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Employee Benefits Security Administration

Report Of The Working Group On Retirement Distributions & Options

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November 2005

This report was produced by the Advisory Council on Employee Welfare and Pension Benefit Plans, which was created by ERISA to provide advice to the Secretary of Labor. The contents of this report do not necessarily represent the position of the Department of Labor.

The Working Group on Retirement Distributions & Options(1) undertook three issues for study, all of them related to participant retirement. The balance of this report will address the scope of the Working Group, the questions for witnesses, dates of testimony and list of witnesses, current environment for the scope of inquiry, consensus recommendations to the Secretary of Labor and summary of testimony from the witnesses.

Advisory Council Working Group Members

  • Chris Rouse, Chair, Windham Brannon, PC

  • Richard D. Landsberg, Vice Chair, Nationwide Financial Services

  • C. Mark Bongard, Ashland Inc. 

  • Charles J. Clark, Aon Consulting

  • Lynn L. Franzoi, Fox Entertainment Group

  • Kathryn J. Kennedy, The John Marshall Law School

  • Mary B. Maguire, Davis Consulting

  • James D. McCool, Schwab Corporate Services

  • Thomas C. Nyhan, Central States Funds 

  • Willow J. Prall, DeCarlo & Connor

  • R. Todd Gardenhire, ex officio, Smith Barney

  • Sherrie E. Grabot, ex officio, GuidedChoice, Inc.

Scope of Inquiry by the Working Group

This Working Group made inquiry into the nature of the distribution options available to participants of defined contribution qualified retirement plans, and the sufficiency of the communication of the options to retiring or terminating participants. The scope of the inquiry was to discern the functional utility of existing plan distribution options, and to determine if existing choices effectively allow participants to “manage” income from retirement plans by efficiently “spending down” retirement assets without outliving those assets. The goal of the study was to assess and recommend to the DOL those plan distribution options that allow plan participants broad choices to facilitate managing their retirement income in a manner consistent with personal objectives. The desired results of the study were to determine whether:

  1. Retirement and distribution options are effectively communicated to retiring and withdrawing participants to facilitate individual management of their retirement plan asset.

  2. Life only, joint and survivor and period certain annuities should be mandatory options offered in defined contribution qualified retirement plans in addition to existing options such as lump sum distributions and other forms of account balance liquidation.

  3. Phased retirement should be an option for plan participants. What are the tax, funding and ERISA issues of “phased retirement?” Do these issues raise impediments to plans design that can/cannot be overcome?

Executive Summary of Findings and Recommendations

The Working Group consensus was that retirement and distribution options are effectively communicated to retiring and withdrawing participants. However, an “information gap” exists between the participants receiving qualified plan distributions and plan sponsors. Most information communication with defined contribution plan participants is focused on asset accumulation rather than asset decumulation. To facilitate communication of decumulation information, the Working Group recommends that regulatory relief and clarity be afforded in follow-up pronouncements to Interpretive Bulletin 96-1 specific to retirement income planning.

We heard testimony that, when offered, plan participants rarely select annuities are not often selected as a distribution option, and that obtaining an annuity with retirement plan assets can be readily handled by rolling over plan assets into an IRA. Therefore, the Working Group does not believe that life only, joint and survivor and period certain annuities should be mandatory options offered in defined contribution qualified retirement plans. However, we also heard testimony about an increase in retirements as the baby boomers retire, and about the projected growth in the size of retiring participant 401(k) accounts as the time 401(k)s have been funded increases. This testimony led us to believe that an annuity option in 401(k) plans could have many benefits to retirees, particularly when coupled with our recommendation regarding education when approaching retirement. But, we also heard testimony that regulatory relief from the outcome based standard of IB 95-1 (“safest available”) to a process-based approach to selecting annuity offerings is needed to help alleviate some sponsors’ concerns about fiduciary liability related to offering annuity options in a DC plan. We also heard that providing for acceptance of electronic signatures could reduce plan administrative costs and other burdens. To facilitate the availability of annuity options in defined contribution plans, particularly 401(k) plans, we recommend that the DOL revise IB 95-1 to clarify sponsor fiduciary responsibilities and provide for a process driven approach to plan annuity selection. We further recommend that the DOL provide regulatory relief that facilitates the use of electronic signatures for handling plan distributions.

The regulations currently in place enable defined contribution plan sponsors to design their plans so those who desire to drawn down their plan asset while an employee can do so without onerous consequences. Because most plans provide for withdrawal after age 59½, we do not recommend any changes in this area.

Testimony of Witnesses

The scope of inquiry for the Working Group and the attendant questions were given to all of the witnesses in advance of testimony. The witnesses were told that the questions were merely a starting point to generate thought and discussion of the scope of the Working Group. The questions were not intended to limit the parameters of testimony.

Questions for Witnesses

  1. What are the plan distribution options available to defined contribution arrangements?”

  2. What are the most prevalent distribution options found in defined contribution plan design?

  3. How and when are the retirement/termination plan asset withdrawal options communicated to the participants?

  4. What financial advice is provided to retiring/withdrawing participants regarding effective use of their defined contribution plan asset.

  5. Why do you think a defined contribution plan sponsor might delete or avoid annuity distribution options?

  6. What is the effectiveness in meeting retirement income needs to life expectancy from existing defined contribution distribution options?

  7. Do retirement distribution options available from IRAs into which qualified plan distributions may be rolled over provide sufficient variety to effectively provide options beyond what might be available in a particular qualified defined contribution plan?

  8. Can individual commercial annuities be utilized to completely transfer longevity risk from the plan sponsor and plan participant?

  9. Do group annuities exist with group annuity pricing for the purpose of transferring longevity risk from plan sponsor and plan participant?

  10. Would annuities offered as an option through a qualified retirement plan require unisex pricing? Would COLAs be available on such annuities, not unlike COLA provisions in defined benefit plan income streams?

  11. What is the effectiveness in meeting retirement income needs to life expectancy from commercial annuities? Do immediate annuities have COLAs to hedge inflation risk?

  12. Are there benefits from an expense and investment perspective to having periodic distributions made from an account either in a defined contribution plan or in an IRA over a stated period (which could be defined as the life expectancy of the participant) without utilization of an annuity contract?

  13. What is the concept of phased retirement?

  14. What are the primary barriers (legislative, legal or cultural) to phased retirement in the United States today? What are the corporate incentives for corporations to have phased retirement?

  15. What are the administrative challenges to existing qualified retirement plans from the implementation of a phased retirement program?

  16. Does existing literature show that workers will delay retirement where a phased retirement program is in place? Does existing literature show that workers will have a better retirement income from a phased retirement company sponsor?

