Private Pensions: Participants Need Information on Risks They
Face in Managing Pension Assets at and during Retirement
(29-JUL-03, GAO-03-810).
The decisions that retiring workers make about how and when to
draw down their pension plan assets determine in part whether
they will have pension income that lasts throughout retirement.
Individuals will need pension and other retirement income to
sustain them over a longer period of time than in the past.
Moreover, the continuing trend towards pension plans with
individual accounts has increased participants' responsibility
for managing their pension assets during retirement. As such, our
objectives were to determine: (1) what benefit payout options and
accompanying information pension plans make available to
participants at retirement, (2) what benefit payouts plan
participants receive at retirement, and (3) the actions available
to help retiring participants preserve their pension and
retirement savings plan assets.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-810
ACCNO: A07763
TITLE: Private Pensions: Participants Need Information on Risks
They Face in Managing Pension Assets at and during Retirement
DATE: 07/29/2003
SUBJECT: Employee retirement plans
Retirement benefits
Retirement pensions
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GAO-03-810
Report to Congressional Requesters
United States General Accounting Office
GAO
July 2003 PRIVATE PENSIONS Participants Need Information on Risks They
Face in Managing Pension Assets at and during Retirement
GAO- 03- 810
Defined benefit (DB) plans make annuities available to all participants at
retirement, while defined contribution (DC) plans make lump sums available
to almost all participants. Recent data also show that about half of
private sector workers who participated in DB plans had a lump sum option
at retirement, and over a third of their counterparts in DC plans had an
annuity option. Plan sponsors GAO spoke with provide retiring participants
with applicable notices about their benefit payout options available under
the plan. Additional information provided by plan sponsors GAO spoke with
primarily focused on saving for retirement. Risks that can affect
retirement income, or other considerations relevant to managing pension
assets at and during retirement were generally not discussed.
According to GAO*s analysis, while 60 percent of recent retirees received
annuities, an increasing percentage from 1992 to 2000 directly rolled over
lump sum benefits into an individual retirement account or deferred their
receipt by leaving these assets in the plan, a trend in part explained by
the shift toward retirees with DC plan benefits. Additionally, GAO found
that a growing percentage of those retirees who reported having a choice
of benefit payouts chose to directly roll over their lump sum benefits or
leave benefits in the plan rather than receive annuities.
Actions available to help retiring participants preserve their pension and
retirement savings plan assets range from options that would encourage the
receipt of annuities to providing information to help participants make
better decisions about managing their pension assets at and during
retirement. According to an expert panel GAO used as part of this study,
retirees need to be aware of the risk of outliving one*s assets in
retirement and the financial risks individuals face in retirement. Over 90
percent of GAO*s panelists rated providing information on such risks as
very or extremely effective in helping retiring participants make
decisions about managing their pension assets.
Types of Pension Payouts Received by Retirees Percent of retirees who
received benefit payouts
Annuity
Retirement period
Source: GAO analysis of weighted HRS data 1992- 2000.
1992- 1994 1994- 1996 1996- 1998 1998- 2000
Direct rollover to IRA and/ or deferred receipt of benefits Cash
settlement
0 10
20 30
40 50
60 70
The decisions that retiring workers make about how and when to draw down
their pension plan assets determine in part whether they will
have pension income that lasts throughout retirement. Individuals will
need pension and other retirement income to sustain them over a longer
period of time than in the past. Moreover, the continuing trend towards
pension plans with individual accounts has increased
participants* responsibility for managing their pension assets during
retirement. As such, our
objectives were to determine: (1) what benefit payout options and
accompanying information pension plans make available to participants at
retirement, (2) what benefit payouts plan participants receive at
retirement, and (3) the
actions available to help retiring participants preserve their pension and
retirement savings plan assets.
GAO is not recommending executive action. However, to improve public
awareness and
understanding of important considerations related to managing pension and
retirement assets in retirement, the Congress may wish to consider
amending the Employee Retirement Income Security Act to require plan
sponsors to provide participants
with a notice on risks that individuals face in managing their income and
expenditures at and during retirement. The Congress
could consider stipulating that this notice must be provided at certain
key milestones. www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 810. To view the
full product, including the scope
and methodology, click on the link above. For more information, contact
Barbara Bovbjerg at (202) 512- 7215 or bovbjergb@ gao. gov. Highlights of
GAO- 03- 810, a report to
Congressional Requesters
July 2003
PRIVATE PENSIONS
Participants Need Information on Risks They Face in Managing Pension
Assets at and during Retirement
Page i GAO- 03- 810 Private Pensions Letter 1 Results in Brief 3
Background 5 DB Plans More Likely to Offer Annuities and DC Plans to Offer
Lump Sums, and Plans Provide Only Applicable Notices on Benefit Payout
Options 11 Most Retirees Receive Annuities, but an Increasing Percentage
Receive Other Types of Benefit Payouts 15 Range of Actions Available to
Help Retiring Participants Preserve Their Pension Assets 22 Conclusions 29
Matter for Congressional Consideration 30 Agency Comments 30 Appendix I
Data, Scope, and Methods 32
Data Sources 33 Methodology 34 Appendix II Descriptive Statistics and
Regression Analyses 40 Pension Payout Categories and Retiree Choice 40
Appendix III Delphi Panel on Options to Encourage the Preservation of
Pension and Retirement Plan Savings 49 Phase I 49 Phase II 54 Factors
Affecting Payout Options 55 Options That Could Encourage More
Annuitization of Pension and
Retirement Plan Savings 57 The Role of Information and Education in
Managing Pension and Retirement Plan Savings during Retirement 59 Phase
III 60 Appendix IV GAO*s Delphi Panel of Experts 62
Appendix V Comments from the Department of The Treasury 65 Contents
Page ii GAO- 03- 810 Private Pensions Tables
Table 1: Types of Pension Payouts Received by Retirees 41 Table 2: Types
of Pension Payouts Received by Retirees Reporting a Choice of Payout
Options 43 Table 3: Sample Averages for Characteristics of Retirees, by
Pension Payout Choice 44 Table 4: Logistic Regression of Annuity Payouts
for All Retirees Reporting a Choice of Payout Options 46 Table 5: Logistic
Regression of DB Annuity Payouts for DB Retirees Reporting a Choice of
Payout Options 47 Table 6: Logistic Regression of DC Annuity Payouts for
DC Retirees Reporting a Choice of Payout Options 48 Table 7: Top Five
Answers That Were Identified as Either a Major or Moderate Factor
Affecting the Pension Options Offered and/ or Elected by Retiring
Participants 56 Table 8: Top Five Answers That Were Most Frequently
Included in
the Top Five Factors Affecting the Pension Options Offered and/ or Elected
by Retiring Participants 56 Table 9: Top Five Answers That Were Identified
as Either
Extremely Effective or Very Effective Options in Encouraging More
Annuitization of Pension and Retirement Plan Savings 57 Table 10: Top Five
Answers That Were Identified as Either Greatly
Helping or Generally Helping Pension and Retirement Plan Coverage 58 Table
11: Top Five Answers That Were Identified as Either Very
Easy or Easy for Plan Sponsors to Comply with and/ or Act on 58 Table 12:
Top Five Answers That Were Identified as Either
Extremely Effective or Very Effective Types of Information and Education
in Helping Retiring Participants Make More Optimal Decisions 59 Table 13:
Top Five Answers That Were Most Frequently Included in
the Top Five Types of Information and Education to Help Retirees Make More
Optimal Decisions 60 Figures
Figure 1: Shares of Aggregate Income for Persons 65 and Over, by Source,
2001 6
Page iii GAO- 03- 810 Private Pensions
Figure 2: Percent of Employees Participating in Types of Plans, by Choice
of Payment Options Provided (2000) 12 Figure 3: Types of Pension Payouts
Received by Retirees 16 Figure 4: Types of Pension Payouts Received by
Retirees with DB
Payouts 18 Figure 5: Types of Pension Payouts Received by Retirees with DC
Payouts 19 Abbreviations
BLS Bureau of Labor Statistics DB defined benefit DC defined contribution
DOL Department of Labor EBSA Employee Benefits Security Administration
ERISA Employee Retirement Income Security Act of 1974 HRS Health and
Retirement Study
IRA Individual Retirement Account IRC Internal Revenue Code NCS National
Compensation Survey NIA National Institute on Aging QJSA qualified joint
and survivor annuities RSEC Retirement Savings Education Campaign SAVER
Savings Are Vital to Everyone*s Retirement Act SSA Social Security
Administration
This is a work of the U. S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
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copyright holder may be necessary if you wish to reproduce this material
separately.
Page 1 GAO- 03- 810 Private Pensions July 29, 2003 The Honorable Earl
Pomeroy The Honorable Rob Portman
The Honorable Ben Cardin The Honorable Phil English House of
Representatives
The decisions that retiring workers make about how and when to draw down
their pension and retirement savings plan assets determine in part whether
they will have pension income that lasts throughout retirement.
Individuals are living longer on average once they retire and will need
pension and other retirement income to sustain them over a longer period
of time than in the past. Moreover, the continuing trend away from
traditional defined benefit (DB) pension plans that can guarantee a stated
level of income for life towards defined contribution (DC) plans with
individual accounts has made participants more responsible for managing
their pension assets during retirement. 1 Increasingly, retirees have
access to their pension and retirement savings plan assets and the
flexibility to choose how and when to invest and draw down these assets.
The type of pension or retirement savings plan workers participate in
could influence the benefit payment options they have available. Private
employers may sponsor DB and/ or DC pension plans for their employees. DB
plans must make available a joint and survivor life annuity to retiring
participants* a series of periodic payments that begin at retirement and
continue through the life of the participant (or other specified period)
and at the death of the participant, to the surviving spouse. These plans
may also offer a lump sum* a cash amount* as an alternative payout option
to the annuity. While some DC plans are required to make available a joint
and survivor annuity, 2 DC plans typically make benefits available as a
lump
1 DB plans promise to provide a benefit that is generally based on an
employee*s salary and years of service. Under a DC plan, employees have
individual accounts to which the employer, employee, or both make periodic
contributions. DC plan benefits are based on
contributions to and investment returns on individual accounts, and
participants may access their accounts before, at, or during retirement.
According to Bureau of Labor Statistics data, 36 percent of private sector
workers participated in a DC plan, while
19 percent of private sector workers participated in a DB plan in 2000. 2
Certain DC plans are required to make an annuity payout option available
to participants. These plans are called money purchase plans. United
States General Accounting Office Washington, DC 20548
Page 2 GAO- 03- 810 Private Pensions sum 3 (i. e., the participant*s
account balance) or installment payments* periodic withdrawals paid until
account balances are exhausted. DC plans
may offer to purchase an annuity. 4 Pension plan sponsors must provide
certain disclosures and notices to retiring participants about their
pension benefit payment options. These requirements vary based on type of
plan and benefit options available under the plan. For all DB plans as
well as those DC plans subject to the joint and survivor annuity
requirement, plans must provide, among other information, a written
explanation of the terms and conditions of the joint and survivor annuity,
including information about other payout options made available under the
plan and the rights of the participant*s spouse.
Annuities and lump sums present different advantages and risks to
retirees. A life annuity, whether received from a plan or purchased,
generally provides insurance that a retiree will not run out of income no
matter how long he or she lives. However, if a retiree dies soon after
choosing or purchasing an annuity, he or she would likely receive
considerably less than if he or she had taken a lump sum and will be
unable to leave that asset as a bequest. Also, income from fixed annuities
may not be adequate to pay for unexpected large expenses or provide
protection against inflation. 5 Retiring participants who receive lump
sums have the flexibility to
preserve or draw down these assets as they wish, but could risk running
out of pension assets if they live longer than expected, draw down assets
too rapidly, or suffer poor investment returns on their assets. A retiree
may choose to receive a lump sum directly from the plan as a cash
settlement and then invest or spend some of or the entire amount.
Alternatively, retirees who receive lump sums may preserve these assets by
purchasing an annuity with some or all of the proceeds to provide a stream
of income throughout retirement.
3 In this report, we refer to lump sums received directly by participants
as cash settlements. 4 DC plans with individual accounts that offer an
annuity must provide them on a genderneutral basis. See Norris v. Arizona
Governing Committee, 463 U. S. 1073 (1983). 5 Certain life annuities that
plans and insurance companies may offer are available to address such
needs. For example, life annuities with guarantee periods or refunds that
pay the remaining balance to a beneficiary if an annuitant dies, as well
as annuities that offer inflation protection are available.
Page 3 GAO- 03- 810 Private Pensions Because of concerns about whether
retirees will preserve their pension assets you asked us to determine: (1)
what benefit payout options and
accompanying information pension plans make available to participants at
retirement; (2) what benefit payouts plan participants receive at
retirement; and (3) the actions available to help retiring participants
preserve their pension and retirement savings plan assets.
To determine what benefit payout options and accompanying information DB
and DC plans make available to participants at retirement, we reviewed
applicable laws and regulations to identify benefit payout options plan
sponsors must and may provide at retirement and the types of accompanying
information they must furnish to participants. We obtained data on the
types of payout options available to participants from the Bureau of Labor
Statistics* (BLS) National Compensation Survey for 2000. We interviewed
pension experts and convened a Web- based expert panel
to identify factors that may affect the benefit payout options plans make
available. To examine how retiring plan participants receive their pension
benefits, we used publicly available data from the University of
Michigan*s
Health and Retirement Study (HRS), covering the period from 1992 to 2000.
In addition, we interviewed plan sponsors and practitioners to obtain
information and views on the benefit payouts retirees choose when they
have payout options and reasons why retirees prefer (or do not prefer)
different benefit payouts. To identify actions that could help retiring
participants preserve their pension and retirement savings plan assets and
obtain expert opinions and views, we interviewed pension experts and
surveyed our Web- based expert panel. A range of experts, including
academics, plan practitioners, and representatives of insurance providers,
employers, and public interest groups, participated on our expert panel.
We conducted our work between August 2002 and July 2003 in accordance with
the generally accepted government auditing standards. (See app. I for more
details on our data, scope, and methodology.)
In general, DB plans are more likely than DC plans to make annuities
available at retirement, while DC plans are more likely than DB plans to
make lump sums available. The most recent BLS data show, not unexpectedly,
that of those private sector workers who participated in DB plans, all had
an annuity option available. Moreover, slightly less than half of these DB
participants had a lump sum option. In comparison, almost all
private sector workers who participated in DC plans had a lump sum option
available, just over a third had an annuity option, and over half had an
installment payment option. Plan sponsors we spoke with provide Results in
Brief
Page 4 GAO- 03- 810 Private Pensions retiring participants with applicable
notices about benefit payout options available under the plan. While some
plan sponsors we spoke with provide
more than these notices, this additional information primarily focuses on
saving for retirement. These plan sponsors generally did not provide
information on considerations relevant to managing pension assets at and
during retirement, such as on the potential risks that retirees face in
managing their assets or on how to assess needs in retirement.
