Some participants have access to products  and services through their plan that can help them turn their savings into  a retirement income stream. Required Minimum Distributions

Under the Internal Revenue Code (IRC), plan sponsors must comply with  required minimum distribution (RMD) provisions under which participants  age 70 ½ or older in 401(k) plans must receive minimum annual  payments from their plan savings based on their account balance and  remaining life expectancy. For example:  In 2008, EBSA promulgated a “safe harbor” that describes actions  plan fiduciaries can take to satisfy their fiduciary responsibilities when  selecting an annuity provider. Most Plans in Our Review Did Not Offer Withdrawal Options or Annuities, and Many Did Not Allow Partial Annuitization

		About Two-Thirds of Plans in Our Review Did Not Offer Withdrawal Options

Record keepers reported that most plans covered by the questionnaire  did not offer withdrawal options, which unlike annuities, are 401(k) plan  account distributions that may be designed, but are not guaranteed, to  last for life. We sent  a questionnaire to a non-generalizable sample of plan record keepers that  represented about a quarter of the 401(k) plan market at the end of  2014. Concerns about Legal Risk may Deter Plan Sponsors from Offering Annuities, and Record Keeper Limitations may Constrain the Options Plans Can Make Available

		Fear of Legal Liability May Deter Plan Sponsors from Offering Annuities

Plan Sponsor Survey Respondent on Legal  Risk  “There is a not a single bit of upside to me as  a plan sponsor in offering an option that  participants don’t want, particularly when it is  a complex offering with lots of room for 20/20  hindsight by plaintiff’s counsel, and one that  tends to be more expensive. Conclude that, at the time of the selection, the annuity provider is  financially able to make all future payments under the annuity  contract. DOL is responsible for educating and assisting plan sponsors to help  ensure the retirement security of workers and their families. DOL has not provided an incentive for plan sponsors to provide  participants a mix of lifetime income options and information about them. Plan Sponsors May Cause Participants to Lose Lifetime Income When They Change Record Keepers or Annuity Providers

Another deterrent to plan sponsors offering annuities, according to  representatives of annuity providers, is the possibility of plan participants  having to lose lifetime income guarantees when the plan sponsor  changes service providers. For  example, plan sponsors who want to offer an annuity option may work  with a number of service providers to determine the appropriate annuity  options to offer their participants. However, DOL’s guidance does not  encourage plan fiduciaries to use a record keeper that supports products  from competing providers. Providing clearer criteria for making this determination likely would  encourage more sponsors to seek fiduciary relief for offering annuities. Second, DOL offers fiduciary relief when savings are accumulated in an  appropriate mix of investments, but it offers no such relief for plans  offering a mix of lifetime income options. DOL guidance can encourage plan sponsors to use a record  keeper that includes annuities from other providers on its record keeping  platform and increase the likelihood the plan sponsor will have access to  annuities that the plan sponsor considers to be in the best interest of the  plan participants. Unless DOL encourages plan  sponsors to consider providing RMD-based default income, many retirees  who do not select a lifetime income option may continue to receive a  single lump sum payout that may not be used for lifetime income. Finally, with respect to the recommendations to provide guidance to  fiduciaries on how the account balances of their participants will translate  into financial security in retirement, DOL stated that it will review its  publications along the lines of the recommendations to explore ways in  which to encourage use of products and arrangements designed to  provide participants and beneficiaries a lifetime income stream after  retirement, and take steps to better educate participants and plan  sponsors about the need to think about retirement savings as lifetime  income. Appendix I: Objectives, Scope, and Methodology

Our objectives were to examine 1) the adoption of lifetime income options  in 401(k) plans; 2) the barriers, if any, that deter plan sponsors from  offering lifetime income options; 3) the challenges participants face, if  any, in learning to make informed decisions about lifetime income  options; and 4) the defaults that exist for participants who do not choose  an option. To address these objectives, we reviewed relevant research, responses  to the Request for Information (RFI) by the Department of Labor (DOL)  and the Department of the Treasury (Treasury) in 2010, federal laws,  regulations, and guidance on lifetime income options. We also  conducted a non-generalizable online survey of 54 plan sponsors. 401(k) Plan Record Keeper Questionnaire