  17. What are the demographic and industry characteristics of phased retirement companies?

The Working Group solicited testimony on these questions of witnesses from a broad cross-section of the qualified retirement plan industry. The witnesses and the dates of their testimony were as follows:

July 8, 2005

  • David Wray, President, Profit Sharing/401(k) Council of America

  • Kelli Hueler, President, Hueler Companies

  • Jerry Bramlett, President, The 401(k) Company

  • Kent Buckles, President, Invesmart

  • Catherine Wilbert, Assistant General Counsel, Northwestern Mutual Life Insurance Company, representing American Council of Life Insurers

  • Kenneth Kent, Consultant, Cheiron U.S., representing the American Academy of Actuaries

September 22, 2005

  • Dana Muir, Professor, Ross School of Business, University of Michigan

  • Stacy Schaus, Practice Leader – Personal Financial Services, Hewitt Associates

  • Keith Hylind, Vice President, Metropolitan Life Insurance

  • Trisha Brambley, President, Resources for Retirement, Inc.

  • John Kimpel, Senior Vice President & Deputy General Counsel, Fidelity Investments

  • Cindy Hounsell, Executive Director, Women’s Institute for a Secure Retirement (“WISER”)

Current Environment for the Scope of Inquiry

Qualified retirement plans have always operated in an environment of economic turmoil and change. Business cycles have long been part of the pension-planning environment. Nevertheless, as several witnesses testified, many retirement plan participants are shifting their focus from accumulation of assets to the distribution of plan assets.(2Part of the reason is changing demographics, primarily the baby boomer age group approaching retirement, and part is due to the growth of participant’s defined contribution plan asset and the increasing amount of retirement assets under employee control.(3)

In the 21st century, demographics will increasingly interact with economics. Slowly, the definition of retirement is changing, as people build phased retirement programs and even move into new careers after “retiring” from another.(4)

One measure of success of a defined contribution plan (“DC plan”) is the plan’s ability to deliver enough money to ensure that participants can afford to retire.(5Yet many plan sponsors do not focus communications on this outcome, instead emphasizing communications to participants that educate them to opportunities to save more, diversify their investment portfolios and other accumulation topics.(6Typically, employers don’t investigate individual participant account balances and savings rates, and more importantly for our Working Group’s topic, nor do they project participant account balances to retirement and offer decumulation education. As a result of the trend in plan design toward participant directed defined contribution plans, participants in defined contribution plans have taken on more and more investment risk during the accumulation phase, and more longevity and inflation risk during the decumulation phase.

In the future, the focus of the management of an income stream is expected to result in greater attention to the retirement phase, which focus dictated the nature and scope of the inquiry by the Working Group. Testimony indicated that many DC plan distributions tend to be paid out in lump sums even when other alternatives are present. Necessarily, the implications of investment variability become paramount. In contrast to the life annuity payout form of defined benefit plans, lump sums expose retirees to a wide range of risks including the possibility of outliving assets, investment losses, and inflation risk.

There is little evidence in the testimony to suggest that plan sponsors who currently do not offer an annuity option are interested in adding one (either voluntarily or by Government mandate). The most common reasons given for lack of interest in adding annuities as an optional form of benefit include perceived non-use by participants, impression that annuities are too complicated, and fiduciary concerns, such as selecting an annuity provider for retiring participants. In fact, testimony was heard that in some plans existing annuity options were replaced by lump sum alternatives as a result of the revised anti-cutback rules. Little clamor was raised by the industry as a result of losing annuities as a benefit distribution option. Several witnesses conceded that the burden of paperwork on plan sponsors and administrators for a benefit distribution annuity option makes the favorability of such an option unlikely. For instance the consent forms, notarization, explanations in SPDs etc. all complicate the use of annuities as an option with paperwork that doesn’t accompany other distribution options (i.e. “lump sum”).

Employees nearing retirement often turn to their employer for retirement income planning advice. Given this preference, about 33 percent of employers offer investment advice to DC plan participants about retirement income planning. Testimony indicated that confusion exists over the difference between education, advice and guidance. Where does help end and liability start?

Consensus of Recommendations

Retirement Income Planning Options

The Working Group believes that retirement and distribution options are communicated adequately to retiring and withdrawing participants. However, the Working Group believes that there is an “information gap” that exists between the communication of options and the understanding of the ramifications of the various distribution options to an individual plan participant. This lack of understanding appears to exist in participants that are not close to retirement, to those approaching retirement, and to participants already in the process of receiving qualified plan distributions. Specifically, the Working Group finds that:

  • Plan participants are not afforded decision making tools that effectively facilitate individual management of retirement plan assets. Focus heretofore has been on accumulation of participant plan assets and not on the management of an income stream in retirement.

  • Guidance is needed for the decumulation phase of retirement income management that is akin to the accumulation phase. Specifically, safe harbor guidance should be afforded for retirement income planning just as it was afforded to plan asset accumulation in IB 96-1.

The Working Group believes that neither the DOL nor employers need provide any new brochures, worksheets, or pamphlets etc. for participants. Instead, the Working Group suggests that regulatory relief and clarity be afforded in follow-up pronouncements to Interpretive Bulletin 96-1 pertaining to retirement income planning. The Working Group believes that the recommendations for clarity and relief are applicable not only to single-employer plans, but also to multi-employer plans.

The Working Group learned that employees nearing retirement often turn to their employer for retirement planning advice. Figures show that anywhere from 55% to 66% of individuals approaching retirement use their employer for planning guidance. However, there was testimony that only approximately 40% of plan sponsors offer guidance to employees nearing retirement.

In providing context to the findings of the Working Group, a review of 96-1 is in order. In Interpretive Bulletin 96-1, the DOL pointed out that information and materials described in the four graduated safe harbors detailed within the bulletin merely represented examples of the type of information and materials that may be furnished to participants without such information and materials constituting “investment advice” for purposes of the definition of “fiduciary” under ERISA Sec. 3(21)(A)(ii).

The first of the safe harbors under 96-1 states that providing information and materials that inform a participant or beneficiary about the benefits of plan participation, the benefits of increasing plan contributions, the impact of pre-retirement withdrawals on retirement income, the terms of the plan, or the operation of the plan that are made without reference to the appropriateness of any individual investment option for a participant or beneficiary will not be considered the rendering of investment advice.

The second safe harbor of 96-1 states that general financial and investment concepts such as risk and return, diversification, dollar cost averaging, compounded return and tax deferred investing, historical rates of return between asset classes based on standard market indices, effects of inflation, estimating future retirement needs, determining investment time horizons, risk tolerance, provided that the information has no direct relationship to investment alternatives available under the plan.

The third safe harbor of 96-1 allows asset allocation information to be made available to all participants and beneficiaries - providing participants with models of asset allocation portfolios of hypothetical individuals with different time horizons and risk profiles. These models must be based on accepted investment theories and all material facts and assumptions on which the models are based must be specified, and disclosures are mandated.

The fourth safe harbor of 96-1 allows interactive investment materials such as questionnaires, worksheets, software and similar materials that provide participants a means of estimating future retirement income needs, provided that requirements similar to those for asset allocation (above) are met.

The “safe harbors” are accumulation tools. Safe harbor treatment applies regardless of who provides the information, how often it is shared, the form in which it is provided (e.g. writing, software, video or in a group or one-on-one) or whether an identified category of information and materials is furnished alone or in combination with other identified categories of information and materials.

