for retirement, seeing an estimated monthly or annual  income stream as well as an account balance could possibly help them to  increase saving and understand how much they actually need to save to  last throughout retirement.
However, this proposed option is subject to many assumptions and  complexities, and certain industry or consumer groups expressed  concerns that an estimate could potentially confuse or discourage  participants. Although the current account balance may be simpler to  convert to an annuity estimate, a few industry groups cautioned that such  an estimate of annuity income could be quite low in some cases and might  even discourage saving by those with smaller balances, such as younger  participants. However, an estimate based on a projection of the worker’s  future balance at retirement would entail additional assumptions, such as  future rates of return, and raise questions about how to account for  investment risk, if at all. Another area of complexity is the level of  uniformity or flexibility with assumptions. While some industry groups  noted that the federal government could provide uniformity and  consistency across plan sponsors by prescribing assumptions for sponsors  to use, other industry groups preferred flexibility, such as tailoring  estimates to a plan’s actual annuity products.
section_title: Concluding Observations
paragraphs: Given the long-term trends of rising life expectancy and the shift from DB  to DC plans, aging workers must increasingly focus not just on  accumulating assets for retirement but also on how to manage those  assets to have an adequate income throughout their retirement. Workers  are increasingly finding themselves depending on retirement savings  vehicles that they must self-manage, where they not only must save  consistently and invest prudently over their working years, but must now  continue to make comparable decisions throughout their retirement years.  Even for the minority of workers with significant retirement savings,  making their savings last may prove challenging. However, for the majority  of workers who approach retirement with small account balances— workers with balances of $100,000 or less—the stakes are far greater. For  those with little or no pension or other financial assets, ensuring income in  retirement may involve difficult choices, including how long to wait before  claiming Social Security benefits in order to receive higher benefits, how  long to work, and how to adjust consumption and lifestyle to lower levels  of income in retirement. Social Security benefits serve as the foundation of  income in retirement and a key source of lifetime retirement income, but  many older people claim benefits at the earliest age and pass up the  opportunity for a higher monthly benefit beginning at full retirement age  or later. By claiming benefits early, whether for health or other important  reasons, individuals take a smaller benefit when they could potentially  work longer and receive a higher monthly benefit. Although retirement  savings may be larger in the future as more workers have opportunities to  save over longer periods through strategies such as automatic enrollment  in DC plans, many will likely continue to face little margin for error. Poor  or imprudent investment decisions may mean the difference between a  secure retirement and poverty.
Even for the half of the workforce participating in pension plans,  employers as plan sponsors are currently not required to provide notices  on the financial risks and choices that participants face in retirement. In  our 2003 report, we included a Matter for Congressional Consideration to  require sponsors to provide a notice to plan participants on risks in  retirement. With the ongoing shift in pension plans and the transition from  lifetime retirement income toward account balances, we believe that this  continues to be important. Absent such a requirement, many more  workers may likely face key retirement decisions without sufficient  knowledge to decide which choices are in their best interest. Without  objective information from employers and the federal government, even  those retirees who have adequate savings may be at risk of not having  sufficient retirement income. For those in the already large segment of the  population depending on limited retirement savings, making prudent  choices is especially important and difficult.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided officials from the Department of the Treasury, IRS,  Department of Labor, SEC, and the National Association of Insurance  Commissioners with a draft of this report. The Department of the Treasury  provided comments indicating that the report is a helpful addition to the  dialogue and analysis regarding the topic. See appendix VI. Officials from  the Department of the Treasury, IRS, Department of Labor, SEC, and the  National Association of Insurance Commissioners provided technical  comments that we incorporated in the report, where appropriate. We also  provided a copy of the draft to officials from SSA for a technical review,  and they also provided technical comments that we incorporated where  appropriate.
As agreed with your office, unless you publicly announce its contents  earlier, we plan no further distribution until 30 days after the date of this  letter. At that time, we will send copies of this report to the Secretary of  the Treasury, Commissioner of Internal Revenue, Secretary of Labor,  Chairman of the Securities and Exchange Commission, Chief Executive  Officer of the National Association of Insurance Commissioners,  Commissioner of the Social Security Administration, and other interested  parties. In addition, this report will be available at no charge on GAO’s  Web site at http://www.gao.gov.
