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Policies and Oversight of Spend-down Options' which was released on 
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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

November 2013: 

401(k) Plans: 

Other Countries' Experiences Offer Lessons in Policies and Oversight 
of Spend-down Options: 

GAO-14-9: 

GAO Highlights: 

Highlights of GAO-14-9, a report to congressional requesters. 

Why GAO Did This Study: 

American workers are primarily saving for retirement through their 
401(k) plans and will likely need assistance making complicated 
decisions about how to spend their money throughout retirement. Other 
countries with defined contribution (DC) systems are also dealing with 
this spend-down challenge. To identify lessons for the U.S. from the 
experiences of other countries, GAO examined selected countries’ (1) 
approaches to offering retirement spend-down options; (2) strategies 
to help participants make sound decisions; and (3) approaches to 
regulating and overseeing options. An initial review of countries with 
established DC systems indicated that some countries including the six 
GAO selected-—Australia, Canada, Chile, Singapore, Switzerland, and 
the United Kingdom—-have developed innovative spend-down policies that 
have the potential to yield useful lessons for the U.S. experience. 
GAO reviewed reports on DC plans; and interviewed experts and 
government officials in the U.S. and selected countries. 

What GAO Found: 

The six countries GAO reviewed can offer U.S. regulators lessons on 
how to expand access to a mix of spend-down options for 401(k) 
participants that meet various retirement needs. Five of the six 
countries generally ensure that participants can choose among three 
main plan options: a lump sum payment, a programmed withdrawal of 
participants’ savings, or an annuity. In the last several decades, all 
the countries took steps to increase participant access to multiple 
spend-down options, with some first conducting reviews of participants’
retirement needs that resulted in policy changes, as shown below. In 
the United States, 401(k) plans typically offer only lump sums, 
leaving some participants at risk of outliving their savings. The U.S. 
Departments of Labor (DOL) and the Treasury (Treasury) have begun to 
explore the possibility of expanding options for participants, but 
have not yet helped plan sponsors address key challenges to offering a 
mix of options through their plan. 

Figure: Example of Steps Taken by Other Countries to Strengthen Access 
to Multiple Spend-down Options: 

[Refer to PDF for image: illustration] 

Provide direction; 
Analyze needs; 
Consult stakeholders; 
Singapore recognized the need to reform its spend-down phase and 
undertook a review. 

Strengthen access to multiple spend-down options: 
Based on its review, Singapore strengthened access to annuities to 
help participants. 

Source: GAO analysis of documents from Singapore’s National Longevity 
Insurance Committee and Central Provident Fund. 

Note: GAO did not conduct an independent legal analysis of the laws, 
regulations, or policies of the countries selected for this study. 

[End of figure] 

Countries reviewed used various strategies to increase participants’ 
knowledge and understanding of spend-down options, which may be useful 
to DOL in its ongoing efforts. Strategies used by other countries 
include (1) communicating spend-down options to participants in an 
understandable and timely manner, and (2) helping participants see how 
their savings would translate into a stream of income in retirement by 
providing them with projections of retirement income in their annual 
benefit statements. Currently, 401(k) participants have difficulty 
predicting how long their savings will last because most benefit 
statements do not focus on the stream of income it can generate. DOL 
is currently considering including income projections in statements, 
which may help participants better understand what their balance could 
provide on a monthly basis once they retire. 

Regulators in the countries GAO reviewed employed several approaches 
to overseeing the spend-down phase aimed at helping participants 
sustain an income throughout retirement. For example, most of the 
countries used withdrawal rules and restrictions for lump sums and 
programmed withdrawals to help protect participants from outliving 
their savings. With respect to annuities, DOL continues to consider 
current regulatory barriers that may prevent 401(k) plan sponsors from 
offering annuities, which do not exist in other countries. Looking at 
what other countries require may help DOL in its efforts. 

What GAO Recommends: 

GAO recommends that DOL and Treasury, as part of their ongoing 
efforts, consider other countries’ approaches in helping 401(k) plan 
sponsors expand access to a mix of spend-down options for 
participants. GAO also recommends that DOL consider other countries’ 
approaches in providing information about options and regulating the 
selection of annuities within DC plans. In response, DOL generally 
agreed with GAO’s recommendations and will evaluate approaches. 

