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

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