When we analyzed the types of payout employees actually received at
retirement, we found retirees increasingly selected benefit payouts other
than annuities. About 60 percent of retirees received annuities from 1992
to 2000, 6 but during that period an increasing proportion of more recent
retirees chose to directly roll over lump sum benefits into an Individual
Retirement Account (IRA) or to defer their receipt by leaving them in the
plan. Specifically, retirees choosing these payouts represented about 32
percent of the group that retired between 1992- 94 and grew to 47 percent
by 1998- 2000. Only about 14 percent of retirees took their pension
benefits as cash settlements, a figure that changed little over the
period. Retirees who received benefits from DB plans were most likely to
receive annuities, while those who received benefits from DC plans were
most likely to roll over benefits into an IRA or to defer receipt. The
shift toward retirees with DC plan benefits in part explains why we
observe a trend away from annuities and toward other payouts.
Additionally, we found that a growing percentage of those retirees who
reported having a choice among benefit payout options chose payouts other
than annuities.
Pension experts identified a range of actions available to help retiring
participants preserve their pension and retirement savings plan assets.
Some policy options would increase or encourage annuitization of pension
assets at retirement. Such options include imposing new requirements on
plan sponsors to offer annuities to retiring participants. Other options
include modifying certain rules to make it easier for plan sponsors to
offer annuities or providing an incentive to retiring participants to
choose annuities. Besides options that focus exclusively on annuities,
information and education could be provided to participants to help them
make decisions about how to manage pension assets during retirement. For
example, our expert panel indicated that participants could make more
6 Some respondents had one or more pensions with and received more than
one type of pension payout. As a result, some respondents are included in
more than one benefit payout category. Therefore, because of the overlap
across pension payout categories, individual percentages cannot be summed.
Page 5 GAO- 03- 810 Private Pensions informed decisions if they were aware
of various risks that affect the level of income they need during
retirement, such as the risk of outliving their assets and the risk of
declining purchasing power. Participants also need
help understanding how to assess needs in retirement, strategies for
drawing down pension assets during retirement, and how annuities provide
retirement income.
This report includes a matter for congressional consideration to require
plan sponsors to provide a notice on risks that individuals face when
managing their income and expenditures at and during retirement.
We provided a draft of this report to the Department of Labor (DOL) and
the Department of the Treasury. Both agencies provided us with technical
comments, and we incorporated each agency*s comments as appropriate.
Additionally, DOL officials stated that the Secretary of Labor does not
currently have the legal authority under ERISA to require plan sponsors to
provide such information. Consequently, we changed our recommendation to a
matter for consideration for the Congress to amend ERISA to require plan
sponsors to provide a notice to participants on risks they face when
managing their pension and retirement savings plan assets in retirement.
The standard of living of the elderly depends on total retirement income,
which includes Social Security, pensions, income from assets, and earnings
from employment. While Social Security provides a foundation for
retirement income, savings through pension and retirement savings plans,
as well as by individuals on their own behalf, can contribute
substantially to ensuring a secure retirement. For example, the Social
Security Administration reports that while 39 percent of income for
persons 65 and over came from Social Security income in 2001, 18 percent
of their income came from pensions (see fig. 1). Background
Page 6 GAO- 03- 810 Private Pensions Figure 1: Shares of Aggregate Income
for Persons 65 and Over, by Source, 2001
To encourage employers to establish and maintain pension plans for their
employees, the federal government provides preferential tax treatment
under the Internal Revenue Code (IRC) for plans that meet certain
requirements. A purpose of tax preferences for employer- sponsored
pensions is to encourage savings for workers* retirement. Pension tax
preferences are structured to strike a balance between providing
incentives for employers to start and maintain voluntary, tax- qualified
pension plans and ensuring participants receive an equitable share of the
tax- favored benefits.
A qualified pension plan is a retirement plan that satisfies certain
requirements set forth in the Internal Revenue Code. In order to be
taxqualified, private pension plans must satisfy a number of requirements,
including minimum requirements on coverage and benefits. Private pension
plans must also generally meet the requirements of the Employee Retirement
Income Security Act of 1974 (ERISA). Title I of ERISA, among other
requirements, contains requirements regarding information that plan
sponsors must provide to participants and defines the obligations of the
individuals who administer employer- sponsored plans.
Asset income Earnings Social Security
3%
Other
39% 24%
Pensions 16%
18%
Source: Income of Aged Chartbook, 2001. Social Security Administration,
Office of Policy; Office of Research, Evaluation, and Statistics.
Page 7 GAO- 03- 810 Private Pensions There has been a continuing trend
from DB to DC plans over the last 2 decades. DOL reports that private
sector employers sponsored over
56,000 tax- qualified DB plans in 1998 down from over 139,000 in 1979,
while the number of tax- qualified DC plans sponsored by private employers
more than doubled from over 331,000 to approximately 674,000 during this
same period. Along with this continuing trend to sponsoring DC plans,
there has also been a shift in the type of plans that private sector
workers participate in. DOL reports that the percentage of private sector
workers who participated in a primary DB plan has decreased from 37
percent in 1979 to 21 percent by 1998, while the percentage of such
workers who participated in a primary DC plan has increased from 7 to 27
percent during this same period. Moreover, these same data show that, by
1998, the majority of active participants (workers participating in their
employer*s plan) were in DC plans, whereas nearly 20 years earlier most of
them were in DB plans.
Employers who sponsor DB plans are responsible for making contributions
that are sufficient for funding the promised benefit, investing and
managing the plan assets, and bearing the investment risk because the
employer, as plan sponsor, agrees to make future payments during
retirement. However, under DC plans, workers bear the investment risk
because there is no promise made by the employer that money will be
available during retirement. Thus, as a result of this shift from DB to DC
plans, an increasing share of the responsibility for providing for one*s
retirement income has shifted from the employer to the employee.
DB plans sponsored by private employers are required to offer joint and
survivor annuities 7 to married participants beginning at the plan*s
normal retirement age. These annuity payouts, called qualified joint and
survivor annuities (QJSA), guarantee a benefit for the life of the
participant and the participant*s surviving spouse. DB plans may also
offer a single- life annuity to unmarried participants. With respect to DC
plans, there is no uniform
requirement regarding benefit payouts they must offer. Rather, certain DC
plans must adhere to the QJSA requirements because, similar to DB plans,
7 29 U. S. C. 1055( a)( 1). These plans must also provide for a qualified
preretirement survivor annuity (QPSA) providing that where a vested
participant dies before the annuity starting date, the QPSA shall be
provided to the surviving spouse. 29 U. S. C. 1055( a)( 2).
Page 8 GAO- 03- 810 Private Pensions they are subject to minimum funding
standards. 8 Other DC plans are not subject to the QJSA requirements if
the plan provides for payment in full
of the participant*s accrued benefit under the plan to the spouse on the
death of the participant and the participant has not elected to receive a
life annuity. 9 Plans subject to the QJSA requirements must provide
participants with a
written explanation of the terms and conditions of the QJSA. As part of
this notice, participants must be furnished with a description of other
benefit payouts that the plan offers as options to the QJSA* including
information on their features and value of a participant*s benefits under
such options. In addition, the plan must provide participants with an
explanation of the participant*s right to make, and the effect of, an
election to waive the QJSA form of benefit, the rights of the
participant*s spouse, and the right to revoke an election to waive the
QJSA form of benefit.
Because of concerns that participants who are offered QJSA benefits do not
have adequate information to compare these benefits with other optional
payouts, IRS has proposed regulations to strengthen the requirements
regarding the written explanation of a QJSA that plans must provide.
Specifically, the proposed regulations provide additional guidance
regarding information that plans furnish to describe the value of a
participant*s benefits under optional payouts compared with the value of a
participant*s QJSA benefits. The comparison must show what the participant
would receive under each optional payout relative to the QJSA (including
for those benefit payouts that are subsidized) in a way that is
meaningful. Additionally, this comparison must include information that is
more readily understandable to participants. 10 There is also required
information that plans must provide retiring
participants about lump sum payouts. Plans that offer a lump sum payout
must provide a rollover notice to retiring participants. The rollover
notice
8 Minimum funding standards establish the minimum amounts that plan
sponsors must contribute to ensure that their plans have sufficient assets
to pay benefits when due. While technically complex, these standards are
designed to ensure that the value of benefits accumulated to date under
the plan and the plan*s assets bear a reasonable relationship to one
another such that the plan can pay benefits due participants when they
retire.
9 In addition, the plan is subject to the survivor annuity requirements to
the extent that they are transferee plans of plans that are otherwise
subject to the requirement. 29 U. S. C. 1055( b)( 1)( C)( iii); 26 C. F.
R. 1.401( a)( 20) A- 5.
10 Federal Register Vol., 67, 62419, Oct. 7, 2002 (notice of proposed
rulemaking).
Page 9 GAO- 03- 810 Private Pensions must discuss the participant*s
ability to have such payouts directly transferred by the plan to another
eligible retirement plan. Rollover
notices must also include information about the tax consequences of
choosing various payout options, such as rolling the assets to another
account or taking a lump sum directly as a cash settlement.
Retiring participants who have the option to receive benefits as a lump
sum amount (i. e., cash settlement) may also choose to directly *roll
over* their assets to another qualified retirement plan, such as an IRA.
11 DB plans that permit lump sums must adhere to certain rules regarding
the calculation of lump sum amounts. Lump sums must be at least as large
as the actuarial equivalent (i. e., present value) of a participant*s
accrued
benefit (i. e., the value of the deferred annuity that the participant is
entitled to receive or at the plan*s normal retirement age). 12 DC plan
participants also have the option to defer receipt of benefits by
leaving assets in their individual accounts. 13 Both directly rolling over
assets into another qualified retirement plan and leaving benefits in the
plan preserve pension assets at the point of retirement. Also, DC plan
participants may have the option to receive their benefits as a series of
installment payments at retirement that he or she may spend or save as
desired. However, unlike a DB plan, a DC plan cannot itself provide a life
annuity, but can offer to purchase an annuity from an insurance company.
Retirees that do not choose or purchase annuities at the point of
retirement assume personal responsibility for managing their pension and
retirement savings plan assets to provide retirement income. In
particular, these retirees must decide how pension assets are saved or
invested and determine the timing and amount of withdrawals.
Increasingly, retirees will* on average* need to balance income and
expenditures over a longer period of time than in the past. This is in
part due to the long- term trend towards earlier retirement throughout
most of the twentieth century. Nearly half of all men now leave the labor
force by age 62 and almost half of all women are out of the workforce by
age 60.
Moreover, the decline in the average retirement age has occurred in an 11
26 U. S. C. 401( a)( 31). 12 Section 417( e) of the Internal Revenue Code
specifies a set of mortality factors and a discount rate that DB plan
sponsors must use to calculate lump sums.
13 DB participants who are eligible to receive benefits earlier than their
plan*s normal retirement age may also choose to defer receipt of benefits.
Page 10 GAO- 03- 810 Private Pensions environment of rising longevity for
the elderly. Falling mortality rates have added almost 4 years to the
expected life span of a 65- year- old man and
more than 5 years to the life expectancy of a 65- year- old woman since
1940.
Individuals face a variety of risks in managing their assets, income, and
expenditures at and during retirement. For example, retirees may outlive
their pension or retirement savings plan assets. In addition, inflation
may erode the purchasing power of their income, investments may yield
returns that are less than expected or decline in value, and large
unplanned expenses, such as those to cover long- term care, may occur at
some point during retirement.
Annuities offer a means to mitigate much of the financial uncertainty that
accompanies living to very old ages, but may not necessarily be the best
approach for all retirees. For example, an individual with a life
shortening illness might not be concerned about the financial needs that
accompany
living to a very old age. Also, some individuals may want to continue to
accumulate assets during retirement and could invest their pension assets
in IRAs or financial products, in which such assets could be more heavily
invested in equities. Strategies to manage risk during retirement, when
most are decumulating rather than accumulating assets will necessarily be
highly individualized. The Internal Revenue Service, DOL*s Employee
Benefits Security Administration (EBSA), and the Pension Benefit Guaranty
Corporation are primarily responsible for enforcing laws that govern
private pension plans. The Internal Revenue Service enforces provisions of
the IRC that apply to tax- qualified pension plans. EBSA enforces ERISA*s
reporting and
disclosure provisions and fiduciary responsibility standards, which among
other things concern the type and extent of information provided to plan
participants. The Pension Benefit Guaranty Corporation insures the
benefits of participants in certain tax- qualified private sector defined
benefit plans.
Recognizing the importance of retirement savings, the Congress enacted the
Savings Are Vital to Everyone*s Retirement (SAVER) Act of 1997 to advance
the public*s knowledge and understanding of the importance of retirement
savings. The act requires DOL to, among other things, maintain an ongoing
outreach program to the public to effectively promote retirement savings
and to disseminate specific educational materials related to retirement
savings and the principles of saving and investment. DOL*s Retirement
Savings Education Campaign (RSEC), which began
Page 11 GAO- 03- 810 Private Pensions 2 years prior to passage of the
SAVER Act, is an outreach program that targets owners of small businesses,
women, minorities, and youth to
change the way they think about, and act on, their retirement saving
needs. As part of its campaign, DOL is partnering with outside
organizations to develop informational materials and tools to help
individuals understand their retirement benefit options and make informed
decisions about retirement, including managing assets during retirement.
DB plans are more likely to make annuities available to retiring
participants because they are required to do so, while DC plans are more
likely to make lump sums available. Additionally, nearly half of private
sector workers who participated in a DB plan have a lump sum available at
retirement, while over a third of DC plan participants have annuities
available. Pension plan sponsors we spoke with provide participants with
applicable notices about their benefit payout options available under the
plan. Some plan sponsors we spoke with provide information beyond these
notices, but this information primarily focuses on saving for retirement
and not on issues related to managing pension assets at and during
retirement.
DB plans are more likely than DC plans to make annuities available at
retirement, while DC plans are more likely than DB plans to make lump sums
available. The most recent BLS data (2000) 14 show that, not unexpectedly,
all private sector workers who participated in DB plans had an annuity
option 15 available at retirement, while only 38 percent of their DC
counterparts had this option. Almost all private sector workers who
participated in DC plans (94 percent) had a lump sum option available and
just under half (46 percent) of their DB counterparts had this option
available. Additionally, over half of these workers in DC plans had an
installment payment option (55 percent) available.
14 For more information on how we reviewed BLS data, please see appendix
I. 15 Data were not available to obtain detailed figures on the types of
annuities that plans make available at retirement. For example, besides
the QJSA annuity, DB plans may offer subsidized annuities at a plan-
specified early retirement age (* early retirement subsidies*) or
annuities with a guarantee period (* period- certain* annuities). DB Plans
More Likely to Offer Annuities and
DC Plans to Offer Lump Sums, and Plans Provide Only Applicable Notices on
Benefit Payout Options Nearly Half of DB Plans
Make Lump Sums Available and Just Over a Third of DC Plans Make Annuities
Available
Page 12 GAO- 03- 810 Private Pensions Some private sector workers in each
type of plan also had more than one benefit payment option available at
retirement (see fig. 2). BLS data show that 46 percent of private sector
workers in DB plans had both an annuity and lump sum option available.
