Lifetime Income Options: Considerations from the GAO

    Bonnie M. Treichel, J.D.
    Senior Consultant

    Often times, plan sponsors and their service providers put all of their energy into enrolling and educating new participants about the availability and features of the retirement plan and the way to sign-up for the plan.  Little time is spent with those nearing retirement – strategizing regarding their distribution plan.  A critical shift in focus must be made from this accumulation phase to the deccumulation phase – as both are vital pieces of the retirement puzzle – and the Government Accountability Office (GAO) agrees.  This is particularly true given the decline of defined benefit plans in America, the fact that defined contribution (DC) plans are the primary source of income that participants must manage to ensure income for the remainder of their life, and the fact that life expectancy continues to rise.

    In August 2016, the GAO published a report that encourages the Department of Labor (DOL) to turn their focus toward lifetime income options in employer-sponsored retirement plans, effectively shifting the attention toward the deccumulation phase.1  The GAO conducted a study and found that approximately 2/3 of the plans in the study did not offer a systematic withdrawal option at retirement and about 3/4 of the plans did not offer an annuity option.  Keep in mind that retirement plans do not have to provide participants with distribution options that will help them secure “lifetime income” in retirement. Instead, plans can provide lump sum distributions of the participants’ entire account balance and effectively remove the participant from the plan after the participant reaches the plan’s retirement age.  Alternatively, if made available by the plan sponsor, the plan can structure an option to allow the participant to utilize their 401(k) plan throughout retirement, whereby there are a variety of different models for this structure.  For example, the plan could utilize a fixed immediate annuity option which is an annuity that provides an immediate guaranteed fixed income stream for a predetermined period of time, such as for the life of the contract holder or a specified number of years.2

    Why the Lack of Retirement Income Options?

    Even though these options exist, historically, most plan sponsors and their participants have not utilized lifetime income options (also known as retirement income options).  Why not?  Several reasons – some more complicated than others – but a few of which that will be addressed below. 

         Lack of Demand

    First, participants generally are not asking for these options, and when they are asking, they are not utilizing lifetime income when it becomes available in the plan.  Presenting at a plan sponsor workshop a few years back with Nevin Adams, JD, from the American Retirement Association, he presented on this topic – lifetime income – and asked the group about their experiences with participant utilization.  “Disappointing.”  That is how plan sponsors describe participant adoption rates of lifetime income.3  So why offer something participants do not want – or rather – something participants do not use?   

         Fiduciary and Legal Risks

    Second, there are fiduciary and legal risks for plan sponsors making lifetime income options available in retirement plans.  The DOL issued guidance in 2008,4 which was clarified in 2015,5 providing a safe harbor for plan fiduciaries when selecting an annuity provider so long as the following were met:

    1. “Engages in an objective, thorough and analytical search for the purpose of identifying and selecting providers from which to purchase annuities. This process must avoid self-dealing, conflicts of interest or other improper influence and should, to the extent possible, involve consideration of competing annuity providers;
    2. Appropriately considers information sufficient to assess the ability of the annuity provider to make all future payments under the annuity contract;
    3. Appropriately considers the cost (including fees and commissions) of the annuity contract in relation to the benefits and administrative services to be provided under such contract;
    4. Appropriately concludes that, at the time of the selection, the annuity provider is financially able to make all future payments under the annuity contract and the cost of the annuity contract is reasonable in relation to the benefits and services to be provided under the contract; and
    5. If necessary, consults with an appropriate expert or experts for purposes of compliance with these provisions.”

    While the safe harbor tends to be appreciated by plan fiduciaries – it does not provide much, if any, comfort.  As the GAO study finds, plan fiduciaries have a great amount of trouble with numbers 2 and 4 above, particularly because it is difficult to assess the future viability and health of an insurer.  As such, the legal and fiduciary risks associated with the selection of a retirement income option do not outweigh the benefit to participants for most plan sponsors.6 

         Risks Associated with Vendor Changes

    Third, the GAO report also finds that plan sponsors fear that participants may lose lifetime income when the plan changes recordkeepers and/or annuity providers.  Likewise, participants who have paid potentially higher fees associated with a lifetime income option may lose the benefit of the lifetime income as a result of a transition, yet not receive a refund on the fees paid for the guarantee.  Often, there are competing interests between the interests of the plan and participants as a whole when the plan puts the recordkeeper/provider out to bid to ensure the most reasonable fees and best services for the participants while at the same time weighing the fact that some participants have lifetime guarantees that may be difficult to transfer.7

    Next Steps

    The GAO study gives a number of other reasons that plan sponsors are unlikely to offer retirement income options, yet the GAO concludes that the DOL should encourage the use of lifetime income options, and the GAO specifically lays out seven ways in which the DOL should do so including: “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.”

    To date, there are no action items for plan sponsors as a result of the GAO’s findings; the GAO is simply making recommendations to the DOL.  However, plan sponsors should continue to:

    1. consider existing DOL guidance when adding lifetime income options to the plan; and
    2. continue to monitor the DOL for forthcoming guidance on lifetime income, as the DOL was receptive to the recommendations from the GAO.

    For additional information on lifetime income, contact your Multnomah Group Consultant to learn more.

    Multnomah Group, Inc.
    Phone: (888) 559-0159
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    1 The full report is available here: http://www.gao.gov/assets/680/678924.pdf.

    2 Alternative options include a guaranteed minimum withdrawal benefit, a deferred annuity, or an annuity shopping platform.

    3 Read more from Nevin Adams on Lifetime Income here: http://www.napa-net.org/news/plan-optimization/dc-plan-design/5-reasons-why-more-plans-dont-offer-retirement-income-options/.

    4 Selection of Annuity Providers – Safe Harbor for Individual Account Plans. 73 Fed. Reg. 58,447 (Oct. 7, 2008) (codified at 29 C.F.R. § 2550.404a-4), available at: https://www.law.cornell.edu/cfr/text/29/2550.404a-4.

    5 DOL Field Assistance Bulletin 2015-02, available at: https://www.dol.gov/sites/default/files/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/fab2015-2.pdf.

    6 The DOL provided additional guidance to TIAA in the form of an Information Letter on December 22, 2016, available here: https://www.dol.gov/sites/default/files/ebsa/employers-and-advisers/guidance/information-letters/information-letter-122216.pdf.  The Information Letter stated that a defined contribution plan could prudently choose as the plan’s default option an investment that contains lifetime income elements.  This was in furtherance of the DOL’s identified need for lifetime income as an “important public policy issue,” stated the Information Letter.  While it is too early to tell and while this is not formal guidance from the DOL, this letter may encourage plan sponsors to utilize lifetime income and it may generate less fear around the fiduciary and legal concerns surrounding lifetime income options. 

    7 The GAO study did find that some respondents were aware of products in the marketplace today that would alleviate some of these fears.  According to the study, “whether by refunding, preserving, or transferring their lifetime income guarantees – 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.”