For GAO-14-9 and interactive retirement materials, go to 
www.gao.gov/products/GAO-14-9. For more information, contact Charles 
Jeszeck at (202) 512-7215 or jeszeckc@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Countries Used Multiple Approaches to Broaden Participants' Retirement 
Options for the Spend-down Phase: 

Strategies Used by the Countries We Studied Helped Participants Make 
More Informed Decisions: 

Countries' Regulation and Oversight of Spend-down Options Offer 
Lessons for U.S. Regulators: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Key Features of DC Pension Systems in Australia, Canada, 
Chile, Singapore, Switzerland, and the United Kingdom: 

Appendix III: Comments from the Department of Labor: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Key Features of DC Plans by Country: 

Table 2: Examples of Trade-offs That Participants Face in Choosing 
among Spend-Down Options: 

Figures: 

Figure 1: Hypothetical Projection of Monthly Retirement Income for a 
65-Year-Old 401(k) Plan Participant: 

Figure 2: Timeline of Key Retirement Spend-down Policy Changes in Six 
Countries Leading to Facilitated Access to Multiple Options for DC 
Plan Participants: 

Figure 3: Steps Singapore Took to Strengthen Pathways to Multiple 
Spend-down Options: 

Figure 4: Steps DOL and Treasury Have Taken to Explore Spend-down 
Options for DC Plan Participants: 

Figure 5: Example of Information on Spend-down Options Developed for 
Participants Approaching Retirement in Australia: 

Figure 6: United Kingdom Cover Letter Example of Best Practices for 
Communicating Spend-down Decisions and Options to Participants: 

Figure 7: Example of Chile's Benefit Statement Illustrating Projected 
Income: 

Abbreviations: 

ABI: Association of British Insurers: 

AFP: Administradoras de Fondos de Pensiones: 

APRA: Australian Prudential Regulatory Authority: 

CPF: Central Provident Fund: 

DB: defined benefit: 

DC: defined contribution: 

DOL: Department of Labor: 

EBSA: Employee Benefits Security Administration: 

ERISA: Employee Retirement Income Security Act of 1974: 

FIO: Federal Insurance Office: 

IRS: Internal Revenue Service: 

NAIC: National Association of Insurance Commissioners: 

OECD: Organisation of Economic Co-operation and Development: 

Treasury: Department of the Treasury: 

U.K. United Kingdom: 

[End of section] 

GAO:
United States Government Accountability Office: 
441 G St. N.W. 
Washington, DC 20548: 

November 20, 2013: 

The Honorable George Miller: 
Ranking Member: 
Committee on Education and the Workforce: 
House of Representatives: 

The Honorable Robert E. Andrews: 
Ranking Member: 
Subcommittee on Health, Employment, Labor and Pensions: 
Committee on Education and the Workforce: 
House of Representatives: 

American workers are primarily saving for retirement through 401(k) 
plans, which have become the dominant type of plan private sector 
employers are offering in the United States.[Footnote 1] Since the 
inception of 401(k) plans, regulators have focused their efforts on 
ensuring that plan participants accumulate savings for retirement. 
[Footnote 2] With many participants who have had defined contribution 
(DC) plans throughout their career nearing retirement, regulators have 
begun to focus on the decumulation phase, or the spending down of 
retirement savings, because of the real possibility that some retirees 
may outlive their savings. Unlike participants in traditional defined 
benefit (DB) plans who are offered a specific periodic benefit for 
life at retirement, 401(k) plan participants must take responsibility 
for the complex decisions required in the spend-down phase. By 2015, 
participants whose retirement savings will be primarily made up of 
what they accumulated in their 401(k) plans, which were introduced in 
1978, will be eligible to retire. Typically, 401(k) plan participants 
receive benefits as a lump sum payment and are thus primarily left on 
their own to manage their money in a way that ensures they do not 
outlive their retirement savings.[Footnote 3] Current regulatory 
efforts by the Department of Labor (DOL) and the Department of the 
Treasury (Treasury) have begun to focus on the spend-down phase as it 
has become clearer that workers in the United States are increasingly 
subject to financial risks in retirement that can cause them to either 
outlive their savings or to lower their standard of living. 

The United States is not alone in facing this growing concern for 
retirees. Other countries with retirement systems dominated by DC 
plans similar to 401(k) plans face the same problem of ensuring that 
plan participants effectively manage the spending of their retirement 
savings, whether under a mandatory or voluntary system. This is 
particularly important given the common challenges of low average 
balances of DC plan participants and the longer average life 
expectancies.[Footnote 4] Some countries have developed innovative 
approaches and strategies that can help participants better manage 
their DC plan savings throughout their lives, while the United States 
has just begun to explore ways to help 401(k) plan participants. As 
DOL and Treasury move forward, you expressed interest in potential 
lessons learned from countries that have addressed these issues. This 
report addresses the following questions: 

1. What approaches have other countries with DC plans taken to offer 
participants certain retirement spend-down options? 

2. What key strategies are used in other countries with DC plans to 
help participants make sound spend-down decisions to improve 
retirement outcomes? 