Also, 32 percent of all private sector
workers who participated in DC plans had a lump sum, an annuity and an
installment payout option available at retirement.
Figure 2: Percent of Employees Participating in Types of Plans, by Choice
of Payment Options Provided (2000)
a Percentages of employees calculated based on the number determinable
responses for each type of plan. b Other options such as rollover into an
Individual Retirement Account were not tabulated separately. Two surveys
conducted on the incidence of payout options plans make
available found similar results. These surveys indicated that almost all
DC plans offer a lump sum to retiring participants, and all DB plans offer
an annuity. In 2001, a study by Hewitt Associates on certain DB plans
found
Percent of participating employees a Payout options of employees in DB
plans Payout options of
employees in DC plans 0 20
40 60
80 100 94
23 1 46
100
32%
(and) Annuity and installment
23%
(and) Installment
5%
(and) Annuity
34%
Lump sum only Source: Bureau of Labor Statistics, National Compensation
Survey, 2000.
Joint and survivor annuity
Lump sum Annuity (no other option)
Other payments b Lump sum
Page 13 GAO- 03- 810 Private Pensions that 40 percent of these plans
offered all participants a lump sum option. 16 A survey of certain DC
plans by the Profit Sharing Council of America 17 shows that, in 2001,
about 99 percent of the DC plans surveyed offered a lump sum at
retirement, 56 percent offered an installment option, and
28 percent offered an annuity. Plan sponsors we spoke with also confirmed
our findings from the BLS data.
Several factors may affect the benefit payout options plans made available
to retiring participants. Our expert panel suggested that DC plans do not
offer an annuity because of certain challenges associated with providing
this payout option. 18 For example, members of the expert panel suggested
that current QJSA regulations* which require plans that offer an annuity
to offer a QJSA annuity and adhere to spousal consent rules* may be
administratively burdensome to plan sponsors. Also, some plans do not
offer an annuity in part because of the concern about being held liable
for
any losses to participants in the event the annuity provider cannot meet
its financial obligations.
Our expert panel also identified worker preferences as an important factor
affecting the pension benefit payout options plans offer to retiring
participants. In part, plan sponsors offer lump sums in response to
employee demand for this option and choose not to offer annuities absent
employee demand for them. Also, pension experts and plan sponsors we
spoke with agreed that plans offer lump sums because workers generally
prefer them to annuities. A funding provider for defined contribution
plans, which used to only offer annuity payouts at retirement, expanded
the payout options it makes available to retiring participants in response
to participants* desire for more options and control in managing their
pension and retirement savings plan assets.
16 *Salaried Employee Benefits Provided by Major U. S. Employers, 2001-
2002.* Hewitt Associates. This report summarizes the principal benefit
plans for salaried employees of 945 major U. S. employers. All information
is based on plan- by- plan specifications collected directly from
participating plan sponsors in 2001- 2002 Hewitt Associates Specbook.
17 *45th Annual Survey of Profit Sharing and 401( k) Plans.* Profit
Sharing/ 401( k) Council of America. This survey summary reports the
2001plan year experience of 937 plans with nearly 3.2 million
participants. Respondents consist of 79 profit- sharing plans, 414 401( k)
plans, and 444 combination profit sharing/ 401( k) plans.
18 See appendix III for detailed results on factors that may affect
benefit payment options offered to or elected by retiring participants
identified by our expert panel.
Page 14 GAO- 03- 810 Private Pensions Plan sponsors we spoke with
indicated that they provide retiring participants with applicable notices
about benefit payout options available
under the plan. For example, those sponsors that offer an annuity payout
told us that they provide the required QJSA and spousal consent notices to
participants. Also, those plan sponsors that offer a lump sum told us that
they provide participants with the required rollover notice that reviews
the tax consequences of choosing various payout options. Additionally,
these sponsors provide retiring participants with various accompanying
materials to the notices that further describe all the benefit payout
options available under their plans.
While plan sponsors we spoke with provided some additional information on
saving for retirement, they generally did not provide information on
considerations relevant to managing pension and retirement savings plan
assets at and during retirement. For example, some of these sponsors
provide information on investment alternatives and the potential impacts
of various investment strategies on accumulating assets for retirement.
Some provide calculators or annual reports that, based on a participant*s
current account balance, estimate retirement income using various saving
strategies and age scenarios.
However, the information provided by the plan sponsors we spoke with
generally does not discuss considerations relevant to managing pension and
retirement savings plan assets at and during retirement. These plan
sponsors generally do not discuss the potential pros and cons of available
payout options as related to managing pension assets during retirement.
For example, these sponsors do not provide information that shows income
payments a retiring participant could receive from an annuity compared
with income payments the participant might receive from personally
investing and drawing down a cash settlement. Additionally,
they typically do not discuss risks retirees may face in managing their
assets during retirement, or provide information on how to assess needs at
or during retirement.
Plan sponsors are hesitant to provide information and education on
managing assets during retirement because of liability concerns. Although
plan sponsors are permitted to provide information and education to
participants, there is no specific guidance that plan sponsors may follow
to provide retiring participants with information on issues related to
managing their pension assets during retirement. If a plan sponsor
provides what is considered to be advice, the sponsor may be held liable
for any monetary losses a participant experiences for making an
unfavorable decision-- with respect to choosing a benefit payout at Plans
Provide Participants
with Notices about Benefit Payout Options, but Information on Managing
Assets during Retirement Is Not Widely Available
Page 15 GAO- 03- 810 Private Pensions retirement or managing pension
assets* based on information they provide. Plan sponsors are, therefore,
careful not to provide information
that may be perceived as advice and could result in litigation if
participants choose benefit payout options or assets management strategies
that ultimately reduce their retirement income. A funding provider for
defined contribution plans we spoke with does, however, provide
information and education on potential risks retirees face and other
considerations for managing assets during retirement. This organization
provides information on three risks to retirement income, including
eroding purchasing power due to inflation, outliving one*s pension and
retirement assets, and the possibility of getting lower than anticipated
investment returns due to market conditions. Participants near and at
retirement also receive information to better understand how each of the
various payout options they may choose from could be most useful in
meeting their individual retirement income needs and preferences.
Information and education is provided at key stages of an employee*s
participation in the plan using multiple communication approaches,
including seminars, Web- based planning tools, written materials,
worksheets, and one- on- one counseling. Representatives from this
organization cited several reasons for providing this type of information,
including an increase in payout options available and participant demand
for more information and education. When we analyzed the types of payout
employees received at retirement,
we found retirees increasingly selecting benefit payouts other than
annuities. Although we found that about 60 percent of retirees received
annuities, over time an increasing percentage of more recent retirees
chose to directly roll over their lump sum benefits into an IRA or to
defer their receipt by leaving them in the plan. On the basis of our
statistical analysis, we found that retirees who received benefits from DB
plans were most likely to receive annuities, while those who received
benefits from DC plans were most likely to directly roll over these assets
into an IRA or
defer the receipt of benefits. We found that participation in a DB plan
was the primary factor in choosing to receive an annuity.
Our analysis of recently retired workers with pensions indicates that
while most received annuities, many received other types of payouts. As
shown in figure 3, from 1992 to 2000 about 60 percent of new retirees with
Most Retirees Receive
Annuities, but an Increasing Percentage Receive Other Types of Benefit
Payouts
Page 16 GAO- 03- 810 Private Pensions pensions received an annuity. 19
However, about 40 percent reported directly rolling over benefits into an
IRA or deferring receipt by leaving
benefits in their plan, and approximately 14 percent of retirees took
pension assets as a cash settlement.
Figure 3: Types of Pension Payouts Received by Retirees
Note: For our analysis, *retirees with pensions* are survey respondents
who reported leaving a preceding- wave job to retire and reported
receiving a pension payout from that job. Figures in subcategories should
not be added because some respondents report receiving multiple pension
payouts. a Includes respondents who received pension benefit payouts from
both DB and DC plans.
b For retirees with DB plans, includes respondents who expect to receive
benefits in the future. For those with DC plans, includes respondents who
reported leaving their assets in a plan account.
While three- fifths of all retirees took annuities, over time an
increasing percentage of more recent retirees received other types of
payouts.
19 Some respondents had more than one pension and some had more than one
form of pension payout. As a result, the addition of individual
percentages may not equal their combined sum.
0 10
20 30
40 50
60 70
Percent of retirees who received benefit payouts a Annuity Direct rollover
to IRA and/ or deferred receipt of benefits b Cash settlement
Retirement period 1992- 2000 percent average
Source: GAO analysis of weighted HRS data 1992- 2000.
1992- 1994 1994- 1996 1996- 1998 1998- 2000
60.2 39.7 14.3
Page 17 GAO- 03- 810 Private Pensions Specifically, the percentage of all
retirees who either directly rolled over benefits into an IRA or deferred
their receipt increased from about 32 to 47 percent, while the percentage
who received cash settlements directly
from their plan changed little. In contrast, the percentage of retirees
receiving annuities ranged from a peak of about 65 percent to about 57
percent.
Most retirees participated in DB plans between 1992 and 2000, and payouts
received by retirees with DB benefits tended to be markedly different from
payouts received by retirees with DC benefits, which helps to explain why
most retirees received annuities. About 77 percent of retirees with DB
plan benefits received an annuity from those plans (see fig. 4), while
only 8 percent of retirees with DC plan benefits received or purchased
annuities with their benefits (see fig. 5). Conversely, over three-
quarters of retirees with DC plan benefits directly rolled over assets
into an IRA or
deferred receipt of benefits by leaving assets in their plan.
Page 18 GAO- 03- 810 Private Pensions Figure 4: Types of Pension Payouts
Received by Retirees with DB Payouts
Note: For our analysis, *retirees with pensions* are survey respondents
who reported leaving a preceding- wave job to retire and reported
receiving a pension payout from that job. Figures in subcategories should
not be added because some respondents report receiving multiple pension
payouts. a For retirees with DB plans, includes respondents who expect to
receive benefits in the future. For
those with DC plans, includes respondents who reported leaving their
assets in a plan account. Annuity
Direct rollover to IRA and/ or deferred receipt of benefits a Cash
settlement
Percent of retirees with DB plan payouts 0 10
20 30
40 50
60 70
80 90
Retirement period 1992- 2000 percent average
Source: GAO analysis of weighted HRS data 1992- 2000.
1992- 1994 1994- 1996 1996- 1998 1998- 2000
76.7 19.0 11.1
Page 19 GAO- 03- 810 Private Pensions Figure 5: Types of Pension Payouts
Received by Retirees with DC Payouts
Note: For our analysis, *retirees with pensions* are survey respondents
who reported leaving a preceding- wave job to retire and reported
receiving a pension payout from that job. Figures in subcategories should
not be added because some respondents report receiving multiple pension
payouts. a For retirees with DB plans, includes respondents who expect to
receive benefits in the future. For
those with DC plans, includes respondents who reported leaving their
assets in a plan account.
The growing trend towards payouts other than annuities may reflect, at
least in part, the continuing trend in coverage towards DC plans. Among
all retiring participants who received pension benefits, the percentage
who had participated in DC plans increased considerably over time, while
the percentage who had participated in DB plans decreased somewhat after
peaking in 1994. Also, little change occurred in the types of payouts
received by those with benefits from either DB or DC plans. For example,
about 90 percent of retirees with DC plan benefits received payouts other
than annuities over the entire period we examined. Similarly, during this
same period, retirees with DB plan benefits received their payouts largely
through annuities, with little change. Percent of retirees with DC plan
payouts 0
10 20
30 40
50 60
70 80
90 Retirement period
1992- 2000 percent average
Direct rollover to IRA and/ or deferred receipt of benefits a Cash
settlement Annuity Source: GAO analysis of weighted HRS data 1992- 2000.
1992- 1994 1994- 1996 1996- 1998 1998- 2000
78.0 15.1
7.5
Page 20 GAO- 03- 810 Private Pensions One likely reason why many retirees
with DB plans receive annuities is that many DB retirees do not have other
payout options available. About
38 percent of the DB retirees we analyzed reported having a choice of
receiving a payout other than an annuity. We narrowed our analysis to
examine the payout choices made by retirees, eliminating from our analysis
DB retirees with no payout choice other than an annuity. Thus, in addition
to examining how all retirees receive their pensions, we also analyzed
only retirees who report having a choice of receiving benefits as an
annuity or as a lump sum amount. 20 Over the period, the percentage of
retirees who chose to directly roll over their lump sum benefits to an IRA
or to defer receipt of benefits rose substantially, from around 44 percent
of retirees to about 66 percent (see table 2 in app. II). The percentage
choosing annuities and cash settlements, however, remained flat,
indicating that more retirees chose multiple payouts. Additionally, we
found that 64 percent of DB retirees with a choice still choose annuities
over other options. As with the full sample of retirees, the changes over
time among those with a choice of payout appears to be attributable
largely to the trend toward participation in DC plans, as we do not
observe many changes in payout choices within either plan type.
Currently, pension experts and plan sponsors we spoke with told us that
most retirees do not choose annuities when they have a choice of payout
options. For example, one plan administrator we spoke with indicated that
about two- thirds of retirees in the DB plans they administer choose
payouts other than an annuity when a choice of payout options is offered.
Additionally, a funding provider for DC plans reports that the percentage
of their participants who chose an annuity (single or joint life) as their
initial income selection fell from 78 percent to 45 percent from 1995 to
2001. Nevertheless, our analysis is not necessarily inconsistent with this
information. Although we found that most retirees with pension benefits
received an annuity, we also found that a growing percentage of all
retirees with a choice of payout options received benefit payouts other
than an annuity. Moreover, the majority of those retirees who received DC
plan benefits and who had a choice of payout options choose to receive
payouts other than an annuity (see table 2 in app. II).
20 Specifically, we use the following criteria to identify a participant
as having a choice of benefit payouts: retired DB participants who receive
or report they had the option to receive benefits as a lump sum; and all
DC participants. Although few DC plans offer to pay an annuity, DC
retirees can use their DC plan benefits to purchase an annuity outside of
their plan. Consequently, all retirees with a choice of payouts have an
annuity payout available or can use plan assets to purchase an annuity
privately at retirement.
Page 21 GAO- 03- 810 Private Pensions It is also possible that the receipt
of lump sums from DB plans, whether as cash settlements or through
directly rolling over lump sum benefits to an
IRA, has increased since 2000. Recently, 30- year Treasury bond rates,
which DB plan sponsors must use to determine lump- sum amounts, have
fallen from their overall 1990*s levels. As a result, lump sums from DB
plans have increased in value relative to participants* annuity benefits,
and retiring participants may find lump sums more attractive when they are
available under their plan.
We further analyzed retirees with a choice of payouts to determine
statistically which factors may influence retirees to choose annuities.