Further, in IB 96-1, the DOL stated that there may be many other examples of information, materials and education services which, if furnished to participants would not constitute the provision of investment advice. Accordingly, the DOL advises no inferences should be drawn from the four graduated safe harbors with respect to whether the furnishing of information, materials or educational services not described therein could constitute the provision of investment advice. The DOL cautions that the determination as to whether the provision of any information, materials or educational services not described in 96-1 constitutes the rendering of investment advice must be made by reference to the criteria of Labor Reg. Sec. 2510.3-21(c)(1). That regulation establishes the criteria for deeming the rendering of investment advice to an employee benefit plan. Specifically, investment advice is rendered where recommendations are provided as to the advisability of investing in particular vehicles and whether the person has indirect or direct discretion to implement such advice.

The Working Group believes that the Department of Labor should provide guidance in the nature of that provided in IB 96-1 in the context of distributions to DC plan participants. Such guidance would identify general standards allowing plan sponsors and other fiduciaries to differentiate between education and advice. This would allow plan fiduciaries to provide useful information to participants and beneficiaries at or around the time they commence benefit distributions without incurring the additional liability that would accompany advice as opposed to education. Such education would provide tools for participants and beneficiaries to make informed decisions regarding accumulated plan wealth that may have to last until death. Among the areas that could be covered in such guidance are:

  • Education on tax consequences of distribution alternatives;

  • Education on typical income needs of retirees for housing, food, dependents and medical expenses and how their plan benefits can serve these needs; and

  • Education on how to allocate assets among investment alternatives post-retirement and the consequences of spending down principal.

Annuities as a Distribution Option

The Working Group does not believe that life only, joint and survivor and period certain annuities should be mandatory options offered in defined contribution qualified retirement plans in addition to existing options such as lump sum distributions and other forms of account balance liquidation. The Working Group believes that the selection of an annuity provider is a fiduciary act and, as such, is subject to ERISA’s fiduciary requirements of loyalty and prudence. The Working Group also believes that the Department is correct, including in the context of a defined contribution plan, that cost can never justify the selection of an unsafe annuity provider. The Working Group believes that action should be taken by the Department to clarify and expand upon the issues presented in Interpretive Bulletin 95-1. The Working Group contends that the DOL should neither impede nor restrict the use of benefit distribution annuities for retirement income streams by participants. The Working Group believes that further action is required for plan sponsors to rely on 95-1 rather than continue to interpret 95-1. The Working Group believes that further clarification and expansion of IB 95-1 is important not only from a defined contribution context but also in a broader context of the purchase of terminal funding annuities in a defined benefit plan context. Finally and probably most important – the Working Group believes that the proper standard for “safest available” is one that focuses on the fiduciary’s conduct and here the required conduct would be for the fiduciaries to keep the interests of beneficiaries foremost in their minds, taking all steps necessary to prevent conflicting interests from entering into the decision-making process.

The actual requirement of IB 95-1 is that a fiduciary duty is discharged where “fiduciaries choosing an annuity provider for the purpose of making a benefit distribution must take steps calculated to obtain the safest annuity available, unless under the circumstances it would be in the interests of participants and beneficiaries to do otherwise.” There are a couple of touchpoints to this fiduciary requirement. First, the Courts have viewed the reference to “steps” to be viewed as a procedural prudence approach though this standard hasn’t been referred to as such. Second, there is recognition in the standard that the safest annuity might not always be the best one.

In 95-1 the Department recognizes that in certain circumstances it may be in the best interest of the participants and beneficiaries to select other than the safest available annuity. To quote from the Bulletin: “Such situations may occur where the safest available annuity is only marginally safer, but disproportionately more expensive than competing annuities, and the participants and beneficiaries are likely to bear a significant portion of that increased cost.” The Bulletin contrasts situations where a fiduciary might choose to purchase other than the safest available annuity in order to “ensure or maximize a reversion of excess assets that will be paid solely to the employer-sponsor in connection with the termination of an over-funded pension plan” and indicates that in those circumstances that choice would breach the fiduciaries’ duty of loyalty.

Finally, 95-1 directs that, even when it is in the interest of the participants and beneficiaries for the fiduciaries to consider the cost of the annuities as one of the selection criteria, no consideration can justify the purchase of an unsafe annuity.

The most direct criticism of the DOL standard came in an opinion by the Fifth Circuit where the court accepted the Department’s characterization of the duty of prudence regarding the nature of the investigation required in the selection of annuity providers (Bussian v. RJR Nabisco Inc., 223 F.3d 286, (5th Cir. 2000).

The court, however, rejected the Department’s characterization of the duty of loyalty requirements. It recited some language that is widespread in duty of loyalty cases; namely that decisions must be “made with an eye single to the interests of the participants and beneficiaries.” Id. at 298.

According to the court the difference between its standard and the Department’s standard is that the Department’s standard “focuses on the quality of the selected annuity.”

The bottom line is that there is ambiguity in the standard that applies to choosing an annuity provider. It is not merely a question as to the meaning of IB 95-1’s “safest available annuity” standard. It is not at all clear that it is even the standard that will be applied by the courts to evaluate a plan sponsor’s choice.

The requirements of prudence do not seem to vary regardless of the type of plan involved (defined contribution or defined benefit), and the requirements of prudence do not seem to be a problem for sponsors to understand and accept. But, the duty of loyalty in a defined benefit plan has to confront the inherent conflict of interest related to purchasing annuities for participants when lower cost is more favorable to plan funding. There is no such obvious moral hazard in the selection of an annuity provider for a defined contribution plan.

The Working Group believes that the selection of an annuity provider for purposes of benefit distribution (whether upon separation from service, retirement or termination of a plan) is a fiduciary decision governed by ERISA. Therefore, in choosing an annuity provider for the purpose of making a benefit distribution, fiduciaries must act solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits to the participants as well as defraying reasonable expenses of administering the plan. It is also the opinion of the Working Group that the language of IB 95-1 as it relates to the “safest available annuity” has resulted in the Bulletin causing concerns of fiduciary liability among sponsors. Specifically, the Working Group believes that 95-1 provides for prudent procedure in the selection of an annuity. However, the “safest available” language has created an outcome based view of 95-1 instead of the prudent methodology at the time of annuity selection. The Working Group believes that the Department of Labor should undertake to clarify the prudent procedures for annuity selection and, if any, the prudent procedures for ongoing monitoring after an annuity purchase.

Phased Retirement

The Working Group did not receive enough testimony to form any opinion or make any recommendations to the Department of Labor regarding “phased retirement.” However, most of the limited testimony pointed out that ERISA rules permitting distribution of plan assets after age 59½ provide opportunities for phased retirement.

