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. 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. 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). 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. 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. 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. 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.) 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. 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. 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. 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. 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.) 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.

Summary: 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. 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.