Not unexpectedly, participation in a DB plan was the strongest predictor
of annuity choice. Also, retirees with lower total household assets
(excluding pensions and other retirement assets) and retirees with more
years in the workforce were more likely to choose an annuity, all else
being equal. In addition, different factors seemed to influence payout
choices for retirees with DC benefits as compared with those with DB
benefits. For example, retirees with DC plan benefits were more likely to
be influenced by the price 21 of an annuity and by their perceived health
status (with those reporting they were in better health more likely to
choose an annuity), while these factors did not appear to affect retirees
with DB plan benefits. 22 Pension experts we spoke with suggested that
annuities may appeal to individuals with certain characteristics or
preferences, while others prefer
to have control of their assets. Annuities may appeal to individuals who
expect to live long, are concerned about outliving their resources in
retirement, value a predictable, guaranteed income stream, or do not wish
or expect to leave a bequest. 23 However, some retirees may decline to
consider annuities because such payouts are generally irrevocable, instead
preferring the flexibility that other payouts offer. Such retirees may
believe they can receive more income and better protect themselves against
inflation by investing assets on their own. Also, some retirees may want
to manage their pension assets because they have difficulty comparing the
value of a lump sum amount to its equivalent annuity
21 The price per annuity dollar decreases with the age at retirement and
with the prevailing rate of interest. 22 See appendix II for additional
results from our statistical analysis.
23 Retirees may choose to annuitize a portion of their pension benefits
and keep a portion as a cash settlement.
Page 22 GAO- 03- 810 Private Pensions income stream. As such, retirees may
believe lump sum amounts are worth more than income payments from
annuities.
Although not all retirees have the option to receive their pension as an
annuity, they may purchase individual annuities 24 to pay income during
retirement directly from insurance companies. However, few retirees use
their pension benefits or other assets to purchase individual life
annuities. Some retirees may choose not to purchase an individual life
annuity
because the availability of these annuities is limited, individual life
annuities have associated administrative and other expenses, and such
annuities generally do not provide protection against inflation.
Additionally, one individual annuity provider told us that the average
premium, or one- time payment an individual makes, to purchase an
individual life annuity is approximately $130,000. The demand for
individual annuities may grow as the market continues to develop
innovative annuity products that appeal to consumer preferences.
For example, demand for individual variable annuities, which offer the
potential for higher income payouts based on investment returns 25 is
growing. Additionally, as more individuals will be approaching retirement
with responsibility for managing a larger share of their pension assets,
the demand for individual life annuities may increase.
Pension experts identified a range of actions that could help retiring
participants preserve their pension and retirement savings plan assets.
Some policy options would require plans to payout or offer annuities to
retiring participants, while others would make it easier for plans to
offer annuities at retirement, or encourage retiring participants to
choose annuities. Additionally, pension experts generally agreed that
information and education could be provided to participants to help them
make better decisions regarding how they manage their pension assets
during
retirement. For example, they noted that participants need to be aware of
various risks that may affect how participants manage and draw down 24
Individual annuities that pay income are referred to as immediate
annuities. Income payments provided by immediate annuities may be fixed or
variable. 25 Variable annuities can be used either to accumulate assets or
to provide payments at regularly scheduled intervals. Unlike fixed
annuities, variable annuities provide income payments that fluctuate in
amount based on the market performance of the annuitant*s underlying
annuity portfolio. Range of Actions Available to Help Retiring
Participants
Preserve Their Pension Assets
Page 23 GAO- 03- 810 Private Pensions their pension assets to provide
income during retirement. At present, public education focuses primarily
on saving for retirement.
Some actions that could help retiring participants preserve their pension
and retirement savings plan assets include options intended to increase or
encourage the receipt of annuities. 26 While annuities are not the only
way plan participants can preserve their pension assets at retirement,
they can provide guaranteed income throughout retirement. Thus, we asked
an expert panel to identify options that could encourage more
annuitization of pension and retirement savings plan assets at retirement.
Some options are intended to increase the number of retiring participants
who receive annuities by imposing new requirements on plan sponsors. One
option is to require that all pension and retirement savings plans pay
life annuities to retiring participants. 27 Such a mandate would ensure
all retiring participants have pension income for their remaining
lifetimes. A variation on mandatory annuitization would make life
annuities the default payout option in all DC plans. This could be
achieved by requiring all taxqualified
DC plans to offer a life annuity at retirement and retiring participants
to actively choose to receive some other payout (e. g., a cash settlement)
instead of an annuity. While annuities would not be compulsory, it is
likely that more retiring participants would choose annuities because
choosing to receive some other payout would require an affirmative choice.
This is because some retiring participants may not take the necessary
steps to choose another type of payout available under their
plan. Another somewhat less stringent option than mandatory annuitization
is to require tax- qualified DC plans to offer annuities to retiring
participants like DB plans are required to do. This option would provide
more retirees with the opportunity to preserve retirement savings by
choosing an annuity from their plan without requiring that they do so.
Also, concerns that some participants might have about the expense of
purchasing an
26 See appendix III for additional results from our expert panel. 27
Mandatory annuitization could be achieved by requiring all tax- qualified
pension plans to payout benefits to participants at retirement as a life
annuity. For example, such a mandate could prescribe that the portion of a
participant*s accrued benefits below a certain dollar level be payable
entirely as an annuity. Actions Available to
Increase or Encourage Receipt of Annuities
Page 24 GAO- 03- 810 Private Pensions individual annuity and potential
difficulty in searching for an annuity product could be mitigated if
annuities were available under their plan.
Although these actions would increase the number of retirees who receive
annuities thus ensuring retirement income throughout their lives, they
also have drawbacks. For example, requiring that pension plans provide
life annuities to retiring participants would reduce people*s ability to
tailor the receipt of benefits to their particular circumstances.
Depending on one*s individual circumstances and preferences, an annuity
may not be the best payout option for managing pension assets during
retirement. A retiring participant who is in poor health or needs cash to
cover certain expenses may not want to receive an annuity. Also, some
retirees might increase their income by rolling over benefits directly to
an IRA, thus enabling them to invest and draw down their pension assets
during retirement.
Requiring all tax- qualified DC plans to offer annuities to retiring
participants* as the default payout option or not* might not substantially
increase the number of retirees who choose annuities. Our analysis shows
that recent experience with retiring participants who have a choice of
payout options indicates that these retirees increasingly choose to
directly roll over their lump sum benefits into an IRA or defer the
receipt of
benefits. Also, some plan sponsors and pension experts we spoke with
indicated that retiring participants generally do not choose annuities
when they have other payout options available.
A common drawback of such requirements on plans to offer annuities at
retirement is that they could increase the administrative and regulatory
burdens plan sponsors face. DC plans would have to comply with applicable
laws and regulations that must be satisfied when annuities are provided,
such as offering annuities that provide income for the life of the
participant and spouse or beneficiary. And those plans that do not
currently offer an annuity payout option at retirement would have to
contract with an annuity provider. Imposing new requirements on plans to
pay or offer annuities at retirement represent prescriptive approaches
that do not necessarily help retiring participants understand their
pension payout options or make decisions suited to their individual needs
or preferences. While requiring plan sponsors to pay or offer annuities
represents one set
of options for increasing annuitization, other options involve modifying
certain requirements to make it easier for qualified plans to offer
annuities. One such modification could be providing regulatory relief to
plan sponsors from potential fiduciary liability they assume in selecting
an
Page 25 GAO- 03- 810 Private Pensions annuity provider. Because plan
sponsors must generally select the safest available annuity for
participants, those that do not offer annuities may be
concerned about being held liable for any losses to participants in the
event the annuity provider cannot meet its financial obligations. Another
modification could be exempting DC plans that are not required to offer an
annuity but choose to do so from having to make a joint and survivor
annuity the default payout or from satisfying associated spousal consent
requirements. These modifications could encourage more DC plans to offer
annuities to the extent they reduce administrative or regulatory burdens
that plans would incur otherwise. However, these modifications could
lessen certain protections available to plan participants that receive or
choose annuities.
In addition to options that focus on plan sponsors, our expert panel
identified other policy options that focus on encouraging more retiring
participants to choose annuities or purchase them with their pension
assets. For example, lowering taxes on annuity income from qualified plans
28 could encourage some retiring participants, who would not otherwise do
so, to choose or purchase an annuity. Such an incentive would not involve
any new requirements on plan sponsors to payout or
offer annuities at retirement. Nor does it constrain an individual*s
choice because retiring participants who receive lump sum benefits could
partially annuitize their pension assets and maintain some assets they
could more easily access to cover immediate and/ or large expenses. Also,
a tax incentive for qualified plan annuities could potentially help to
reduce the long- term burden on government assistance programs, such as
the Supplemental Security Income and Medicaid programs, to the extent that
fewer retirees deplete their assets during retirement.
However, a tax incentive for income provided by qualified plan annuities
could also have drawbacks. For example, such an incentive might be limited
to only those assets held in qualified retirement plans. Also, annuities
could be made more attractive to some retiring participants for whom
another payout option might be more advantageous, such as those in ill
health who need large sums of cash to cover medical expenses. Moreover,
some participants, who would elect an annuity from their plan even in the
absence of such an incentive, would benefit. To the extent this 28 For
example, capital gains tax rates could apply to income received from
qualified plan
annuities instead of income tax rates that currently apply. Another way to
provide favorable tax treatment of annuity income would be to exempt a
certain portion of such income (up to a specified amount) from taxation.
Page 26 GAO- 03- 810 Private Pensions option encourages more retirees to
choose or purchase annuities, it would result in the federal government
forgoing some amount of revenue.
Another option that could encourage more retiring participants to choose
annuities would involve modifying the mandatory interest rate that DB plan
sponsors must use to calculate lump sums. By law, DB plans must use the
interest rate on 30- year Treasury bonds, which some pension experts and
plan sponsors consider to be low and thus inflate the value of lump sums
relative to annuities. 29 A higher mandatory interest rate would generally
decrease and potentially equalize the value of lump sums from DB plans
relative to participants* annuity benefits. As a result, smaller
lump sums may not be as economically attractive to some retirees. However,
the extent to which more retiring participants with DB benefits would
choose annuities instead of lump sums when they are both offered is
uncertain.
Alternatively, the taxes that apply to lump sums (i. e., cash settlements)
received directly by individuals prior to retirement could also be applied
to cash settlements received by retiring participants. Currently, lump
sums that are received directly by participants as cash settlements (prior
to attaining age 59- 1/2) are subject to certain taxes. 30 Less favorable
tax treatment of cash settlements, while not requiring retiring
participants to take an annuity or any other type of payout, could
encourage retirees to preserve their pension benefits. However, this
option could be disadvantageous for some retiring participants. For
example, those
participants who are in poor health and need cash to pay for medical
expenses may want the access to large sums of cash and flexibility that a
cash settlement provides. Moreover, to the extent retiring participants
have difficulty comparing the value of annuity income payments with lump
sum amounts, options that seek to influence the payouts chosen by retiring
participants might have limited impact.
29 For more information on the mandated interest rate DB plans must use to
determine lump sum payouts and in other important pension calculations,
see U. S. General Accounting Office, Private Pensions: Process Needed to
Monitor the Mandated Interest Rate for Pension Calculations, GAO- 03- 313
(Washington, D. C.: Feb. 2003). 30 Currently, if a departing participant,
prior to attaining age 59- 1/2, chooses to receive a lump sum directly and
does not have his or her employer transfer the amount directly to an IRA
or another qualified plan, the lump sum amount is subject to an excise tax
of 10 percent in addition to ordinary income taxes. Also, the employer is
required to withhold 20 percent of lump sum amount if the participant
elects to receive it directly.
Page 27 GAO- 03- 810 Private Pensions Beyond options focusing exclusively
on annuities, pension experts we spoke with generally agreed that retiring
participants need information
and education to help them make decisions about how to manage their
pension assets during retirement. While annuities reduce the risk of
outliving one*s assets, they may not always be the best choice for
addressing individual retirement needs and preferences. Moreover, retiring
participants may have a choice of benefit payout options, and the payouts
they choose may or may not address their individual retirement income
needs and preferences.
According to our expert panel, retiring participants need information and
education on various risks that affect the level of income needed during
retirement. 31 These risks include outliving one*s assets during
retirement (i. e., longevity risk) and financial risks, such as declining
purchasing power of retirement income (i. e., inflation risk) that affect
how retirees balance income and expenses. Almost all of the respondents
from our expert panel rated information on the financial risks individuals
face in retirement (96 percent) and the risk of outliving one*s assets in
retirement
(91 percent) as very or extremely effective in helping retiring
participants make decisions about how to manage pension assets. 32
Furthermore, a recent study by the Society of Actuaries on retirement
risks indicates that both retirees and individuals approaching retirement
age tend to underestimate the average life expectancy of individuals at
age 65. This study also reports that 63 percent of pre- retirees and 55
percent of retirees surveyed are somewhat or very concerned about not
being able to keep the value of their savings and investments growing
faster than inflation. 33 Our expert panel also noted the importance of
information and education
on other considerations relevant to managing pension and retirement
savings plan assets during retirement. Such considerations include how to
assess needs in retirement, how to compare annuity and lump sum
amounts, the value of expected benefit from DB and DC plans, how annuities
provide retirement income, and strategies for drawing down
31 See appendix III for additional results on types of information and
education identified by our expert panel. 32 These figures are based on
the total number of responses to phase II of our expert panel, in which 22
of the 24 participants who completed phase I of this process submitted
completed responses to the phase II questionnaire. 33 *Retirement Risk
Survey: Report of Findings.* Matthew Greenwald and Associates, Inc., and
the Employee Benefits Research Institute. January 2002. Increased
Information and
Education Could Help Participants Make More Informed Decisions
Page 28 GAO- 03- 810 Private Pensions pension assets during retirement. At
least 60 percent of our expert panel participants rated such
considerations as very or extremely effective in
helping retiring participants make decisions about managing their pensions
during retirement.
Overall, federal efforts to provide information and education on
retirement planning have focused on accumulating pension assets and not on
how to manage these assets to provide income throughout retirement. Under
its authority to implement the SAVER Act, current DOL outreach efforts are
primarily aimed at advancing public awareness and understanding about the
importance of saving for retirement. For example, DOL convened two
national summits focusing on challenges to saving for retirement. Also, as
we previously reported, DOL conducts a range of outreach activities,
including developing and distributing publications and using public
service announcements. 34 DOL has begun to broaden the focus of its
education initiatives to include
managing assets during retirement. For example, DOL is developing a tool
kit for those near retirement that will include some information on
considerations relevant to managing retirement assets during retirement.
However, some pension experts told us that there is a need for more focus
on managing pension and retirement savings plan assets during retirement.
These experts generally agreed that the federal government could improve
public awareness and understanding about issues related to managing
pension assets during retirement.
Also, pension experts we spoke with generally agreed that participants
need information and education in several areas to help them make
decisions about how to manage their pension assets during retirement. Some
of these experts told us that many participants do not accurately assess
the risk that they could live to very old age and have little income to
meet their needs. Others indicated that retiring participants do not
understand how annuities provide retirement income or how to assess
retirement income needs.