If you or your staff have any questions concerning this report, please  contact me at (202) 512-7215 or jeszeckc@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report. GAO staff who made key contributions to this  report are listed in appendix VII.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: To identify the strategies experts recommend retirees employ to ensure  income throughout retirement we interviewed a judgmental sample of a  range of financial planners and other financial experts from different  academic and industry organizations and a retiree interest group, which  were from different geographic areas of the country. As part of these  interviews, to ensure we identified strategies that apply to households  across the net wealth spectrum and with both defined benefit (DB) and  defined contribution (DC) pension plans, we randomly selected five  households from the Health and Retirement Study (HRS) conducted by  the University of Michigan in the lowest, middle, and highest net wealth  quintiles with different combinations of pension plans in the middle and  highest quintiles. See appendix III for selected characteristics of these five  households. See appendix II for selected financial and demographic data  about these net wealth groups. The HRS is a nationally representative  longitudinal survey of older adults sponsored by the National Institute on  Aging and the Social Security Administration. The survey is administered  in waves (generally every 2 years) and includes information on respondent  demographics, health status, service receipt, and household  characteristics, among other things. An additional HRS dataset, produced  by the RAND Corporation, includes recoded variables and more detailed  information on household finances. Using RAND’s March 2010 compilation  of HRS data for waves 1992 through 2008 and HRS data compiled by  Gustman, et al., we identified these net wealth groups using 2008 total net  wealth data from RAND (including second homes) as well as the present  value of households’ DB and DC pensions in 2006. We limited our sample  to households with a member nearing typical retirement age (aged 55 to  60) in 2008 and adjusted income and asset values for inflation to 2008  dollars. These net wealth estimates did not include the present value of  expected Social Security benefits. We assessed the reliability of the data  we used by reviewing pertinent system and process documentation,  interviewing knowledgeable officials, and conducting electronic testing on  data fields necessary for our analysis. We found the data we reviewed  reliable for the purposes of our analysis.
We drew a random selection of five typical households from the first  (lowest), third (middle), and fifth (highest) net wealth quintiles. To do so,  we further restricted our analysis to households with net wealth within 10  percent of the median for each of these three quintile groups. For  example, for the lowest quintile, median net wealth was $2,000 so we  selected households with net wealth in the $1,800 to $2,200 range. Based  on data for the first (lowest) quintile (see app. III), we selected a single- person household with neither a DB nor a DC pension, two or three living  children (not necessarily living in the household), who reported being in  “fair” or “good health,” and who did not own a house. Based on data for  the third (middle) quintile, we selected two households consisting of  married couples that owned their home, with either the respondent or  spouse in “good” or “very good” health, and with two living children. From  this quintile we selected one couple with only a DB pension and another  with only a DC pension. Based on data for the fifth (highest) quintile, we  selected two households consisting of married couples that owned their  home. We selected one with either the respondent or spouse in “good” or  “very good” health, two living children, and who had both a DB and a DC  pension. We selected another couple from this quintile with only a DB  pension, with members in “fair”, “good”, or “very good” health, and no  restriction concerning the number of their living children. This procedure  provided five households with characteristics approximately equal to  median values for their net wealth quintile in these respects, but may not  be in other ways.
We shared data on these households with the experts we interviewed and  discussed the strategies that the experts would recommend these  households’ utilize and their trade-offs. See the households’ summary  financial data in appendix III. We also reviewed company-specific financial  product documentation and studies of retirement income strategies such  as those describing systematic withdrawals from retirement savings,  including the results of Monte Carlo simulations.
To review the choices retirees have made for managing their pension and  financial assets for generating income, we analyzed data from the HRS,  reviewed others’ analyses of the HRS, and analyzed data from the Social  Security Administration, compiled by the Office of the Chief Actuary. We  reviewed other data sources including data on retirement account  holdings from the Employee Benefit Research Institute, labor force  participation data from the Bureau of Labor Statistics, and poverty  estimates from the Census Bureau’s Current Population Survey.
We analyzed data concerning the disposition of pensions using HRS data,  including data compiled by RAND and Gustman, et al. We restricted this  analysis to workers that reported leaving employment with a DB or DC  pension plan and retiring between 2000 through 2006. We also included  only respondents that were in the HRS data set during each wave, 2000  through 2006. Furthermore, we assembled and analyzed data for a subset  of these respondents that provided information concerning the availability  of a lump sum option for their DB pension in the same HRS wave in which  they reported a pension disposition.