Summary of Testimony

Summary of Mr. David Wray, President, Profit Sharing/401(k) Council of America, July 8, 2005

David Wray is the Executive Director of the Profit Sharing Council of America and a former chair of the ERISA Advisory Council. Mr. Wray stated that 55.3% of the respondents to his trade organization’s 2003 Annual Survey provide special education programs to help retiring employees determine how to manage defined contribution plan accumulations. This “education” manifests itself as either one on one consultation with financial planners, software modeling programs or pre-retirement counseling seminars. Mr. Wray stated that plan sponsors and financial service companies are being driven by the marketplace to provide communications, education and advice solutions. He stated that there is a commitment by employers to successful defined contribution outcomes, but asked if there is any “measurement” of post-retirement education, Mr. Wray stated that he didn’t have a good sense of what is happening in the “lump-sum-rollover-IRA world.” Mr. Wray stated that the defined contribution marketplace to this point in time has been a marketplace focused on accumulation of assets but that as the baby boomers move into retirement there will be a focus shift from accumulation to management of distributions. Mr. Wray stated that it would be up to the Council to “determine how to measure success.”

To the issue of making commercial annuities optional in defined contribution plans, Mr. Wray believes that a commercial annuity optional form of income stream could harm the defined contribution system. He believes that the government requires compelling reasons for mandating the annuity option, and that such compelling reasons do not exist at this time. Mr. Wray stated that the case for IRA rollovers that end up purchasing annuities is inconclusive. Mr. Wray favors rollovers to IRAs while keeping the annuitization of the balance or a portion of the balance at some point in the future a.k.a. “post-employment.” Mr. Wray also stated that there is no evidence that participants who choose not to purchase annuities through a defined contribution plan end up running out of money or harm themselves during their retirement years. Mr. Wray maintains that mandating annuity options would stifle innovation. Mr. Wray cited an innovative annuity design from an insurance carrier that provides attention to risk tolerance, a guaranteed income stream and period of time to fund the annuity. Such annuities don’t currently exist for most plan options. Mr. Wray’s point is that government intervention by statute, regulation or guidance/opinion will burden plan sponsors with additional compliance measures.

There wasn’t any substantive discussion pertaining to phased retirement, although the PSCA Annual Survey cited by Mr. Wray disclosed that 75% of sponsors allow withdrawals at age 59½ while the participant continues working.

Summary of Ms. Kelli Hueler, President, Hueler Companies, July 8, 2005

Ms. Hueler’s firm, The Hueler Companies, has an educational tool that plan sponsors can offer retirees and beneficiaries who wish to purchase annuities at competitive and transparent prices. Clarification by the Department of Labor of its Interpretative Bulletin 95-1 would allay plan sponsors’ concerns in using such educational tool.

The mission of Hueler Companies is to empower retirees via an educational tool made available through the plan sponsor that can be used by the retiree to purchase annuities for retirement purposes. Ms. Hueler realized that many defined contribution plans do not offer annuities and yet retirees need to be protected against the investment and mortality risks inherent in a lump sum amount. She has nine insurers working together to provide institutional pricing (which results in a 4 – 9% difference in the quote of an individual annuity, if it even is available) and an “apple to apple” comparison of annuities. Due to DOL’s Interpretive Bulletin 95-1, which requires employers who offer a selection of annuity providers to provide the “safest available” annuity, employers have been hesitant to recommend annuity providers to retirees. The DOL’s Interpretative Bulletin provides an outcome based determination for employer liability purposes, in contrast with ERISA’s normal fiduciary determination which is process driven.

To resolve the employer liability concerns, the Hueler Companies’ recommendation is for the plan to offer a lump sum rollover option, but then provide retirees with the educational tool they will need to decide whether and how to annuitize. The disadvantage of the current system is twofold: if the defined contribution plan offers annuities, it is a decision made at retirement which fixes the retiree into a single type of annuity; and if the defined contribution plan doesn’t offer annuities, the individual annuity market is costly and does not afford the retiree with an “apple to apple” comparison of the variety of annuity quotes, making selection difficult.

As a result, Hueler Inc. has an educational tool with nine insurers who have agreed to offer competitive annuity quotes at group rates over the retiree’s retirement – hence, it would no longer be an irrevocable decision at retirement and part of the retiree’s lump sum amount could be annuitized over a variety of different terms. Also the insurers agreed to provide quotes on an “apple to apple” comparison, affording retirees with an accurate decision as to the relative costs. The end result was to have the retiree select the provider and purchase the annuity with part or all of his/her lump sum rollover. This provides the best of both worlds – the employer is not selecting the provider and thus doesn’t have fiduciary exposure and the retiree does not have to decide at the time of retirement to annuitize all of his/her benefits. In fact, Ms. Hueler’s experience is that retirees take three to four years after retirement before deciding whether to annuitize part or all of their rollover proceeds.

The Advisory Council asked Ms. Hueler whether clarification of the DOL’s Interpretative Bulletin 95-1 would be helpful in promoting tools such as the one Hueler Inc. has developed. “Absolutely”, was the response. The market place is able to develop effective educational tools for retirees to protect themselves from the investment and mortality risks inherent with a lump sum amount. Obviously using the employer as the intermediary for the dissemination of such tools is cost productive; however, any legal impediment imposed on employers providing for such dissemination will limit the growth of such tools. Hence, the DOL clarification as to the employer’s liability would be extremely helpful.

Summary of Mr. Jerry Bramlett, President, The 401k) Company, July 8, 2005

Jerry Bramlett is the President and CEO of The 401(k) Company, a third-party administrator that serves the small to mid-size plan market. Mr.Bramlett began his testimony by stating that from a visceral experience with plan participants, investment education has failed. Mr. Bramlett said that the risk management process for “in-retirement” management of a defined contribution account asset must balance and address 4 different risks – longevity risk, market risk, draw-down risk and inflation risk. Mr. Bramlett believes that investment education has failed because it is a “process” and not a “product.” He believes that success for participant directed investment management hinges upon simplified and automated approaches.

In order to provide simplified and automated approaches, Mr. Bramlett believes individual advice is not a viable option because of the uncertainty, subjectivity and unpredictability of the process. Consequently, he believes that software is the better answer as a tool for participant directed account balance management. Mr. Bramlett also believes that commercial annuity options create certainty, are objective, and mitigate the four risks of longevity, market, draw down and inflation. Annuities are predictable. The reason Mr. Bramlett favors software asset allocation solutions and annuities is because the experience of his company shows that plan participants respond to product solutions better than process solutions.

While Mr. Bramlett focused on the product v. process for a great deal of his testimony, he did speak to the public policy issues. Mr. Bramlett spoke to the possibility of tax incentives (exclusion from income) for annuitization. He believes tax incentives create interest and demand. He also stated that fiduciary relief for the annuity option in a defined contribution plan is a necessity to reduce “pension leakage.”

Summary of Mr. Kent Buckles, President, Invesmart, July 8, 2005

Mr. Kent Buckles is the President and CEO of Invesmart, Inc. a national full-service qualified retirement plan recordkeeper and investment advisor. Invesmart has approximately 3,600 clients, 300,000 participants in those clients and approximately $10 billion assets under management. Approximately 60 percent of Invesmart’s clients are defined contribution plans.