At present, federal pension law does not generally address managing
pension and retirement savings plan assets during retirement. Disclosures
plan sponsors must provide to participants about their pension benefits
34 See U. S. General Accounting Office, Retirement Saving: Opportunities
to Improve DOL*s SAVER Act Campaign, GAO- 01- 634 (Washington, D. C.: June
2001).
Page 29 GAO- 03- 810 Private Pensions are intended to give them
information about rights and obligations under the plan. There are no
additional requirements on plan sponsors to provide
information and education to participants regarding managing pensions
during retirement. Also, while DOL issued regulatory guidance for plan
sponsors who want to provide investment information and education to their
participants, it has not issued similar guidance regarding the provision
of education on retirement planning. Recognizing the need for more
information on retirement planning, DOL*s Employee Retirement Income
Security Act Advisory Council Working Group on Planning for Retirement
issued a report that recommended DOL explore regulatory measures to
encourage employers to provide retirement planning advice to their
employees. 35 The decreasing number of employer- sponsored pension plans
that offer
only life annuities at retirement and the increasing percentage of
retiring participants who choose benefit payouts other than annuities
suggest that, in the future, fewer retirees may receive pension income
guaranteed to last throughout retirement. The growth in the number of DC
plans, along with the increasing availability of lump sums from DB plans,
means that retirees will face greater responsibility and choices for
managing their pension and other assets at and throughout retirement.
Depending on their choices, retirees could be at greater risk of outliving
their pension and
retirement savings plan assets or ultimately having insufficient income to
maintain their standard of living through their retirement years.
Such risks underscore the need for providing enhanced information and
education to participants about their available payout options, the issues
they may face in managing retirement assets, and how different options may
mitigate, or increase, these risks. As part of their responsibility,
retirees will have to weigh certain pros and cons of different ways to
manage and preserve pension assets. Currently, the notices that plan
sponsors must furnish to retiring participants are not sufficient to help
them choose payout options that suit their individual circumstances, while
assuring adequate levels of such income to the extent possible. Our expert
panel suggested that providing several types of information, such as on
risks that could affect retirement income security, could help retiring 35
Report of the Working Group on Planning for Retirement. U. S. Department
of Labor, Employee Benefits Security Administration. November 14, 2001.
Conclusions
Page 30 GAO- 03- 810 Private Pensions participants make more informed
decisions regarding how they balance income and expenditures during
retirement. To improve public awareness and understanding of important
considerations related to managing pension and retirement savings plan
assets at and during retirement, the Congress should consider amending
ERISA so that it specifically requires plan sponsors to provide
participants with a notice on risks that individuals face when managing
their income and expenditures at and during retirement. Also, the Congress
could
consider stipulating that this notice must be provided to participants at
certain key milestones, such as at enrollment in the plan, when
participants receive or when changes are made to certain plan documents,
when participants reach various years of service, when a participant
separates from service, and/ or at retirement among other instances.
We provided a draft of this report to the Department of Labor and the
Department of the Treasury. We received technical comments from both
agencies that we incorporated as appropriate.
In the draft of this report we sent to agency for review, we recommended
that the Secretary of Labor direct the Assistant Secretary, Employee
Benefits Security Administration, to require plan sponsors to provide
participants with information on risks that individuals face when managing
their income and expenditures during retirement. DOL officials said that
the Secretary does not currently have the legal authority under ERISA to
require plan sponsors to provide such information. Consequently, we
changed our recommendation to a matter for consideration for the Congress
to amend ERISA so that it requires plan sponsors to provide a notice to
participants on risks that may affect an individual*s ability to manage
income and expenditures at and during
retirement. In addition, we received a letter from the Department of the
Treasury that neither agrees nor disagrees with our findings and
conclusions. Instead, the letter highlights the Administration*s proposal
to replace the 30- year Treasury rate as the mandated discount rate used
in many pension calculations. Of relevance to this report, the letter
notes that the Administration*s proposal would affect the calculation of
lump sum payments (see app. V). Matter for
Congressional Consideration
Agency Comments
Page 31 GAO- 03- 810 Private Pensions We are sending copies of this report
to the Secretary of Labor, the Secretary of the Treasury, and interested
congressional committees.
We will also make copies available to others on request. In addition, the
report will be available at no charge on GAO*s Web site at http:// www.
gao. gov.
If you have any questions concerning this report, please contact me at
(202) 512- 7215 or George A. Scott at (202) 512- 5932. Other major
contributors to this report include Jeremy Citro, Mark M. Glickman, Gene
Kuehneman, Luann Moy, Nyree M. Ryder, Patrick DiBattista, Joseph
Applebaum, and Roger Thomas.
Barbara D. Bovbjerg Director, Education, Workforce, and Income Security
Issues
Appendix I: Data, Scope, and Methodology Page 32 GAO- 03- 810 Private
Pensions We used a variety of data sources to examine the pension payouts
plans make available to retiring participants and the benefit payouts they
receive, as well as to identify what available actions could help retiring
participants preserve their pension and retirement savings plan assets. We
used National Compensation Survey (NCS) data from the Bureau of Labor
Statistics (BLS) to determine the availability of various pension payout
options. Further, we analyzed Health and Retirement Study (HRS) data
covering individual respondents that retired between 1992 and 2000 to
determine the pension payouts retirees receive and what factors influenced
their choice of payout.
Generally, the estimates in this report of the availability and the
receipt of pension payouts are derived from a sample of usable responses
(i. e., NCS and HRS) and therefore are subject to sampling and nonsampling
errors. Sampling errors are the differences that can arise between results
derived from a sample and those computed from observations of all units in
the population being studied. When probability techniques are used to
select a sample, statistical measures called *standard errors* can be
calculated to measure possible sampling errors.
Nonsampling errors also affect survey results. They can be attributed to
many sources: inability to obtain information about all establishments in
the sample; definitional difficulties; differences in the interpretation
of questions; inability or unwillingness of respondents to provide correct
information; mistakes in recording or coding the data; and other errors of
collection, response, processing, coverage, and estimation for missing
data. Computer edits of the data and professional review of both
individual and summarized data reduce the nonsampling errors in recording,
coding, and processing the data. These nonsampling errors can influence
the accuracy of information presented in the report, although the
magnitude of their effect is not known.
Finally, we convened a virtual expert panel* using a Delphi method* to
identify and evaluate the actions available to help retiring participants
preserve their pension and retirement savings plan assets at and during
retirement. We performed our work between August 2002 and July 2003 in
accordance with generally accepted government auditing standards. Appendix
I: Data, Scope, and Methodology
Appendix I: Data, Scope, and Methodology Page 33 GAO- 03- 810 Private
Pensions BLS collects information covering incidence and detailed
provisions of selected employee benefit plans as part of the NCS. The
portion of the
NCS from which reported estimates on employee benefits were made covers
all private- sector establishments in the United States, with the
exception of farms and private households. The most recent (2000) NCS
obtained data from 1,436 private industry establishments, representing
over 107 million workers; of this number, nearly 86 million were full-
time workers and the remainder* nearly 22 million* were part- time
workers. NCS collects incidence and provisions data for both defined
benefit and defined contribution retirement plans. Excluded from the
survey are selfemployed
persons, proprietors, major stockholders, members of a corporate board who
are not otherwise officers of the corporation, volunteers, unpaid workers,
family members who are paid token wages, the permanently disabled,
partners in unincorporated firms, and U. S.
citizens working overseas. BLS statistics based on NCS data are estimates
derived from a sample of usable occupation quotes selected from the
responding establishments. They are not tabulations based on data from all
employees in private establishments within the scope of the survey. BLS
did not calculate estimates of sample error for these statistics. Summary,
data collection, and survey methodology information for the NCS is
publicly available through the Bureau of Labor Statistics* World Wide Web
site at http:// www. bls. gov/ ncs/ home. htm.
HRS is a national panel study intended to provide data related to
retirement, health insurance, saving and economic well- being. The HRS
began with an initial (1992) sample of over 12, 600 persons in 7,600
households. 1 The HRS baseline is drawn from in- home, face- to- face
survey interviews conducted in 1992 for the 1931- 1941 birth cohort (and
their
spouses, if married, regardless of age); and in 1998 for newly added 1924-
1930 and 1942- 1947 birth cohorts. Follow- ups are administered by
telephone every second year, with proxy interviews after death. Future
data collections will largely replicate the 1998 HRS in design, format,
coverage, structure, and measurement. Data is collected by the Institute
for Social Research, University of Michigan, and is supported by funding
from the National Institute on Aging (NIA), the Social Security
1 HRS oversamples (100%) Hispanics, Blacks, and Florida residents. Data
BLS Employee Benefits Data
HRS Retirement Data
Appendix I: Data, Scope, and Methodology Page 34 GAO- 03- 810 Private
Pensions Administration (SSA), the Department of Labor, the state of
Florida Department of Elder Affairs, and the Assistant Secretary for
Planning and
Evaluation at the Department of Health and Human Services. HRS is an
ongoing survey that plans to be continually representative of the complete
U. S. population over the age of 50 by adding additional cohorts every
6 years while continuing to follow up with existing cohorts. Further
information on the design, history, content, and use of HRS study
components is available at http:// hrsonline. isr. umich. edu/ intro/ sho_
intro. php? hfyle= uinfo.
The RAND HRS data file is a cleaned and streamlined version of the Health
and Retirement Study with derived variables covering a broad, though not
complete range of measures and which are named consistently across waves.
NIA and SSA support the development and continued maintenance of the RAND
HRS data. As of late 2001, RAND HRS data included the HRS cohort (1931-
1941 birth cohort, plus spouses) and is based on 1992, 1994,
and 1996 public releases and the 1998 and 2000 preliminary releases. We
reviewed applicable laws and regulations to identify benefit payout
options plan sponsors must and may provide at retirement and the types of
accompanying information they must furnish to participants. We obtained
data from NCS on the types of payout options available to participants.
Specifically, we tabulated supplementary NCS data published by BLS in the
Monthly Labor Review (April 2003). We recalculated the percent of
participants with each payout option to include only those for which
benefit options were determinable. Also, we interviewed plan sponsors and
practitioners to supplement BLS data and to determine what benefit payout
options DB and DC plan sponsors typically make available to
participants at retirement. Further, we asked our Delphi panel to identify
factors that affect the benefit payout options offered to retiring
participants, as well as conducted interviews with plan sponsors and
practitioners to determine some of the factors that affect the options
offered.
We determined what information DB and DC plan sponsors must provide to
retiring participants about their benefit payout options by reviewing
relevant provisions of pension laws and regulations. We also interviewed
plan sponsors to determine the information plan sponsors do and do not
RAND HRS Data
Methodology Determining Defined Benefit and Defined Contribution Payout
Options and Accompanying Information Available at Retirement
Appendix I: Data, Scope, and Methodology Page 35 GAO- 03- 810 Private
Pensions provide to retiring participants and some factors that influence
the types of information they provide. While we did not have a specific
selection
criteria for interviewing pension plan sponsors, we sought a range in
terms of the type of company (i. e., we interviewed an insurance, a
manufacturing company, a pharmaceutical, a tobacco company, a funding
provider for educational institutions, and a law firm) and in the types of
plans (i. e., we interviewed both DB and/ or DC plan sponsors).
We analyzed HRS data to determine the benefit payouts pension plan
participants receive at retirement. We examined benefit payouts for 1,523
HRS respondents that reported being covered by a pension on a job they
held in the preceding survey wave and left to enter retirement. This
information was collected for HRS in 1994, 1996, 1998, and 2000 (survey
waves 2- 5) and included respondents that retired between 1992 and 2000.
We used information reported by individual respondents on the type of plan
they participated in and on the corresponding pension payouts received. We
only examined pension payouts received at the earliest time at which a
respondent reported leaving a job to retire. For
example, a respondent who reported being retired in 1994, reported
resuming work in 1995, and again reported retiring in 2000 would be
categorized as a 1994 retiree and not as a 2000 retiree.
Our analyses depend upon the accuracy of reported plan type among the
recently retired who received or deferred a pension payout in connection
with their recent retirement. Some experts have expressed concerns
regarding the accuracy of HRS respondents with respect to pension
availability and type of pension. Workers who are years away from
retirement may not have good information about their plan type. To
mitigate this concern, we limit our analyses to respondents who leave a
job they held in the previous wave to retire. We believe that these
respondents are likely to have more accurate information about their
pension plans because they likely will have received recent information on
their plans and payout choices. Accordingly, we confirm a respondent*s
reported plan type and choice of payouts by examining the respondent*s
actual payout from a DB or DC plan, and where discrepancies exist between
a respondent*s plan type description and actual receipt of benefits from a
type of plan we use the information from the actual receipt. There is a
range of sampling errors for the estimated percentages of retirees that
receive each type of pension payout as reported in tables 2- 4. Except as
noted in these tables, all estimated percentages had sampling errors less
than plus or minus 6 percentage points at the 90 percent confidence level.
Determining Benefit
Payouts Plan Participants Receive at Retirement
Appendix I: Data, Scope, and Methodology Page 36 GAO- 03- 810 Private
Pensions To determine the payouts plan participants receive at retirement,
we tabulated the number and percent of participants for four benefit
payout
option categories. These four categories include receiving or purchasing
an immediate annuity, rolling over assets directly into an Individual
Retirement Account (IRA), deferring receipt of benefits by leaving them in
the plan, or receiving benefits directly from their plan as a cash
settlement directly from their plan (i. e., lump sum amount). We tabulated
figures for the receipt of pension payouts, as well as payouts elected by
those retirees with a choice of payout options, for HRS waves two through
five. The numbers and percent receiving any given pension payout may
exceed the totals because individuals may have more than one pension and
because respondents may receive more than one payout from a pension (e.
g., a
respondent with a DB pension may take a partial cash settlement and
receive an annuity for the remainder).
There are payout categories where the effect on receipt of pension
benefits differs between retirees with benefits from DB plans and those
with benefits from DC plans. The payout category *deferring benefit
receipt* for retirees with benefits from DB plans generally means delaying
the receipt of an annuity, while for retirees with benefits from DC plans
this payout category generally means maintaining the DC account balance
with the plan sponsor. Also, while retirees with annuities from DB plans
receive an immediate annuity from their plan sponsor, retirees with
annuity payouts from DC plans may have converted their account balance
into an annuity through their pension plan sponsor or used their account
balance to purchase an annuity privately. The HRS data on annuity payouts
received by retirees with DC plan benefits do not permit us to determine
whether these annuities are from plans or were purchased privately. A
further possibility is that retirees with DC plan benefits that receive a
cash settlement and privately purchase an annuity might categorize this
payout as a cash withdrawal or as an annuity. We categorize DC
participants pension payouts based on the retiree*s survey responses.
We further tabulated pension payouts separately for DB and DC pensions. We
excluded 49 respondents from this tabulation because their survey
responses did not distinguish whether the pension payouts they reported
corresponded to their DB or DC pension. We tabulated DB and DC pension
payouts using the same four categories as for the overall tabulations.