To identify policy options that are available to ensure income throughout  retirement as well as their advantages and disadvantages, we collected and  reviewed information representing a variety of academic, consumer,  industry, and government sources. We analyzed over 40 public comments  from diverse groups submitted in response to the Department of Labor’s  (Labor) and the Department of the Treasury’s (Treasury) 2010 request for  information (RFI) on lifetime income, and at relevant congressional and  Treasury-Labor department hearings. In addition to the RFI submissions,  we also reviewed other publications from a variety of academic,  consumer, and industry sources. We reviewed reports from Labor’s  Employee Retirement Income Security Act (ERISA) Advisory Council, and  financial literacy materials on retirement income available from federal  agencies including the online version of Labor’s Taking the Mystery Out  Of Retirement Planning and the Financial Literacy and Education  Commission’s Web site, www.MyMoney.gov. We conducted interviews  with a variety of academic, consumer, and industry sources. Interviews  with officials of federal government agencies included Labor, the  Securities and Exchange Commission (SEC), Treasury, the Internal  Revenue Service (IRS), and Treasury staff of the Financial Literacy and  Education Commission. Lastly, we reviewed applicable federal laws and  regulations.
section_title: Appendix II: Demographic and Financial Characteristics of Households Nearing Social Security Eligibility, 2008
paragraphs: These demographic and financial characteristics are for households in the  HRS in which either the respondent or spouse was in the 55 to 60 age  range in 2008. Except as noted, the income figures apply to income in 2007  and asset figures apply to assets at the time of the 2008 HRS interview,  typically mid-2008. Estimates are expressed in 2008 dollars. See table 8 for  confidence intervals of these household characteristics.
Table 8 presents the confidence intervals for data in table 7, based on a 95  percent confidence level.
section_title: Appendix III: Demographic and Financial Characteristics of a Sample of Five Households Nearing Social Security Eligibility
paragraphs: Below are selected demographic and financial characteristics of five  households whose retirement prospects we discussed with financial  planners and retirement income experts. We randomly selected these  households from a sample of near-retirement households in the HRS in  which the respondent and spouse were in the 55 to 60 age range in 2008.  We selected one household from households in the lowest of five net  wealth groups, two households from the households in the middle net  wealth group, and two households in the highest net wealth group.
section_title: Appendix IV: Retirees’ Disposition of Pensions
paragraphs: Table 14 provides estimates and confidence intervals for estimates of the  percentage of workers who reported the disposition of their pension upon  leaving work with a DB pension and retiring. Based on analysis of our  sample of HRS respondents, we are 95 percent confident that the actual  proportion of workers is between the low and high percentage indicated in  each cell. See appendix I for details concerning our methodology for  developing these estimates.
Table 15 addresses the dispositions of DC pensions by workers who left  employment with a pension and retired.
section_title: Appendix V: Selected Types of Retirement Income Arrangements and Products
paragraphs: Table 16 describes selected types of arrangements which are tax- advantaged and products that may provide retirement income. They  include tax-advantaged retirement arrangements, annuity products, and  investment products. This list is not meant to be exhaustive, but rather to  provide a sense of certain types of financial arrangements and products  that may provide income throughout retirement.
section_title: Appendix VI: Comments from the Department of the Treasury
section_title: Appendix VII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Michael J. Collins, Assistant  Director; Joseph A. Applebaum; Carl S. Barden; Susan C. Bernstein; Jason  A. Bromberg; Michael Brostek; Tara E. Carter; Patrick S. Dynes; Sharon L.  Hermes; Mitchell B. Karpman; Gene G. Kuehneman Jr.; Mimi Nguyen;  Benjamin P. Pfeiffer; Bryan G. Rogowski; Matthew J. Saradjian; Roger J.  Thomas; Frank Todisco; Karen C. Tremba; and Walter K. Vance made key  contributions to this report.
section_title: Related GAO Products
paragraphs: 401(K) Plans: Improved Regulation Could Better Protect Participants  from Conflicts of Interest. GAO-11-119. Washington, D.C.: January 28,  2011.
Defined Contribution Plans: Key Information on Target Date Funds as  Default Investments Should Be Provided to Plan Sponsors and  Participants. GAO-11-118. Washington, D.C.: January 31, 2011.
Consumer Finance: Regulatory Coverage Generally Exists for Financial  Planners, but Consumer Protection Issues Remain. GAO-11-235.  Washington, D.C.: January 18, 2011.
Social Security Reform: Raising the Retirement Ages Would Have  Implications for Older Workers and SSA Disability Rolls. GAO-11-125.  Washington, D.C.: November 18, 2010.
State and Local Government Pension Plans: Governance Practices and  Long-term Investment Strategies Have Evolved Gradually as Plans Take  On Increased Investment Risk. GAO-10-754. Washington, D.C. August 24,  2010.
Retirement Income: Challenges for Ensuring Income throughout  Retirement. GAO-10-632R. Washington, D.C.: April 28, 2010.