We collected data on plan adoption and participant use of lifetime income  options in 401(k) plans from 11 record keepers who together represent  about 42 percent of the 401(k) market as measured by assets, 46 percent  as measured by participants, and 26 percent as measured by plans. Related GAO Products

GAO, 401(k) Plans: Clearer Regulations Could Help Plan Sponsors  Choose Investments for Participants, GAO-15-578 (Washington, D.C.:  Aug. 25, 2015).
Why GAO Did This Study

As 401(k) plan participants reach retirement they face the challenge of making their savings last for an unknown lifespan, and many 401(k) plan sponsors do not offer options to help participants with this complex task. GAO was asked to review any related challenges and potential changes to help plan sponsors and participants.
This report examines, among other things, what is known about the adoption of lifetime income options in 401(k) plans, barriers that deter plan sponsors from offering such options, and the defaults that exist for participants who do not choose a lifetime income option. GAO administered a non-generalizable questionnaire to record keepers, conducted a non-generalizable survey of 54 plan sponsors, and interviewed a range of stakeholders.

What GAO Found

Workers relying in large part on their 401(k) plan in retirement may not always have a feasible way to make their savings last throughout retirement. Responses to GAO’s non-generalizable questionnaire from 11 401(k) plan record keepers—entities that manage participant account data and transactions for plans—showed that most plans covered by the questionnaire had not adopted products and services that could help participants turn their savings into a retirement income stream (referred to as lifetime income options in this report). Responses to the questionnaire represented more than 40 percent of all 401(k) assets and about a quarter of plans at the end of 2014. GAO found that of the plans covered by the questionnaire, about two-thirds did not offer a withdrawal option —payments from accounts, sometimes designed to last a lifetime—and about three-quarters did not offer an annuity—arrangements that can guarantee set payments for life.
Concerns about legal risks and record keeper constraints may deter many plan sponsors—typically employers that provide 401(k) plans and establish investment and distribution options—from offering lifetime income options. The Department of Labor (DOL) issues regulations and guidance for plan sponsors and is responsible for educating and assisting them to help ensure the retirement security of workers. For example, DOL has prescribed steps plan sponsors can take to satisfy their fiduciary duties (i.e. act prudently and in the best interest of participants) when selecting an annuity provider for a 401(k) plan. However, according to industry stakeholders GAO interviewed, those steps are not often used because they include assessing “sufficient” information to “appropriately” conclude that the annuity provider will be financially able to pay future claims without definitions for those terms. Without clearer criteria to select an annuity provider, fear of liability may deter plan sponsors from offering annuities. Further, GAO found that a mix of lifetime income options to choose from is not usually available. DOL provides an incentive in the form of limited liability relief to plan sponsors who, among other things, provide participants at least three diversified investment options. However, no such incentive exists for plan sponsors offering a mix of lifetime income options. Without some degree of liability relief, plan sponsors may be reluctant to offer a diverse mix of lifetime income options to their participants. Lastly, stakeholders told GAO that record keepers may make only their own annuities available to the plans they service. DOL provides guidance on selecting service providers, but it does not encourage plan sponsors to seek choices from their service providers, which may prevent plans from having appropriate annuity options available to offer participants.
Required minimum distributions (RMD) can offer a default for those who do not choose a lifetime income option by setting a minimum amount of taxable 401(k) income for those age 70 ½ or older, based on life expectancy. Some plan sponsors know how to administer RMDs, and some already choose to provide RMD payments calculated to last a lifetime. However, DOL’s guidance on default lifetime income is focused on a particular annuity type used only by a few plans. By issuing guidance encouraging plans to consider letting RMDs be the default distribution process for retiring participants, DOL may help create lifetime income for participants who do not choose an option.

What GAO Recommends

GAO makes seven recommendations to DOL, including that it clarify the criteria to be used by plan sponsors to select an annuity provider, consider providing limited liability relief for offering an appropriate mix of lifetime income options, issue guidance to encourage plan sponsors to select a record keeper that offers annuities from other providers, and consider providing RMD-based default lifetime income to retirees. DOL generally agreed, and described actions it would take to address the intent of the recommendations.