Additionally, we tabulated benefit payouts for retirees with a
Appendix I: Data, Scope, and Methodology Page 37 GAO- 03- 810 Private
Pensions choice of benefit payouts. This group includes all retirees
participating in a DC pension 2 as well as DB participants that reported
having a choice or
demonstrated having such a choice by receiving all or part of their DB
pension in a form other than an annuity.
We also conducted logistic regressions on retiree payout choices to
evaluate factors that might influence retirees to choose an annuity versus
other payouts. We augmented the main HRS information with accompanying
information from the RAND HRS data set. Survey sample weights were used
throughout our analysis because HRS data is collected from a stratified
sample. We used the individual sampling weights from the
first survey wave in our regressions and to calculate associated standard
errors. We used STATA software to estimate logistic regression parameters
and associated standard errors. Results of our regression analyses are
presented in appendix II.
To supplement results from our analysis of HRS data, we interviewed plan
sponsors and practitioners to obtain testimony and data on the payouts
participants receive at retirement, as well as the benefit payouts
retiring participants choose when offered a choice of payout options. In
addition, we obtained plan sponsors and practitioners* views on why
retiring participants choose (or do not choose) certain payout options,
such as annuities or lump sums. We also asked our Delphi panel to identify
the most significant factors that affect the payout options retiring
participants elect.
2 We included all DC retirees since in addition to managing one*s DC
account balance, DC participants generally have the opportunity to
purchase an annuity privately, even if the DC plan does not offer an
annuity directly. Because employers may require DB participants to receive
a pension as a lump sum if the cash equivalent amount is below a specific
dollar
threshold, DB participants that took a lump- sum payout at or below this
threshold in our count of retirees were not assumed to have demonstrated a
choice of pension payout by receiving a lump- sum payout.
Appendix I: Data, Scope, and Methodology Page 38 GAO- 03- 810 Private
Pensions We convened a virtual panel on the Internet of 27 experts in the
area of pensions and retirement to address the third study objective. The
panelists were asked to identify factors affecting benefit payout options
offered to
and/ or elected by retirees, policy options that could encourage more
annuitization of pension and retirement plan savings, and the role that
education and information could play in helping retirees make optimal
decisions about retirement income management. We employed a modified
version of the Delphi method 3 to organize and gather opinions from
experts in the area of pensions and retirement using a Web- based forum. 4
The panel was selected from a list of experts, including from participants
in the Comptroller General*s Retirement Advisory Panel, referrals from
interviews, experts cited in the literature, and representatives of other
important players in the pension and retirement field. To ensure we had a
range of views, we asked participants from several different backgrounds
including: academic, practitioners, legal experts, plan sponsors, consumer
and public interest groups, and insurance providers, to participate in our
survey. Of the 30 experts we contacted, 27 agreed to participate. The
identity of respondents, as well as their comments and answers, remained
anonymous to other participants.
Our Delphi process entailed 3 questionnaire phases. Phase I asked the
panel to identify the most significant factors that affect pension and
retirement savings plan benefit payout options offered to and elected by
retiring participants; identify options that could be considered to
encourage more annuitization of pension and retirement plan savings and
the likely effects and tradeoffs of these options; and discuss the role of
information and education. Phase II presented 7 follow- up questions where
respondents were asked to either rank or rate the responses from phase I
(all responses were included in follow- up questions). The Phase III
survey provided panelists with some of the key findings from phase II and
solicited their feedback about these findings. Phase III also asked the
panel to identify options to encourage retiring participants to preserve
their pension assets at retirement by deferring the receipt of benefits
(i. e., leaving assets in an account balance), or rolling over assets
directly to an IRA at retirement. A full discussion of this expert panel,
including the
process we employed and methodology, and highlights of results from 3
Harold A. Linstone and Murray Turnoff, eds., The Delphi Method: Techniques
and Applications (Reading, Massachusetts: Addison- Wesley, 1975). 4 The
Delphi method, developed by the RAND Corporation in the 1950s, is most
commonly applied in a group- discussion forum. We modified the approach to
have the group discussion take place in the form of a Web- based forum.
Identifying Actions
Available to Help Retiring Participants Preserve Their Pension and
Retirement Savings Plan Assets
Appendix I: Data, Scope, and Methodology Page 39 GAO- 03- 810 Private
Pensions phases I and II are presented in appendix III. A copy of the
phase II questionnaire can be viewed at http:// www. gao. gov/ cgi- bin/
getrpt? gao- 03-
990sp.
Appendix II: Descriptive Statistics and Regression Analyses
Page 40 GAO- 03- 810 Private Pensions This appendix presents more detailed
descriptive statistics for our analysis of the relationship between the
choices to receive an annuity versus other
pension payouts. It includes further discussion of pension payout
categories and retiree choice, characteristics of retirees by payout
choice, and regression statistics.
For each respondent in the Health and Retirement Study (HRS) who reports
leaving a job to retire, HRS collects information on how the respondent
received his DB and/ or DC pension payouts. Retirees with DB pensions are
asked whether they (1) expect future benefits, (2) are receiving benefits
now, (3) received a cash settlement, (4) rolled benefits into an IRA, or
(5) lost benefits. Retirees with DC pensions are asked whether they (1)
withdrew the money, (2) rolled assets into an IRA, (3) left plan assets to
accumulate, or (4) converted assets to an annuity. We characterize these
pension payouts in four categories:
Annuities include DB respondents receiving benefits now and DC
respondents who converted assets to an annuity. Cash settlement includes
DB respondents who received a cash settlement
and DC respondents who withdrew the money from their plan. Direct
rollover into IRA and/ or deferred benefits includes DB and DC
respondents who rolled plan assets into an IRA directly from their plan, 1
includes DB respondents who expect future benefits and includes DC
respondents who left plan assets to accumulate. We used these categories
for all HRS retirees receiving one or more pension payout. These payouts
are reported in table 1.
1 DB respondents who reported receiving a cash settlement are asked by the
HRS what they did with the money. One response for these retirees includes
*Rolled over money into an IRA,* but because we could not obtain analogous
information on DC respondents, we counted these respondents as having
taken a cash settlement rather than as having rolled benefits into an IRA.
Appendix II: Descriptive Statistics and
Regression Analyses Pension Payout Categories and Retiree Choice Pension
Payout Categorization
Appendix II: Descriptive Statistics and Regression Analyses
Page 41 GAO- 03- 810 Private Pensions Table 1: Types of Pension Payouts
Received by Retirees Retirement period 1992- 94 1994- 96 1996- 98 1998-
2000 1992- 2000
Percent of retirees with pension plan benefits a Annuity 59.7 65.1 58.4
57.1 60.2 Cash settlement 15.8 11.6 16.8 12.9 14.3 Direct rollover to IRA
and/ or deferred receipt of benefits b 32.0 39.5 40.3 47.1 39.7
Number of retirees with pension plan benefits 353 408 405 357 1,523
Percent of retirees with DB plan benefits Annuity 77.3 77.3 75.9 76.3 76.7
Cash settlement 10.0 10.9 14.5 8.3 11.1 Direct rollover to IRA and/ or
deferred receipt of benefits b 18.3 20.2 18.0 19.2 19.0
Number of retirees with DB plan benefits 236 324 302 257 1,119
Percent of retirees with DC plan benefits Annuity 7.8 12.0 4. 9 5.9 7. 5
Cash settlement 22.8 c 10.3 15.9 15.4 15.1 Direct rollover to IRS and/ or
deferred receipt of benefits b 71.2 c 77.6 79.2 79.9 78.0
Number of retirees with DC plan benefits 68 137 149 168 522 Source: GAO
analysis of weighted HRS data 1992- 2000.
Notes: For our analysis, *retirees with pensions* are survey respondents
who reported leaving a preceding- wave job to retire and reported
receiving a pension payout from that job.
Figures in subcategories may not add up to 100 percent because some
respondents report multiple pension dispositions. a Includes respondents
who received multiple pension benefit payouts.
b For retirees with DB plans, includes respondents who expect to receive
benefits in the future. For those with DC plans, includes respondents who
reported leaving their assets in a plan account. c The estimated
percentage had a sampling error greater than plus or minus 6 percentage
points at the 90- percent confidence level.
In addition to tabulating the form in which retirees receive their
pensions, we also analyzed the pension payouts received by retirees who
had a choice among different pension payout options. We identify this
subset of retirees from HRS answers about the available options for payout
of a pension associated with the job from which a respondent retired. For
DB participants, we used information from HRS waves prior to retirement,
since questions about options for pension payouts are asked only when the
respondent has a current job, not retrospectively about a job from which a
respondent has retired. We define *choice* as having the option to Choice
Appendix II: Descriptive Statistics and Regression Analyses
Page 42 GAO- 03- 810 Private Pensions take a pension as either a lump sum
amount (i. e., as a cash settlement or as a direct rollover to an IRA) or
as an annuity. We include in this
definition all DC participants. This is because all DC participants have
the option to take a rollover IRA, almost all have the option to take a
cash settlement, and all have the option of purchasing an annuity on the
private market. We also include DB participants who annuitize and who
report in the prior wave that they had the option of taking a pension as a
lump sum or in installments. Additionally, we consider DB participants
whom we
observe a cash settlement or IRA rollover to have had a choice, because
almost all DB plans must offer an annuitized payout of benefits. Thus, the
only retirees we categorized as not having a disposition choice are DB
participants who elect to receive an annuity and who, in the previous
wave, report that they did not have a lump sum option. 2 Using our
definitions of choice, we analyzed pension payouts for those
retirees who choose the form of their pension over other available forms.
These payouts are reported in table 2. 2 An exception concerns those DB
participants who have benefits worth less than $5,000 ($ 3,500 before
August 1997). Because employers can require participants with such *de
minimus* accounts to take a cash settlement, even if otherwise they would
have to offer an annuity from the plan, we drop any such retirees from the
sample when we analyze only those with a choice of payout options.
Appendix II: Descriptive Statistics and Regression Analyses
Page 43 GAO- 03- 810 Private Pensions Table 2: Types of Pension Payouts
Received by Retirees Reporting a Choice of Payout Options Retirement
period 1992- 94 1994- 96 1996- 98 1998- 2000 1992- 2000 Percent of
retirees with pension plan benefits a Annuity 42.0 51.5 42.6 41.0 44.4
Cash settlement 26.0 19.4 25.2 17.9 22.1 Direct rollover to IRA and/ or
deferred receipt of benefits b 43.9 55.9 54.1 65.9 55.1
Number of retirees with pension plan benefits 207 232 253 229 921
Percent of retirees with DB plan benefits Annuity 63.2 c 67.4 c 60.0 c
64.1 c 63.6 Cash settlement 25.8 c 27.9 c 31.1 c 17.9 c 26.5 Direct
rollover to IRA and/ or deferred receipt of benefits b 24.1 c 23.1 c 20.4
c 24.5 c 22.8
Number of retirees with DB plan benefits 91 119 125 85 420
Percent of retirees with DC plan benefits Annuity 7.8 12.0 4. 9 5.9 7. 5
Cash settlement 22.8 c 10.3 15.9 15.4 15.1 Direct rollover to IRA and/ or
deferred receipt of benefits b 71.2 c 77.6 79.2 79.9 78.0
Number of retirees with DC plan benefits 68 137 149 168 522 Source: GAO
analysis of weighted HRS data 1992- 2000.
Notes: For our analysis, *retirees with pensions* are survey respondents
who reported leaving a preceding- wave job to retire and reported
receiving a pension payout from that job.
Figures in subcategories may not add up to 100 percent because some
respondents report multiple pension dispositions. a Includes respondents
who received multiple pension benefit payouts.
b For retirees with DB plans, includes respondents who expect to receive
benefits in the future. For those with DC plans, includes respondents who
reported leaving their assets in a plan account. c The estimated
percentage had a sampling error greater than plus or minus 6 percentage
points at the 90- percent confidence level.
For retirees who made different pension payout choices, we calculated
means for several descriptive variables for each category. We included
only those retirees with a choice of payouts and present the means for
three categories: (1) those who chose an annuity; (2) those who did not
choose an annuity; and (3) all retirees with a choice of payout.
Characteristics of Retirees
by Payout Choice
Appendix II: Descriptive Statistics and Regression Analyses
Page 44 GAO- 03- 810 Private Pensions Table 3: Sample Averages for
Characteristics of Retirees, by Pension Payout Choice Category Chose an
annuity Did not choose an annuity All retirees with a
choice Means Age at retirement 61.0 61.5 61.4
Age of Spouse at retirement 60.2 60.0 60.0 Years of education 13.5 13.2
13.3 Self reported health status (1= Excellent, 5= Poor) 2.3 2.4 2. 3
Mother*s age (current or max) 75.1 76.0 75.8 Father*s age (current or max)
72.6 72.1 72.2 Out of pocket medical expenses $1,633 $1,697 $1,679
Household Social Security disability income $141 $369 $306 Household
Social Security retirement and widow benefits $4,024 $4,844 $4,618 Total
household income $63,955 $67,063 $66,193 Total household wealth $339,065
$505,410 $458,570 Self- reported probability of living to 75 71.0% 69.6%
70.0% Self- reported probability of receiving an inheritance 22.0% 22.0%
22.0% Total years in the workforce 38.8 39.2 39.1 Annuity price $10.7
$10.7 $10.7 Time of retirement 1996.1 1996.8 1996.6 S& P 500 level 720.9
823.2 794.5
Probabilities, conditional on pension choice Had DB only 85.5% 27.3% 43.6%
Had DC only 11.8% 47.7% 37.6% Had both DB and DC 2.6% 25.0% 18.8% Male
53.1% 59.2% 57.5% White 85.8% 90.6% 89.3% Married 80.8% 82.9% 82.3%
Covered by health insurance in retirement 64.8% 63.6% 63.9% Spouse covered
by health insurance in retirement 39.7% 38.9% 39.1% Worry about retirement
income 41.2% 38.9% 39.6% Most risk averse (top category) 64.7% 68.7% 67.6%
Financial horizon of 5 years or greater 36.6% 40.7% 39.5% At least 90%
chance of leaving bequest 56.4% 67.0% 64.0%
Number of retirees 259 662 921
Source: GAO analysis of weighted HRS data 1992- 2000.
Appendix II: Descriptive Statistics and Regression Analyses
Page 45 GAO- 03- 810 Private Pensions We performed logistical regressions
to ascertain the contributions of different factors to the probability of
choosing an annuity. Specifically, we calculated logistic regressions of
the form:
log( p/ 1- p) = *X + . Where the are coefficients that represent the
effect that our explanatory variables have on the log odds of having an
annuity versus not having an annuity, and X represents a series of retiree
characteristics; and an error term. Only retirees with information
available on all explanatory variables were included in these regressions.