Mr. Buckles noted the shift from defined benefit plans to defined contribution plans. In his opinion, participants perceive defined contribution plans differently from defined benefit plans. Participants view defined benefit plans as arrangements producing a stream of income at retirement. Participants view defined contribution plans as savings vehicles whose assets can be tapped before retirement. He said that part of the selling point of defined contribution 401(k) plans is that a participant’s savings can be used before retirement. Many of these plans have provisions for plan loans, hardship distributions and in-service distributions at and after age 59½. He believes it would be unfair to change the rules to restrict distributions to retirement. Such a restriction would be contrary to the expectations of participants who are now contributing to these plans and it would discourage the entry of new participants.

Mr. Buckles also said that more than 50 percent of the participants among his clientele are very uncomfortable with making investment decisions. They are unwilling to commit time to learning about investing their plan accounts. He concludes that investment education has failed. Self-help investment tools are only used by about 5 percent of participants. Participants want someone to tell them how to investment their plan assets. He said that 60 percent of participants would let someone else manage their investments when that option is available.

On the question of annuity distribution options in defined contribution plans, he reiterated that there is not a demand from plan sponsors or from participants for such options. He said that very few of his clients want annuity distribution options. Mr. Buckles contends that the current options available under defined contribution plans are effectively communicated because they are mostly lump sums or installments. Mr. Buckles does not think that investment advice can be a “product” or “commoditized.” He stated that no education is effective when provided on/by forms. Participants also lack an understanding of annuities. Mr. Buckles noted that annuities are a tough sell in the present low interest rate environment.

Small distributions – those under $10,000 – are usually cashed out. This is generally attributable to the turnover of younger workers in a mobile workforce. Additionally, participants who move to a new employer may not trust their former employer with the stewardship of their savings plan accounts. Larger account balances are more likely to be rolled over.

In response to a question, Mr. Buckles said that he did not have data on whether the employees of today’s more mobile workforce have 401(k) accounts with their former employers.

Mr. Buckles said that although this working group is studying defined contribution plan distributions the most important issue is still the accumulation of savings. He said there are about 65 million employees in the small market (less than or equal to 500 employees). Only 15 million of these employees have access to 401(k) plans. Therefore, more employers need to sponsor plans. Additional new regulatory requirements would hinder the creation of new plans, which would be a detriment to the need to have more employees in the small market have access to plans.

Mr. Buckles answered the questions the working group sent to him before his testimony as follows:

  • Are retirement and distribution options of defined contribution plans effectively communicated? He said they are effectively communicated. Nonetheless, even when a plan offers a simple set of distribution options they can result in lengthy paper explanations and election forms.

  • Should annuities be a mandatory form of distribution option in defined contribution plans? He said that there should not be mandated distribution options. Mandates would cause employers to be reluctant to start or continue sponsoring plans.

  • Are there adequate phased retirement options in defined contribution plans? He said there are adequate options under the present in-service distribution options allowed under law.

He had several additional suggestions beyond the questions posed by the working group.

He said that there is a need to encourage the development of programs to assist retirees to manage their account balances in retirement. A level playing field among different providers should be maintained so that one type of investment is not preferred over another.

He also said that cash outs should be discouraged. He noted that this might be hard to actually accomplish although he offered a suggestion that rollovers could be required before allowing a cashout.

He again noted the importance of accumulating retirement savings. He responded to a question on whether the Department of Labor should mandate the availability of lifecycle funds as investments by saying that a mandate should not be made. He would endorse a non-binding recommendation for the inclusion of such investment options.

In response to other questions, he said that he cannot generalize on the extent of a paternalistic attitude among plan sponsors in the small employer market. He also estimated that about 10% of separations among his clientele are due to retirement. He thinks that percentage is likely to increase as the baby boomers begin to retire, but he could not opine as to how much that percentage might increase.

Summary of Ms. Catherine Wilbert, Assistant General Counsel, Northwestern Mutual Life Insurance Company, representing American Council of Life Insurers, July 8, 2005

Catherine Wilbert is Assistant General Counsel & Assistant Secretary of the Northwestern Mutual Life Insurance Company. Ms. Wilbert has over 15 years experience advising on qualified retirement plans from a sales, service and compliance perspective.

Ms. Wilbert’s testimony spoke initially to the fact that defined contribution plans have more than doubled while defined benefit plan have been reduced by 66% in the 20 year period from 1980 to 2000. The Financial Research Corporation has estimated that rollovers from mutual funds held inside plans will double to $400 trillion by 2010. Most of the rollover accounts will require the individuals to manage the money themselves over their lifetime. Americans are also living longer, making longevity risk, market risk, and draw-down risk of a lump sum distribution very significant risks to individual retirees. EBRI research shows that 15 percent of the 64-74-year old cohort had lost 50 percent or more of their total wealth from 1992 to 2002, and about had 30 percent had lost 50 percent or more of their financial wealth. Wilbert pointed out that this means less money to sustain an increasing life expectancy

Wilbert suggested that for participants to hedge this type of catastrophic investment loss and to prohibit pension leakage, immediate lifetime annuities should be an optional form of benefit from defined contribution plans. She doesn’t think that plans should be mandated to require annuitization (fully or partially). Wilbert maintains that mandating the annuity option would increase plan costs. Making annuities an optional benefit is a viable alternative provided that regulatory relief from the “safest available” standard in DOL IB 95-1 is clarified or modified. Ms. Wilbert also points out that annuity pricing is done in qualified plans on a gender neutral basis.

Ms. Wilbert clarified that annuities were removed from defined contribution plans when the Sec. 411(d)(6) anti-cutback rules were modified, i.e. the elimination of an annuity option was available if the defined contribution plan provided a lump sum option.

Wilbert sees the same need for clarification to take place with regard to the “distribution phase” that is the heart and soul of whether retirement distribution communications are effective. She would like the DOL to expand on IB 96-1 as it relates to the delineation of investment education, and advice. While 96-1 was geared to the “accumulation phase” of retirement planning she would like to see it expanded and applied to the “distribution phase” as well. For instance she supports an “annuity calculator” that converts a lump sum to a monthly benefit as an educational tool.

She was the only witness to provide footnoted evidence of her factual claims.

Summary of Kenneth Kent, Consultant, Cheiron U.S., representing the American Academy of Actuaries, July 8, 2005

Kenneth Kent is the Vice President of the Pension Practice Council of the American Academy of Actuaries. Mr. Kent started his testimony by providing the perspective from which an actuary would view the inquiry of the Working Group. Specifically, Mr. Kent stated that actuaries are concerned with financial risks and typically deal with such risks through the concept of pooling. Mr. Kent stated that in retirement there are two risks – investment and longevity. Mr. Kent contends that the actuarial profession’s concern about retirement distributions is in the incentives that drive economic choice. He maintains that such incentives should be level and fair between alternatives. Mr. Kent spoke to the issue of the shift from defined benefit to defined contribution plans over the last 20 years.

