Clear Messages Given at DoL/Treasury Hearings

Forty-five companies and interest groups representing the retirement industry testified before the Department of Labor (DoL) and the U.S. Treasury yesterday and today to discuss lifetime income options.

At the joint hearing, the DoL’s Employee Benefits Security Administration (EBSA) and the Department of the Treasury had asked for participants to discuss the following points (see “DoL and Treasury to Hold Hearing on Lifetime Income Options“): 

  • participant concerns affecting the choice of lifetime income relative to other options;  
  • information to help participants make choices on the management and spend down of retirement benefits;  
  • disclosure of account balances as monthly income streams;  
  • the fiduciary safe harbor for selection of lifetime income issuers or products;  
  • alternative designs of in-plan and distribution lifetime income options 

Of these five points, many of the speakers focused on the fourth–fiduciary liability.  Several speakers said that because of fiduciary liability concerns, plan sponsors were reluctant to offer lifetime income/annuity options.  

Sheldon Smith, President of the American Society of Pension Professionals and Actuaries (ASPPA), said:  “Our membership generally believes that a primary hindrance to the availability of lifetime income options in defined contribution plans results from the prospect of fiduciary liability attendant to selection and monitoring of lifetime income options. Notwithstanding the existing fiduciary safe harbor for selection of annuity products, it appears that the safe harbor is rarely used. It is the exception when an annuity is the form of distribution from a defined contribution plan. In fact, very few defined contribution plans offer this distribution option, and in the few that do, participants rarely select it….Currently, the safest path for plan sponsors to follow is to avoid consideration of lifetime income options and, by design, force participants to take a lump sum distribution.”   

Allison Klausner echoed this sentiment when she testified on behalf of The ERISA Industry Committee (ERIC).  Not only did ERIC urge EBSA and the Treasury to enhance the fiduciary “safe harbor” policy, but to also “embark on an educational initiative to help employees and retirees understand the potential benefits and risks of investing in annuity contracts.” She noted that most participants choose lump-sum distributions rather than annuities or installments, subjecting themselves to the risk of overspending or outliving their retirement savings. 



"Without a doubt, a growing body of research suggests that employees (our future retirees) would be well advised to address these risks by including one or more annuity contracts in their investment portfolio. The mismatch between the academic research and employee behavior may be attributable to employees' lack of information and understanding. Many employees don't understand what annuities are, how they might be helpful, or what they are paying for in choosing an annuity," Klausner said.

As for the alternative designs of in-plan solutions for lifetime income, David Wray, President of the Profit Sharing/401(k) Council of American said:  “In general, because participant interest is so low, defined contribution plan sponsors increasingly see no reason to accept the additional fiduciary exposure that comes with an in-plan annuity option. As a result, the availability of annuity options in employer sponsored defined contribution plans has been declining. In the Profit Sharing/401k Council of America’s survey of 2009 plan year experience, 19% of plans offered an annuity distribution option. This is down from 23% in 2005 and 34% in 2000.”  

As for the government’s role in increasing the popularity of annuitized disbursement in retirement, Wray summed it up, saying: “Confidence in our financial institutions has recently been dealt a significant blow. Annuities by their nature depend upon the ability of institutions to exchange dollars today for payments over decades. Unless plan sponsors and participants are confident that those selling an annuity today will be able to deliver the promised benefits tomorrow, they will be reluctant to annuitize plan assets. It is critical that the government continue to take whatever steps are necessary to rebuild and then maintain the confidence of working Americans in our financial institutions.” 

Online, the DoL has made available copies of the witnesses’ requests to testify ( ) and testimony outlines (