We calculated this regression for all retirees, and separately for those
who took a pension from a DB plan and those who took a pension from a DC
plan (see tables 4, 5, and 6). Regression Analysis
Appendix II: Descriptive Statistics and Regression Analyses
Page 46 GAO- 03- 810 Private Pensions Table 4: Logistic Regression of
Annuity Payouts for All Retirees Reporting a Choice of Payout Options
Variable Coefficient Standard error t- Statistic
Annuity price -0.25087 0.231967 -1.08 Time of retirement 0.001362 0.002873
0.47 Had DB pension a 3.4595 0. 373268 9.27 Had DC pension 0.393633
0.307601 1.28 S& P 500 index 0.000164 0.000483 0.34 Health status 0.010337
0.133094 0.08 Age of spouse at respondent*s retirement a 0.032597 0.018563
1.76 Probability of leaving bequest 0.001824 0.003764 0.48 Retirement age
-0.09303 0.06347 -1.47 Total household Social Security income 3.36E- 05 2.
58E- 05 1.3 Total household wealth, net of retirement accounts a -0.00125
0.000419 -2.99 Probability of living to 75 0.002496 0.005197 0.48 Risk
aversion measure -0.12428 0.12742 -0.98 Out- of- pocket medical expenses,
previous 2 years 5.14E- 05 4. 71E- 05 1.09 Mother*s current or maximum age
-0.01387 0.010083 -1.38 Father*s current or maximum age -0.00547 0.008423
-0.65 Retiree has health insurance -0.0271 0. 238637 -0.11 Spouse covered
by health insurance in retirement -0.09481 0.254387 -0.37 Total household
income, net of pensions 6.65E- 07 2. 30E- 06 0.29 Worry about retirement
income 0.019336 0.120549 0.16 Years of education 0.071815 0.052977 1.36
Expect to receive inheritance 0.004127 0.003465 1.19 Years in workforce a
0.030211 0.016801 1.8 Financial planning horizon of 5+ years 0.100165
0.109364 0.92
Number of observations 529 F statistic 5.40 Prob. > F 0.0000 Source: GAO
analysis of weighted HRS data 1992- 2000. a Denotes variable that is
significantly different from zero at the 0.10 level.
Appendix II: Descriptive Statistics and Regression Analyses
Page 47 GAO- 03- 810 Private Pensions Table 5: Logistic Regression of DB
Annuity Payouts for DB Retirees Reporting a Choice of Payout Options
Variable Coefficient Standard error t- Statistic
Annuity price -0.09807 0.324193 -0.3 Time of retirement 0.002018 0.004173
0.48 Had DC pension a -0.97222 0.424141 -2.29 S& P 500 index -0.00019
0.000707 -0.27 Health status -0.15276 0.187185 -0.82 Age of spouse at
respondent*s retirement 0.028123 0.023523 1.2 Probability of leaving
bequest -0.00156 0.00529 -0.3 Retirement age -0.07108 0.097696 -0.73 Total
household Social Security income a 7.41E- 05 3. 93E- 05 1.88 Total
household wealth, net of retirement accounts a -0.00133 0.000619 -2.15
Probability of living to 75 0.001074 0.007111 0.15 Risk aversion measure
0.096408 0.155251 0.62 Out- of- pocket medical expenses, previous 2 years
3.72E- 06 2. 78E- 05 0.13 Mother*s current or maximum age -0.00011
0.012965 -0.01 Father*s current or maximum age -0.00752 0.010782 -0.7
Retiree has health insurance -0.26401 0.326731 -0.81 Spouse covered by
health insurance in retirement -0.36816 0.313117 -1.18 Total household
income, net of pensions 2.93E- 06 2. 80E- 06 1.05 Worry about retirement
income -0.00034 0.152546 0 Years of education 0.0821 0. 067164 1.22 Expect
to receive inheritance 7.34E- 03 0. 005174 1.42 Years in workforce
0.007865 0.023182 0.34 Financial planning horizon of 5+ years 0.005217
0.148459 0.04
Number of observations 251 F statistic 1.26 Prob. > F 0.1956 Source GAO
analysis of weighted HRS data 1992- 2000. a Denotes variable that is
significantly different from zero at the 0.10 level.
Appendix II: Descriptive Statistics and Regression Analyses
Page 48 GAO- 03- 810 Private Pensions Table 6: Logistic Regression of DC
Annuity Payouts for DC Retirees Reporting a Choice of Payout Options
Variable Coefficient Standard error t- Statistic
Annuity price a -2.31524 0.919319 -2.52 Time of retirement a 0.018948
0.008539 2.22 Had DB pension -0.47319 0.729786 -0.65 S& P 500 index
0.001132 0.001271 0.89 Health status a 0.506268 0.265987 1.9 Age of spouse
at respondent*s retirement 0.02792 0.043543 0.64 Probability of leaving
bequest 0.001694 0.009517 0.18 Retirement age a -0.3346 0. 147274 -2.27
Total household Social Security Income -5.4E- 05 4.89E- 05 -1.11 Total
household wealth, net of retirement accounts -0.0016 0. 001 -1.6
Probability of living to 75 0.008101 0.009112 0.89 Risk aversion measure a
-0.74169 0.242509 -3.06 Out- of- pocket medical expenses, previous 2 years
a 0.0001 6. 03E- 05 1.66 Mother*s current or maximum age -0.02623 0.019592
-1.34 Father*s current or maximum age a -0.03902 0.018709 -2.09 Retiree
has health insurance 0.428917 0.56647 0.76 Spouse covered by health
insurance in retirement a 1.378197 0.595818 2.31 Total household income,
net of pensions 3.93E- 07 6. 21E- 06 0.06 Worry about retirement income
-0.20785 0.307375 -0.68 Years of education 0.221811 0.153804 1.44 Expect
to receive inheritance -0.00022 0.007027 -0.03 Years in workforce a
0.077752 0.037246 2.09 Financial planning horizon of 5+ years 0.409007
0.252653 1.62
Number of observations 281 F Statistic 5.63 Prob. > F 0.0000 Source: GAO
analysis of weighted HRS data 1992- 2000. a Denotes variable that is
significantly different from zero at the 0.10 level.
Appendix III: Delphi Panel on Options to Encourage the Preservation of
Pension and Retirement Plan Savings
Page 49 GAO- 03- 810 Private Pensions This appendix presents the results
from the expert panel on options to encourage the preservation of pension
and retirement savings. Included
here are the questions and some of the results from the three
questionnaires that were completed by members of the panel selected for
this study (referred to as *phase I,* *phase II,* and *phase III*). We
obtained a pledge of confidentiality from our requesters that they would
not request any of the responses obtained during this Delphi survey
process. A complete set of descriptive statistics from the survey can be
found at http:// www. gao. gov/ cgi- bin/ getrpt? gao- 03- 990sp. We
administered the questionnaires for phases I and II over the Internet; we
administered phase III via E- mail.
In the first phase of the expert panel, which ran from February 11 to
February 28, 2003, we asked the panelists to respond to three open- ended
questions about the preservation of pension and retirement plan savings.
We developed these questions based on our study objectives. We pretested
the questions on the on- line version with two individuals to ensure that
the questionnaire (1) was clear and unambiguous, (2) did not place undue
burden on individuals completing it, and (3) was independent and unbiased.
We made relevant changes before we deployed the first
questionnaire to all participants on the Internet. Phase I consisted of
open- ended questions on themes related to the preservation of pension and
retirement plan savings. The questions addressed the following themes.
1. Factors that affect pension and retirement savings plan benefit payout
options offered to and elected by retiring participants.
2. Options that could be considered to encourage more annuitization of
pension and retirement plan savings and the likely effects and tradeoffs
of these options.
3. The role of information and education in managing pension and
retirement plan savings during retirement.
After panelists completed the first questionnaire, we performed a content
analysis on the responses to the open- ended questions in order to compile
a list of the most important factors affecting preserving pension and
retirement savings, as well as identify options that may encourage more
annuitization of pension and retirement assets, and the type of education
and information that could assist retirees in making optimal decisions
Appendix III: Delphi Panel on Options to
Encourage the Preservation of Pension and Retirement Plan Savings
Phase I
Appendix III: Delphi Panel on Options to Encourage the Preservation of
Pension and Retirement Plan Savings
Page 50 GAO- 03- 810 Private Pensions regarding their retirement income.
We coded panelists* responses, and similar responses were given the same
code. To maintain standards of
methodological integrity, two team members coded each of the participant*s
responses together and, when necessary, codes were updated to reflect
participants* responses. Any disagreements in coding decisions were
discussed until consensus was reached. We had a third person
review some of the coded responses to ensure that our coding decisions
were valid. We contacted respondents, if necessary, when a response was
unclear. We reviewed and coded answers to each of the three questions to
develop close- ended questions for phase II of the survey.
Twenty- four of the 27 panelists selected completed phase I of the survey
(about 89 percent response rate). Those that did not complete this phase
were dropped from subsequent phases. Below are lists of the categories for
the responses from the phase I open- ended questions. Categories are
presented in order of frequency from most frequently to least frequently
provided responses for each of the questions.
Worker preferences for the type of plan they want and /or how they
receive benefits [employers include certain benefits in the plan because
workers want them or workers prefer to receive benefits in a certain way].
Lack of consumer knowledge/ understanding about annuitization and/ or
key risks they will face in retirement.
Challenges to offering an annuity, such as administrative cost/ burden,
or compliance with applicable rules (including QJSA, PBGC premiums, etc.).
Adequacy of available annuity product types (i. e., variety, pricing,
value of payments, lack of inflation protection, etc.).
The value of lump sums from DB plans has increased [low 30- year
Treasury rate makes lump sums more valuable]. Trends in types of
employer- sponsored plans.
Participants* expectations about needs in retirement (e. g., income,
expenses, longevity).
Preferences of owners/ executives who start plans. Factors Affecting
Payout
Options Offered and/ or Elected
Appendix III: Delphi Panel on Options to Encourage the Preservation of
Pension and Retirement Plan Savings
Page 51 GAO- 03- 810 Private Pensions Individuals believe they can do
better managing the money than with an annuity.
The role of financial advisors [financial planners prefer lump sums
because they receive better commission].
Changes in plan design/ features within plans. Impact of laws and
regulations on employer decisions (i. e., impact of
ERISA or the tax code). Trends in workforce demographics and retirement
[greater worker mobility, people are living longer]. Changes in the
availability and/ or election of various payout options. Amount of
retirement/ saving plan assets of future retirees. Concerns and trust
issues about annuity providers and/ or employers
ability to provide annuity payments (i. e., solvency issues). Widespread
media, investment community, and employee focus on
account balances [the focus for pensions have been on saving and
accumulating].
Competitive pressures: attract workers, minimize/ stabilize costs.
Workers/ retirees already have annuity income (i. e., from social
security,
from a DB plan, from a spouse*s plan). Household decisions about
retirement income. Bequest motives. Retirees/ employees don*t have
adequate information to make benefit
elections. Participants* lack of understanding about the value of
certain DB plan
benefit features (e. g., early retirement subsidies). PBGC guaranties
qualified DB annuity payouts. Participants do not understand investments
and/ or how to invest their
retirement savings.
Appendix III: Delphi Panel on Options to Encourage the Preservation of
Pension and Retirement Plan Savings
Page 52 GAO- 03- 810 Private Pensions The taxation of distributions from
various types of retirement plan vehicles.
Change in employee attitude about employers* role in providing
retirement security.
Concerns of higher- income DB participants about potential loss of
benefits as a result of PBGC guarantee limits.
Inertia- the real and/ or perceived cost of changing the status quo in
terms of options offered.
Increase information and education to participants/ retirees. Provide
tax incentives for employees who receive qualified annuity
income (i. e., favorable tax treatment of annuity income). Mandating
pension/ retirement saving plan benefits be paid as annuities
(partial or full). Change related regulations (e. g., interest rate for
DB lump sum
calculations, PBGC premium requirements, etc.) that affect pension
obligations or payout options.
Require qualified DC plans to offer an annuity option. Modify rules/
regulations that currently apply when plans offer an annuity (e. g., limit
QJSA provisions).
Mandating qualified DC plans offer an annuity as a default option of
pension benefits (i. e., apply QJSA provisions).
Have PBGC or another government agency provide annuities to employers
and/ or employees (i. e., as a competitor to provide or sell annuities).
Develop more adequate annuity products (not a policy option per se).
Provide tax incentives for employers and/ or insurance providers to
provide annuities to retirees. Apply the same tax penalties for taking a
lump sum at retirement as are
applied for pre- retirement lump sum distributions. Options That Could
Encourage More Annuitization of Pension and Retirement Plan Savings
Appendix III: Delphi Panel on Options to Encourage the Preservation of
Pension and Retirement Plan Savings
Page 53 GAO- 03- 810 Private Pensions Simplify various DB plan rules to
level the playing field with DC plans. Amend ERISA Investment Advisor
rules to clarify that plan sponsors may
provide information/ education on managing income during retirement.
Change benefit portability rules/ regulations. Allow employer plans to
distribute a certain amount of pension benefits as
annuity income and the remainder with participant discretion. Allow plan
sponsors or employers to form or join purchasing pools to
offer annuities. Set minimum standards for state insurance guaranty
funds. Enable government to act as an insurer for commercial annuity
providers
(i. e., federal guaranty program). Require pension/ retirement plans
that allow retirees to elect lump sums to
also offer the option to annuitize some benefits at a later date.
Require pension/ retirement plans offering distributions in the form of an
annuity to offer an inflation- indexed annuity option. Require all DC
plans that do not normally pay out in the form of an annuity
to roll out all lump sum distributions to a new type of IRA that pays
benefits in the form of a J& S annuity. Helping participants to
understand longevity risk (i. e., risk of outliving
assets). Strategies/ advice for managing retirement income during
retirement (i. e.,
decumulation). Helping participants/ retirees understand financial risks
that they will face
in retirement (e. g., inflation, lower standard of living, investment).
Helping participants assess needs in retirement (i. e., health, income,
etc.). Annuities- what are they? How do they work?, etc.
Improving financial literacy. The Role of Information
and Education
Appendix III: Delphi Panel on Options to Encourage the Preservation of
Pension and Retirement Plan Savings
Page 54 GAO- 03- 810 Private Pensions Payout options plans make
available to retiring participants (e. g., description and/ or value of
retirement benefits under available options).
Seeking financial *advice,* and other resources for retirement income
planning.
How to project potential retirement income from pensions/ retirement
plan savings.
The value of expected DB and/ or DC plan benefits (i. e., what a
participant*s accumulation is likely to provide).
How to compare annuity and lump sum amounts (i. e., how to compare
equivalent amounts).
De- emphasize information and education on investing/ investments vis-
`avis retirement income needs.
Available annuity products employers could offer. The tradeoffs of
extending one*s working life. The pricing of annuity products (i. e.,
administrative fees). How guaranteed lifetime income from a
participant*s retirement plan
could enhance government provided retirement income. How various types
of retirement savings plans are taxed. How to take inventory of
retirement income sources.
We analyzed the responses to the questions above to develop the phase II
questionnaire. The purpose of the second phase was to provide the
panelists with the opportunity to consider the other panelists* responses
to the first phase and to respond in a structured, quantifiable way. Phase
II, which ran from April 3 to April 18, 2003, consisted of several closed-
ended questions on the categorized responses to phase I (all response
codes/ categories were included in follow- up questions).