Mr. Kent contends that the risk of living off a lump sum means that most Americans will feel obligated to continue to save during retirement or overestimate their investment ability or underestimate their longevity. Mr. Kent believes that today the opportunities to protect plan participants from either outcome is not inexpensive. To address the financial security of retirees, pooling of risk becomes important in terms of cost management and distribution options should focus on pooling. In the end, Mr. Kent stated that the incentives to remove participants from risk pooling and manage money on their own will unequivocally increase society’s costs. Mr. Kent maintains that incentives, if provided, should be for all annuity income provided by the employer sponsored plans as well as though individual annuitization. He believes that annuitization meets a fundamental societal need in securing retirement for the elderly. In the final analysis, Mr. Kent believes that a lower-risk model is needed and the crux of achieving such a goal is the cost of securing longevity and investment risk. Investment education can only go so far. Likewise, not everyone is going to be risk averse and want annuities.

Summary of Ms. Dana Muir, Professor, Ross School of Business, University of Michigan, September 22, 2005

Professor Dana Muir is a faculty member of the Stephen M. Ross School of Business at the University of Michigan. Her research interests are employment law, especially health care plans and pension benefits; plan investment issues; and securities law. In 2002, she was cited by the Supreme Court for her research in important decisions on ERISA rules. Professor Muir is a former member of the ERISA Advisory Council.

One of the questions facing this Working Group is whether certain annuity options should be mandatory under defined contributions plans. The DOL’s Interpretative Bulletin 95-1 (referred to as IB 95-1) has put a chilling effect on the selection of annuity providers by plan sponsors. This is a result of the DOL’s interpretation of the plan sponsor’s (who is a plan fiduciary) duty of loyalty.

In March of 1995, the DOL issued IB 95-1 in which it stated specific fiduciary duties applied to a defined benefit plan sponsor in selecting annuity insurers for payment of benefits to ERISA plan participants and beneficiaries. There was a historic reason for this bulletin. During the 1980s, there were more than 1,600 terminations of surplus defined benefit plans resulting in reversions of $1 million or more, affecting approximately 1.8 million employees. Some plan sponsors purchased annuities from risky companies, resulting in higher reversions for the sponsor. The insurers later went into conservatorship and the participants sued.

In announcing the basic fiduciary standards for plan sponsors in purchasing annuities for participants under a defined benefit plan in IB 95-1, the DOL enunciated two basic standards:

  • The fiduciary duty of loyalty which required the fiduciary to “take steps calculated to obtain the safest annuity available, unless under the circumstances it would be in the interests of the participants and beneficiaries to do otherwise” and

  • The fiduciary duty of prudence which required an “objective, thorough and analytical search for the purpose of identifying and selecting providers from which to purchase annuities.” The IB then lists six specific factors to consider in such an evaluation.

Professor Muir analyzed the DOL’s interpretation of the duty of loyalty in IB 95-1:

  1. The language does not state that the plan sponsor must choose the safest annuity; rather it says it has to take steps in an attempt to choose the safest annuity.

  2. The standard has an “unless” clause to recognize that there are situations in which it may not be right to choose the safest annuity. This is in recognition of the statutory standard that the fiduciary’s duty of loyalty requires it to act in the best interests of participants and beneficiaries. For example, there may be situations when the safest available annuity is only marginally safer but disproportionately more expensive than competing annuities and the participants and beneficiaries are likely to bear a significant portion of the cost.

  3. This is an interpretation of a fiduciary’s duty of loyalty.

Professor Muir compared the DOL’s interpretation of the duty of loyalty with the duty of prudence. The latter duty is process driven – i.e., the plan sponsor is to conduct an objective, thorough and analytical search for the purpose of identifying and selecting annuity providers. Unfortunately, plan sponsors have interpreted the first duty – the duty of loyalty – to require the purchase of the best available annuity, even though that language is not contained in IB 95-1. Such an interpretation is outcome determinative and therefore extremely difficult to satisfy. As a result, plan sponsors of defined contribution plans would be reluctant to provide annuities and to select the annuity provider if they were not required to do so.

No court has adopted the DOL’s first fiduciary duty of loyalty standard. Courts have rejected and either adopted a new standard or did not state a standard. The most direct criticism of the DOL standard is found in the Fifth Circuit opinion, in Bussian v. RJR Nabisco Inc., 223 F.3d 286, 300 (5th Cir. 2000). The DOL filed an amicus brief in that case and the court accepted the DOL’s interpretation of the prudence standard. In interpreting the fiduciary’s duty of loyalty, the court held that the fiduciary’s decision would be judged “with an eye single to the interests of the participants and beneficiaries.” If the fiduciary kept its focus on the interests of participants and beneficiaries foremost in its minds, taking all steps necessary to prevent conflict interests from entering into the decision-making process, it would satisfy the duty of loyalty. Such a standard focused on the conduct of the fiduciary, not the outcome of the decision.

The Fifth Circuit criticized the DOL “safest annuity standard” as it was not defined. In addition, the characteristics of the annuity that are supposed to be judged by this standard were not defined. For example, one annuity provider may be safer if you look to its investments, whereas another may be safer if you look to its history. The Fourth Circuit has also rejected the DOL’s interpretation of the duty of loyalty but did not set forth another standard.

Professor Muir recommended that the Working Group use this occasion to recommend to the DOL to reconsider its position in IB 95-1. She outlined three different choices:

  1. Keep the current interpretation, but clarify on what safest means and provide some guidance to plan sponsors to decide what is safest.

  2. Keep with the standard, but concentrate on the process aspect of selecting the annuity provider; emphasis on the steps to determine the safest, not the outcome of who is the safest.

  3. Recommend the alternate standard posed by the Fifth Circuit.

Under the third choice, Professor Muir further explained the Fifth Circuit’s standard. The fiduciary’s duty of loyalty derives from trust law – an obligation to put the interests of the participants and beneficiaries first, before that of the fiduciary, and then let the outcome be what it is. If the fiduciary is operating under a conflict of interest, it should minimize its effect. In the defined contribution context, selection of the annuity provider has no obvious moral hazard, as it could in the defined benefit context (i.e., reversion of surplus assets to the sponsor). Hence, the duty of loyalty could be judged differently in the defined contribution context than in the defined benefit context.

While the conflict of interest can be minimized in the annuity selection context, Professor Muir contrasted the conflict of interest in the claims adjudication context (an issue that another Working Group is considering). In the claims adjudication context, where the insurance company both pays the benefits and makes the decision on benefit eligibility, the insurer has a very strong incentive in inappropriately deny claims. The lack of remedies for injured participants and beneficiaries insulates the insurer from any real financial risk that results from this conflict of interest. That just simply is not the case in the annuity selection decision by a defined contribution sponsor. Therefore what would be required by the fiduciary operating under a conflict of interest in a claims adjudication context would be different than what would be required in the annuity selection decision.

