A Government Accountability Office
(GAO) questionnaire from 11 401(k) plan recordkeepers 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.
GAO noted that responses to the questionnaire
represented more than 40% of all 401(k) assets and about one-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 systematic withdrawal
option—payments from accounts, sometimes designed to last a lifetime—and
about three-quarters did not offer an annuity.
Concerns about
legal risks and recordkeeper constraints may deter many plan sponsors
from offering lifetime income options. The GAO pointed out that the
Department of Labor (DOL) has prescribed steps
plan sponsors can take to satisfy their fiduciary duties 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 providing clear definitions for those terms.
Further,
GAO found that a mix of lifetime income options to choose from is not
usually available. The 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.
Stakeholders
also told GAO that recordkeepers may make only their own annuities
available to the plans they service. The 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.
The
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 required minimum distributions (RMDs) be the
default distribution process for retiring participants, the DOL may help
create lifetime income for participants who do not choose an option,
the GAO said.
GAO made seven recommendations to the 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 recordkeeper that offers
annuities from other providers; and consider providing RMD-based default
lifetime income to retirees. The DOL generally agreed to the
recommendations and told the GAO it would take actions to address them.
The GAO report may be downloaded from here.