In phase II, panelists rated these items on various dimensions (e. g.,
major/ minor factor, effectiveness of options, help/ hinder coverage, ease
of compliance) depending on the theme. We also asked the experts to rank
responses to phase I questions one and three. We pretested the questions
Phase II
Appendix III: Delphi Panel on Options to Encourage the Preservation of
Pension and Retirement Plan Savings
Page 55 GAO- 03- 810 Private Pensions for the second phase; using the same
methods as in phase I. Twenty- two of the 24 panelists that completed the
phase I survey also completed phase II (about 92 percent response rate for
those included in phase II). Those that
did not complete this phase were dropped from subsequent phases. As part
of the analysis, we calculated the frequency of responses to identify the
highest rated items for phase II. The results in this section are
displayed based on responses that were rated in the top two rating
categories for questions 1 and 3- 6, as well as the top five responses
identified most frequently in the top five for questions 2 and 7. To be
included in the top five for the rating questions, at least 85 percent of
panelists had to respond to the question. For the questions with a
fivepoint scale, we collapsed the scale to a three- point scale by
combining the top two available responses and combing the bottom two
available responses. For example, if the five- point scale included
extremely effective, very effective, moderately effective, somewhat
effective, slightly or not effective, the three- point scale will be:
extremely or very effective;
moderately effective; and somewhat, slightly or not effective. For the
ranking questions (2 and 7), we identified the most frequent responses
ranked in the top five by calculating the frequency in which they were in
the top five. We report the top five responses for all phase II questions
in this appendix.
In the phase I questionnaire, we asked each member of the panel *What do
you consider to be the top 5 factors in pensions and retirement affecting
the payout options offered to retiring participants and/ or elected by
retirees? (In your response, you might consider trends in employer
pensions, worker preferences, workforce coverage and participation,
retirement, the economy, or any other trends you believe are important.
Please identify the most significant first).* We compiled a list of the
factors that experts identified and categorized them. We then presented
the list of factors to the experts in phase II and asked them to rate how
great a
factor, if at all, are each of the trends were in affecting payout options
offered to retiring participants and/ or elected by retirees. The ratings
were made on a four- point scale ranging from *major factor* to *not a
factor* (panelists were also given the option of responding *no answer*).
Factors Affecting Payout Options
Appendix III: Delphi Panel on Options to Encourage the Preservation of
Pension and Retirement Plan Savings
Page 56 GAO- 03- 810 Private Pensions Table 7: Top Five Answers That Were
Identified as Either a Major or Moderate Factor Affecting the Pension
Options Offered and/ or Elected by Retiring Participants
Category by rank order Major factor Moderate factor Minor factor Not a
factor Number of
responses
1. Lack of consumer knowledge /understanding about annuitization and/ or
key risks they will face in retirement. 19 3 0 0 22
2. Individuals believe they can do better managing the money than can an
annuity. 18 3 1 0 22
2. Trends in types of employer sponsored plans. 11 10 1 0 22
3. Participants* expectations about needs in retirement (e. g., income,
expenses, longevity). 15 5 2 0 22 4. Widespread media, investment
community, and employee focus on account balances. 16 3 3 0 22
Source: GAO analysis of phase II results.
We also asked panelists to rank the factors identified as at least
moderate in question 1. Responses in the top five for the question, *among
the factors that you checked as *at least moderate, * what would you rank
as the top 5 factors affecting plan payout options offered and/ or elected
by retiring participants?* are shown in table 8.
Table 8: Top Five Answers That Were Most Frequently Included in the Top
Five Factors Affecting the Pension Options Offered and/ or Elected by
Retiring Participants
Category by rank order Number of responses
1. Lack of consumer knowledge/ understanding about annuitization and/ or
key risks they will face in retirement. 14
2. Individuals believe that they can better manage their money than can an
annuity. 13 3. Participants* expectations about needs in retirement (e.
g., income, expenses, longevity). 10
4. Challenges to offering an annuity, such as administrative cost/ burden,
or compliance with applicable rules (including QJSA, PBGC premiums, etc.).
9
5. The role of financial advisors. 7 Source: GAO analysis of phase II
results.
Appendix III: Delphi Panel on Options to Encourage the Preservation of
Pension and Retirement Plan Savings
Page 57 GAO- 03- 810 Private Pensions In phase I, we asked panelists:
*What options, if any, could policymakers consider that could encourage
more annuitization of pension and
retirement plan savings at retirement? What are the likely effects and
tradeoffs associated with each of these options with respect to plan
sponsors, participants, the pensions and investment community, and the
federal government? (Please consider such options as mandates, incentives,
other government actions, information and education, etc. in your
response.)* After categorizing responses to this question, we asked
the following series of questions in phase II. The ratings were made on a
five- point scale for each of these questions (panelists were also given
the option of responding *no answer*).
1. How effective, if at all, would each of the following options be in
encouraging more annuitization of pension and retirement plan savings?
2. In your opinion, would the following options help or hinder pension and
retirement plan coverage?
3. How easy or difficult would it be for plan sponsors to comply with and/
or act on the following options?
Table 9: Top Five Answers That Were Identified as Either Extremely
Effective or Very Effective Options in Encouraging More Annuitization of
Pension and Retirement Plan Savings
Category by rank order Extremely or very effective Moderately
effective Somewhat,
slightly or not effective Number of responses
1. Provide tax incentives for employees who receive qualified annuity
income (i. e., favorable tax treatment of annuity income). 19 1 1 21
1. Mandating pension/ retirement saving plan benefits be paid as annuities
(partial or full). 19 0 2 21
2. Provide tax incentives for employers and/ or insurance providers to
provide annuities to retirees. 17 1 3 21
3. Mandating qualified DC plans offer an annuity as a default option of
pension benefits (i. e., apply QJSA provisions). 17 3 2 22
3. Require qualified DC plans to offer an annuity option. 17 3 2 22
Source: GAO analysis of phase II results.
Options That Could Encourage More Annuitization of Pension and Retirement
Plan Savings
Appendix III: Delphi Panel on Options to Encourage the Preservation of
Pension and Retirement Plan Savings
Page 58 GAO- 03- 810 Private Pensions Table 10: Top Five Answers That Were
Identified as Either Greatly Helping or Generally Helping Pension and
Retirement Plan Coverage
Category by rank order Greatly or generally help Neither help nor hinder
Greatly or generally
hinder Number of responses
1. Provide tax incentives for employers and/ or insurance providers to
provide annuities to retirees. 18 3 0 21
1. Increase information and education to participants/ retirees. 18 2 1 21
1. Provide tax incentives for employees who receive qualified annuity
income (i. e., favorable tax treatment of annuity income). 18 2 1 21
2. Simplify various DB plan rules to level the playing field with DC
plans. 17 4 0 21
3. Have PBGC or another government agency provide annuities to employers
and/ or employees (i. e., as a competitor to provide or sell annuities).
10 7 2 19
Source: GAO analysis of phase II results.
Table 11: Top Five Answers That Were Identified as Either Very Easy or
Easy for Plan Sponsors to Comply with and/ or Act on Category by rank
order Very easy or
easy Neither easy nor difficult Very difficult
or difficult Number of responses
1. Amend ERISA Investment Advisor rules to clarify that plan sponsors may
provide information/ education on managing income during retirement. 13 5
1 19
2. Provide tax incentives for employees who receive qualified annuity
income (i. e., favorable tax treatment of annuity income). 13 4 2 19
3. Provide tax incentives for employers and/ or insurance providers to
provide annuities to retirees. 14 4 3 21
4. Apply the same tax penalties for taking a lump sum at retirement as are
applied for pre- retirement lump sum distributions. 11 3 5 19
5. Increase information and education to participants/ retirees. 11 6 4 21
Source: GAO analysis of phase II results.
Appendix III: Delphi Panel on Options to Encourage the Preservation of
Pension and Retirement Plan Savings
Page 59 GAO- 03- 810 Private Pensions In phase I, we asked panelists,
*What types of information and education could help retiring participants
make more optimal decisions regarding the
use (i. e., saving and spending) of pension and retirement plan savings
during retirement? How and in what form could each type of information or
education be delivered?* After categorizing the responses to that
question, we followed up with a rating and ranking question about the
effectiveness of each type of information and education.
We then presented the list of types to the experts in phase II and asked
them to rate how effective, if at all, each type of information and
education would be in helping retiring participants make more optimal
decisions. The ratings were made on a five- point scale ranging from
*extremely effective* to *slightly or not effective* (panelists were also
given the option of responding *no answer*). We calculated the frequency
of responses for the types rated in the phase II questionnaire.
Table 12: Top Five Answers That Were Identified as Either Extremely
Effective or Very Effective Types of Information and Education in Helping
Retiring Participants Make More Optimal Decisions
Category by rank order Extremely or very effective Moderately
effective Somewhat,
slightly or not effective Number of
responses
1. Helping participants/ retirees understand financial risks that they
will face in retirement (e. g., inflation, lower standard of living,
investment). 21 0 1 22
2. Helping participants to understand longevity risk (i. e., risk of
outliving assets). 20 1 1 22
3. Helping participants assess needs in retirement (i. e., health, income,
etc.). 18 3 1 22
4. How to compare annuity and lump sum amounts (i. e., how to compare
equivalent amounts). 17 3 2 22
5. The value of expected DB and/ or DC plan benefits (i. e., what a
participant*s accumulation is likely to provide). 16 4 2 22
Source: GAO analysis of phase II results.
We also asked panelists to rank the types of information and education
identified as at least moderately effective in phase I. The top five most
commonly ranked responses to the question, *Among the types of information
and education that you rated *at least moderately effective, * what would
you rank as the five most effective types to help retirees make more
optimal decisions?* are shown in table 13. The Role of Information and
Education in Managing Pension and Retirement Plan Savings during
Retirement
Appendix III: Delphi Panel on Options to Encourage the Preservation of
Pension and Retirement Plan Savings
Page 60 GAO- 03- 810 Private Pensions Table 13: Top Five Answers That Were
Most Frequently Included in the Top Five Types of Information and
Education to Help Retirees Make More Optimal Decisions Category by rank
order Number of responses
1. Helping participants to understand longevity risk (i. e., risk of
outliving assets). 20
2. Helping participants/ retirees understand financial risks that they
will face in retirement (e. g., inflation, lower standard of living,
investment). 18
3. Annuities- what are they? how do they work?, etc. 15 4. How to compare
annuity and lump sum amounts (i. e., how to compare equivalent amounts).
12
5. Helping participants assess needs in retirement (i. e., health, income,
etc.). 11
Source: GAO analysis of phase II results.
The third phase, which was conducted via e- mail, ran from May 6 to May
13, 2003. The purpose of this phase was to provide panelists with some of
the key findings from phase II and obtain feedback about the results, as
well as to identify other ways that a retiree could preserve their
retirement savings. We conducted a pretest of the questionnaire and made
changes as necessary. Ten experts (45 percent of the 22 panelists that
completed
phase II) responded with comments or responses to our questions. In the
third phase, we asked panelists the following questions. *For each of the
options below please discuss what actions (policy or otherwise), if any,
could encourage more retirees to preserve their pension and retirement
savings plan assets. Please discuss some of the potential tradeoffs, such
as the effect on plan coverage, plan compliance, and effectiveness for
preserving pension and retirement savings plan assets, of
the options identified.* 1. Options to encourage retiring participants to
preserve their pension
assets at retirement by deferring the receipt of benefits (i. e., leaving
assets in an account balance), or rolling over assets directly to an IRA
at retirement. 2. Options to assist retirees in managing their assets
personally with the
objective of providing an income stream to help them balance income and
expenditures. Phase III
Appendix III: Delphi Panel on Options to Encourage the Preservation of
Pension and Retirement Plan Savings
Page 61 GAO- 03- 810 Private Pensions 3. What other options, if any,
should be considered to help retiring participants preserve their pension
and retirement savings plan assets
at retirement? Originally, we asked the panelists to respond to these
three questions about actions that could encourage the preservation of
pension and retirement savings plan assets. Based on feedback about the
length of and time commitment needed to respond to the phase III
questionnaire, we narrowed the focus and gave panelists the option of only
responding to question one. Some respondents provided answers for all
three of the questions and others only responded to question one.
Responses to this questionnaire are presented at http:// www. gao. gov/
cgi- bin/ getrpt? gao- 03- 990sp.
Appendix IV: GAO*s Delphi Panel of Experts Page 62 GAO- 03- 810 Private
Pensions John Ameriks Senior Research Fellow
TIAA- CREF Institute Jeffrey R. Brown Assistant Professor of Finance
College of Business University of Illinois at Urbana- Champaign
Edward E. Burrows Independent Consulting Actuary Boston, Massachusetts
Jamie Delaplane Davis and Harman, LLP
John Hotz Deputy Director Pension Rights Center
Ron Gebhardtsbauer Senior Pension Fellow American Academy of Actuaries
Teresa Ghilarducci Associate Professor of Economics University of Notre
Dame
Melissa J. Kahn Vice President MetLife Sanford Koeppel
Vice President, Legislative and Regulatory Affairs Prudential Retirement
The Prudential Insurance Company of America
Jules H. Lichtenstein Senior Policy Advisor AARP Public Policy Institute
Judith F. Mazo Senior Vice President and Director of Research The Segal
Company Appendix IV: GAO*s Delphi Panel of Experts
Appendix IV: GAO*s Delphi Panel of Experts Page 63 GAO- 03- 810 Private
Pensions Olivia S. Mitchell Executive Director, Pension Research Council
International Foundation of Employee Benefit Plans Professor of Insurance
& Risk Management, Wharton School
Alicia Munnell Peter F. Drucker Professor of Management Sciences Center
for Retirement Research, Boston College
Kim Mustin Vice President Scudder Investments Retirement Services Diane
Oakley TIAA- CREF Consulting Services Vice President Special Consulting
Services
John P. Parks President MMC& P Retirement Benefit Services
John C. Penney, Jr. Senior Pension Policy Consultant John Hancock Life
Insurance Company
Anna Rappaport Mercer Human Resource Consulting
Kathryn Ricard Vice President, Retirement & Pensions American Council of
Life Insurers
Dallas Salisbury President and CEO Employee Benefits Research Institute
John C. Scott Director, Retirement Policy American Benefits Council
Appendix IV: GAO*s Delphi Panel of Experts Page 64 GAO- 03- 810 Private
Pensions Norman Stein Douglas Arant Professor
University of Alabama School of Law Christopher T. Stephen, Esq. Sr.
Principal, Legislative Affairs National Rural Electric Cooperative
Association
Jack VanDerhei Temple University and EBRI Fellow
Appendix V: Comments from the Department of The Treasury
Page 65 GAO- 03- 810 Private Pensions Appendix V: Comments from the
Department of The Treasury
Appendix V: Comments from the Department of The Treasury
Page 66 GAO- 03- 810 Private Pensions (130169)
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