As an aside, Professor Muir remarked that plan sponsors were not too concerned about annuity products simply because their participants were not interested in purchasing them. Thus, the potential fiduciary liability associated with the selection of the annuity provider may not appear to be the problem. In addition, annuities are negatively perceived. If the DOL wishes to encourage sponsors to offer annuities, participants and beneficiaries are going to have to be educated through communication efforts on their value.

Summary of Ms. Stacy Schaus, Practice Leader – Personal Financial Services, Hewitt Associates, September 22, 2005

Ms. Schaus testified that retirement plan distribution options are effectively communicated to plan participants. She highlighted the fact that participants already receive a summary of material features for all forms of optional forms of distribution, and that they may receive distribution guides from employers and seminar booklets as the most common forms of employer communication. Ms. Schaus believes that plan sponsors are providing a great deal of information about plan options, in some cases more than the participant needs to know, but that the participants still need more help with broader financial education that goes beyond plan options. She maintains that most education – even as it applies to distribution options – is focused on the accumulation or portfolio management side of the equation. Ms. Schaus testified that retirement income management can be complex and requiring educated decision-making and should encompass a more “holistic” financial planning approach. Yet, employers, she cited, stop short of providing holistic financial advice because of the fear of overstepping the boundaries set by existing Department of Labor guidance in Interpretive Bulletin 96-1. Specifically, employers are afraid of being classified as fiduciaries and being held accountable for offering investment advice rather than education. She encourages providing more guidelines and encouragement to plan sponsors for offering holistic retirement financial planning guidance and advice. Ms. Schaus’ view is that more employer support should help increase employee understanding of retirement and distribution options and ultimately help improve individual management of retirement plan assets.

As to the issue of commercial annuities being mandatory options in DC plans, Ms. Schaus went on the record with the view that there should not be a mandate for annuities as an optional form of benefit. Ms. Schaus cited lack of interest on the part of participants, competitively priced annuities can be made available outside plans (citing Ms. Hueler’s company as an example of her point) and finally Ms. Schaus reiterated the regulatory stumbling blocks to annuities by reaffirming the positions of Professor Muir. This is not to say that annuitization is bad or an inadequate financial planning technique, Ms. Schaus pointed out. In fact, partial annuitization can be an effective income stream management hedge, she testified. In the end, Ms. Schaus recommended that regulatory burdens currently existing should be lessened or alleviated so that access to annuities can be offered by an employer as a service to employees. She advocated the use of a price-advantaged platform as opposed to a fiduciary selecting a single insurance company as annuity provider.

When it came to phased retirement, Ms. Schaus believed that by removing the impediments for annuitization and providing holistic financial planning for retirement, employees can enhance their phased retirement dreams and needs. In her opinion, defined contribution plans need to allow participants access to their defined contribution assets at age 59½, if they do not already do so. Then the participant phasing into retirement can rollover and annuitize if desired.

Summary of Keith Hylind, Vice President, Metropolitan Life Insurance, September 22, 2005

Mr. Hylind testified that the primary risks that people face in retirement are investment risk, inflation risk and longevity risk. Longevity is the greatest retirement risk retirees face, because it is the only risk that they cannot manage on their own.

He said, market risk can be alleviated somewhat through asset allocation and inflation risk can be addressed by investing a portion of assets in growth equities. Based on studies, American workers will live longer in retirement than any preceding generation. We need to make sure that income lasts as long as we do.

He mentioned the shift from defined benefits to defined contribution plans. He said that the major shortcoming of defined contribution and 401(k) plans in particular, as compared to a defined benefit plan, is that these plans do not generate life long income for the individual participant. He quoted the Government Accountability Office report that analyzed the types of payouts workers actually received at retirement from defined benefit and defined contribution plans.

In the period of 1992 to 2000, the GAO found that retirees in increasing numbers are selecting benefits in a form other than those that guarantee life-long income payments like annuities. Also, an increasing proportion of most retirees choose to directly roll over lump sum benefits into IRAs or leave their assets in the pension plan. The report went on to state that a growing percentage of retirees who reported having a choice among benefit payout options chose payouts other than annuities.

He quoted an analysis conducted by EBRI supporting the GAO findings. All indications are that when given a choice to replicate the benefit forms provided by traditional pensions or annuities, few individuals are making that choice. He said participants do not understand how much the retirement savings will translate to in terms of a stream of income.

Participants will be largely left on their own to replicate security previously provided by defined benefit plans, security that was created by teams of actuaries, pension experts, investment professionals, benefit consultants, accountants, attorneys, and by the government through the protection offered by the PBGC.

Stripped of this expertise and protection, he believes employees need help that most employers are unable, or are unwilling, to provide. As a solution he thinks income annuities can replicate the security of defined benefit plans by generating lifelong income benefits.

Income annuities help people manage longevity risk and they allow conversion of savings and other asset accumulation into income streams guaranteed to pay out for the life of the individual, a spouse, or another joint life. He states that no other investment can make this guarantee. He discussed innovations of a wide choice of payout options, which can be tailored to meet the life needs of an individual. Examples are joint life annuities, joint survivor annuities, annuities for a specified duration, life annuities with a guaranteed payment, annuities with inflation and option riders, some of which are tied to the CPI, while others provide a flat percentage rate each year and a list of other types of annuities.

He testified that if the goal of defined contribution plans is to help individuals retire in relative financial comfort, income annuities should be prominently promoted as income distribution vehicles. He stated only two percent of retirees select annuities at the time of distribution. He quoted his Met Life study which looked at the income and spending patterns in retirement of Americans between the ages of 59 and 71. It revealed a strong correlation between guaranteed income from pensions and annuities, and an increased feeling of comfort in retirement. Retirees who had regular income from both a pension and an annuity were three times as likely as those with neither to say that retirement was much better than they expected it would be.

On the subject of communications, some employers will communicate to participants only when necessary, and provide only the bare minimum, things such as summary plan descriptions, plan amendments, et cetera. Other employers take a different approach and offer educational outlets to participants in addition to communicating issues relating to plan operations.

He discussed the importance of the effect of education and quoted a Met Life survey of 1,200 men and women between the ages of 56 and 65, and within five years of retirement. The survey was comprised of 15 multiple-choice questions designed specifically to assess their knowledge of retirement income issues. The results were very poor. Ninety five percent of those surveyed failed the test; the average score was 33 percent. In his opinion the results of this survey confirmed: Retirees and near-retirees are uninformed and unprepared for the financial realities that they will face in retirement. He believes that the first step in improving education to plan participants is educating the plan sponsor.

He stated that Met Life believes that the Department of Labor can provide clarification and changes that will protect employers from incurring fiduciary liability when providing retirement plan information and advice. And that there is a perception among employers that providing information is going to present a greater risk than if they provided nothing at all. To the extent that the Department of Labor could provide something that was generic, something that was educational, something that was understandable and useful to the plan participant, that did not contain the biases, that would be a home run in his opinion, and he thinks that employers would absolutely and positively welcome that categorically.