Social Security: Options to Protect Benefits for Vulnerable Groups When  Addressing Program Solvency. GAO-10-101R. Washington, D.C.:  December 7, 2009.
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.
Retirement Savings: Better Information and Sponsor Guidance Could  Improve Oversight and Reduce Fees for Participants. GAO-09-641.  Washington, D.C.: September 4, 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.
Financial Literacy and Education Commission: Progress Made in  Fostering Partnerships, but National Strategy Remains Largely  Descriptive Rather Than Strategic. GAO-09-638T. Washington, D.C.: April  29, 2009.
Private Pensions: Conflicts of Interest Can Affect Defined Benefit and  Defined Contribution Plans. GAO-09-503T. Washington, D.C.: March 24,  2009.
Individual Retirement Accounts: Additional IRS Actions Could Help  Taxpayers Facing Challenges in Complying with Key Tax Rules.  GAO-08-654. Washington, D.C.: August 14, 2008.
Defined Benefit Pensions: Plan Freezes Affect Millions of Participants  and May Pose Retirement Income Challenges. GAO-08-817. Washington,  D.C.: July 21, 2008.
Private Pensions: Fulfilling Fiduciary Obligations Can Present  Challenges for 401(k) Plan Sponsors. GAO-08-774. Washington, D.C.: July  16, 2008.
Individual Retirement Accounts: Government Actions Could Encourage  More Employers to Offer IRAs to Employees. GAO-08-590. Washington,  D.C.: June 4, 2008.
Private Pensions: Low Defined Contribution Plan Savings May Pose  Challenges to Retirement Security, Especially for Many Low-Income  Workers. GAO-08-8. Washington, D.C.: November 29, 2007.
Retirement Security: Women Face Challenges in Ensuring Financial  Security in Retirement. GAO-08-105. Washington, D.C.: October 11, 2007.
State and Local Government Retiree Benefits: Current Status of Benefit  Structures, Protections, and Fiscal Outlook for Funding Future Costs.  GAO-07-1156. Washington, D.C.: September 24, 2007.
Retirement Decisions: Federal Policies Offer Mixed Signals about When  to Retire. GAO-07-753. Washington, D.C.: July 11, 2007.
Defined Benefit Pensions: Conflicts of Interest Involving High Risk or  Terminated Plans Pose Enforcement Challenges. GAO-07-703.  Washington, D.C.: June 28, 2007.
Employer-Sponsored Health and Retirement Benefits: Efforts to Control  Employer Costs and the Implications for Workers. GAO-07-355.  Washington, D.C.: March 30, 2007.
Private Pensions: Changes Needed to Provide 401(k) Plan Participants  and the Department of Labor Better Information on Fees. GAO-07-21.  Washington, D.C.: November 16, 2006.
Baby Boom Generation: Retirement of Baby Boomers Is Unlikely to  Precipitate Dramatic Decline in Market Returns, but Broader Risks  Threaten Retirement Security. GAO-06-718. Washington, D.C.: July 28,  2006.
Social Security Reform: Answers to Key Questions. GAO-05-193SP.  Washington, D.C.: May 2005.
Older Workers: Labor Can Help Employers and Employees Plan Better  for the Future. GAO-06-80. Washington, D.C.: December 5, 2005.
Redefining Retirement: Options for Older Americans. GAO-05-620T.  Washington, D.C.: April 27, 2005.
Highlights of a GAO Forum: The Federal Government’s Role in  Improving Financial Literacy. GAO-05-93SP. Washington, D.C.:  November 15, 2004.
Consumer Protection: Federal and State Agencies Face Challenges in  Combating Predatory Lending. GAO-04-280. Washington, D.C.: January  30, 2004.
Private Pensions: Participants Need Information on Risks They Face in  Managing Pension Assets at and during Retirement. GAO-03-810.  Washington, D.C.: July 29, 2003.
Retiree Health Insurance: Gaps in Coverage and Availability.  GAO-02-178T. Washington, D.C.: November 1, 2001.
Pension Plans: Characteristics of Persons in the Labor Force Without  Pension Coverage. GAO/HEHS-00-131. Washington, D.C.: August 22, 2000.
Social Security Reform: Implications of Raising the Retirement Age.  GAO/HEHS-99-112. Washington, D.C.: August 27, 1999.
Social Security Reform: Raising Retirement Ages Improves Program  Solvency but May Cause Hardship for Some. GAO/T-HEHS-98-207.  Washington, D.C.: July 15, 1998.