In addition to that, he stated the Web site that the Department of Labor has is very good. He encourages DOL to more prominently display income and retirement income management on that site. He stated that people learn differently. Insurance and financial services firms will work with employers to provide educational support in the media that meets the plan sponsor and the plan participant needs. The DOL can also address retirement income education prominently on its Web site, again, providing information and tools within context is imperative.

Finally, the DOL could issue guidance regarding the provision of investment advice to plan participants that would alleviate the plan sponsors concerns regarding fiduciary liability.

Summary of Trisha Brambley, President, Resources for Retirement, Inc., September 22, 2005

Ms. Brambley heads a consulting firm that primarily serves the mid-market (up to 5,000 employees in a single plan). The basis of Ms. Brambley’s testimony were facts and figures from surveying 20 of her client plans (covering approximately 20,000 employees).

Fifty-five percent of those surveyed thought that “financial counseling” would make it easier for plan participants to effectively handle their account balance distribution. Not a single other answer received more than 11 percent. However, when asked if participants would pay for such advice or guidance out of their own pocket – 40 percent of the responses suggested that plan participants would not pay for advice yet they want one-on-one counseling.

Ms. Brambley’s research showed that when employers were asked whether annuities should be offered to plan participants as distribution options, 70 percent responded affirmatively. But, they qualified their affirmative response by saying annuities should be offered “if” they could distance themselves from the fiduciary concerns, and “if” they could avoid the administrative burdens of annuities. Much of Ms. Brambley’s research reviews confusion amongst employers and participants regarding annuities. For instance, running out of money is the Number One fear about retirement, and 80% of participants prefer to receive benefits in a form of regular payments for life. Her research confirms that participants have a hard time understanding annuities and this lack of understanding creates a lack of interest by participants.

Ms. Brambley believes that methods can be employed to overcome the common obstacles mentioned above. She mentioned that education at enrollment, throughout the accumulation phase, at pre-retirement and at the time of distribution using seminars, personal illustrations and one-on-one support. She described “platform companies” that were confirmed to be of the variety of the Hueler Companies that provide independent, arm’s length transactions. Ms. Brambley believes that creating a platform or using a platform of multiple vendors dampens the fiduciary concerns and can be successfully deployed without added fiduciary burdens.

Summary of John Kimpel, Senior Vice President & Deputy General Counsel, Fidelity Investments, September 22, 2005

Mr. Kimpel’s entire testimony addressed the “annuities as mandatory options issue.” Mr. Kimpel started out by stating that in Fidelity’s world – “plan leakage” of DC account balances is only about 5%. This is less than some policymakers believe. He stated that the most used options in DC arrangements are lump sum distributions and periodic distributions. Interestingly, Mr. Kimpel stated that even money purchase pension plan participants (which must be offered joint and survivor annuity option) elect to receive the account balance in some other optional form of benefit other than an annuity.

Mr. Kimpel provided some insight into the unpopularity of annuities from an employer standpoint. In addition to the current regulatory concerns from a fiduciary perspective, he contends that the qualified joint and survivor annuity rules discourage plan sponsors from offering annuities as an optional form of benefit. He cited that the QJSA rules were complicated and difficult to explain as well as difficult to administer. Simply put, Mr. Kimpel maintains that annuities require papered administration of distributions that are otherwise done paperlessly.

On the other side of the coin, Mr. Kimpel testified that the reasons annuities are met with a lack of interest by plan participants are because participants lack education regarding the role and benefits of annuities. Mr. Kimpel believes that the perceptions and belief systems of most participants are misinformed and grounded in perceptions and understandings of deferred annuities rather than income annuities. Secondly, Mr. Kimpel testified that most of today’s retirees are already sufficiently annuitized through Social Security. Third, he provides that traditional annuities reflect the annuitant pool and not the general population. Fourth, longevity is not the only risk.

Kimpel advocates that annuities should be considered in conjunction with other sources of retirement income. If annuitization is desired by a plan participant, the choice of a fixed or variable income annuity should depend on the retiree’s other source of income as well as the retiree’s ability to tolerate fluctuation of income. Kimpel stated that Fidelity has a rule of thumb that no more than 30% of a retiree’s available liquid assets should be annuitized. The reasons for advocating partial annuitization rather than full annuitization are based on inflation risk and the erosion of purchasing power that can occur to a fixed income recipient. Additionally, interest rate risk creates a reduction in retirement income from reduced interest rates used in current annuity purchase rates. Finally, there is the issue of carrier risk. Insurance carrier insolvency has become an issue in the last 20 years with the liquidations and rehabilitation efforts of Executive Life and Mutual Benefit.

Finally, Mr. Kimpel testified to various Fidelity programs that can generally be stated to provide a more holistic, retirement financial planning approach. Several times throughout his testimony Mr. Kimpel alluded to the fact that retirement income planning is geometrically more complex than accumulation planning.

Summary of Cindy Hounsell, Executive Director, Women’s Institute for a Secure Retirement (“WISER”), September 22, 2005

Ms. Hounsell testified to the anxiety of people she works with regarding whether they will have enough money to retire and whether they will outlive the money they have. Ms. Hounsell stated that there seems to be a basic need for core information. She defined core information as being a need for rudimentary retirement and financial education. How to make individual savings last a lifetime is a fundamental issue about how individuals want to receive income from an asset pool. Transferring the investment risk or self-management or will it be a blend? Most people, according to Ms. Hounsell cannot even answer that question much less anything about how to execute on it.

Ms. Hounsell maintains that because each individual’s circumstances and preferences are different – effective communication of options and retirement income planning is complex. Consequently, Ms. Hounsell believes that most people take lump sum distributions because it is simple and easy to understand without the need to make another decision – for the immediate moment. Like other witnesses, Ms. Hounsell stated the current prevalent focus on accumulation rather than income planning as being something that has to change from vendors and plan sponsors and regulators.

Ms. Hounsell stated that she was in favor of having annuities utilized more by plan participants but she stops short of endorsing annuities as mandatory options. To make annuities mandatory options, she believes would be fought vigorously by the employer pension lobby because it would be viewed as costly, burdensome with a potential for liability. In the final analysis, Ms. Hounsell doesn’t see much benefit in adding options as participants cannot make good use of the options because they lack the proper guidance, education or planning skills to make the option work effectively for them. Ms. Hounsell advocates that the Department of Labor take the lead in establishing educational methods about retirement income planning.


  1. Hereinafter referred to as “the Working Group”

  2. See testimony of Wray, Wilbert, Kent, Schaus, Hylind, Brambley, Kimpel, Hounsell

  3. See testimony of Wray, Wilbert, Kent, Schaus, Hyind, Brambley, Kimpel, Hounsell

  4. See testimony of Schaus

  5. See testimony of Wray

  6. See testimony of Wray, Bramlett, Buckles, Wilbert, Kent, Schaus, Hylind, Brambley, Kimpel, Hounsell