3. What approaches have other countries used to regulate and oversee 
spend-down options? 

To answer these questions, we selected six countries with extensive or 
growing DC systems in which to conduct in-depth reviews of retirement 
spend-down phase strategies: Australia, Canada, Chile, Singapore, 
Switzerland,[Footnote 5] and the United Kingdom (U.K.). We selected 
these countries from an initial review of countries with well-
developed account based retirement systems. In selecting these six 
countries, we considered if the country had (1) developed innovative 
spend-down phase policies or options; (2) a clearly defined and well-
established oversight structure for the DC plan spend-down phase and 
providers, such as insurance companies, that offer spend-down 
products; and (3) an approach to the spend-down phase that was 
different from the other countries we selected. As part of our initial 
review, we interviewed and obtained comparative studies of DC systems 
published by academics, the Organisation for Economic Co-operation and 
Development, The World Bank, and other industry experts, such as 
international benefits consulting firms, as well as our prior work. 
[Footnote 6] We then examined the characteristics of each country's DC 
system for policies, practices, and requirements related to retirement 
spend-down options. On the basis of this initial review, we determined 
that the six countries selected could potentially provide lessons for 
the United States given their experience and unique approach to the 
spend-down phase. For each of the six countries selected, we reviewed 
publicly available research and reports about each country's spend-
down options, oversight framework, and initiatives to educate 
participants about options. We also interviewed pension experts, 
service providers, regulatory agencies and other government officials 
from the countries selected. We did not conduct an independent legal 
analysis to verify the information provided about the laws, 
regulations, or policies of the foreign countries selected for this 
study. Instead, we relied on appropriate secondary sources, interviews 
with relevant officials, and other sources to support our work. We 
submitted key report excerpts to agency officials in each country for 
their review and verification, and we incorporated their technical 
corrections as necessary. To provide context for various spend-down 
options and illustrate some of the factors that can affect retirement 
income we designed a retirement model and hypothetical scenarios. To 
create this, we consulted with actuaries to develop a formula for 
pricing annuities based on benchmarks typically used by insurance 
companies in U.S. retail markets. We also reviewed data from the 
Federal Reserve Economic Database, including 10-year Treasury constant 
maturity rates, and Thrift Savings Plan to establish historical ranges 
for interest rates, inflation, and investment returns on 401(k) 
accounts. Appendix I provides additional information on our scope and 
methodology. 

We conducted this performance audit from June 2012 through November 
2013 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

Background: 

U.S. 401(k) Plans and Their Oversight Framework: 

Employers can sponsor two broad types of retirement plans, referred to 
in the Employee Retirement Income Security Act of 1974 (ERISA) as 
pension plans: (1) DB plans, which promise to provide benefits 
generally based on an employee's years of service and frequently are 
based on salary, regardless of the performance of the plans' 
investments, and (2) DC plans, in which benefits are based on 
contributions and the performance of the investments in participants' 
individual accounts. Since the inception of ERISA, employers have 
shifted away from sponsoring DB plans and moved toward sponsoring DC 
plans. The dominant type of DC plan is a 401(k) plan. In 2011, U.S. 
employers sponsored over 510,000 401(k) plans covering more than 61 
million workers with more than $3.1 trillion in plan assets.[Footnote 
7] Unlike DB plans, in which plan participants are eligible for a 
specific payment for life, 401(k) plan participants typically must 
make their own, sometimes complex, choices about their account balance 
both before and during retirement. For example, participants need to 
decide how much to contribute, how to invest, and how to spend down 
savings in retirement. 

In the United States, 401(k) plans are subject to provisions of ERISA, 
which are generally enforced by DOL's Employee Benefits Security 
Administration (EBSA) and Treasury's Internal Revenue Service (IRS). 
[Footnote 8] To carry out its responsibilities under ERISA, EBSA 
issues regulations and other guidance. The IRS, under Title II of 
ERISA, and subsequent amendments to the Internal Revenue Code, 
generally is responsible for ensuring that plans meet certain 
requirements for tax qualification, among other things. Tax advantages 
are intended to encourage employers to establish and maintain pension 
plans and encourage employees to participate in the plans. For 
example, employer contributions to qualified plans are, within limits, 
tax deductible and, in general, contributions and investment earnings 
are not taxed as income until the employee withdraws them from the 
plan. 

In recent years, EBSA and IRS have increased their focus on the 
decumulation phase of 401(k) plans, exploring ways to facilitate 
access to lifetime retirement income products, such as annuities. For 
example, in 2008, EBSA issued a new safe harbor regulation for 
selecting annuity providers as an optional way for sponsors and other 
plan fiduciaries of DC plans to satisfy their responsibilities under 
ERISA to act prudently and in the interest of the plan's participants 
and their beneficiaries.[Footnote 9] Subsequently, in 2010, EBSA and 
IRS sought public comments to aid the agencies in thinking about how 
they might facilitate access to and the use of lifetime income streams 
after retirement.[Footnote 10] More recently, IRS proposed a new 
regulation in February 2012 to encourage retirement plans to offer a 
longevity annuity option, also referred to by some as deeply deferred 
annuities, in which payments initiate at an advanced age, such as age 
80.[Footnote 11] This regulation has not been finalized. 

In addition, other entities play a role in overseeing and monitoring 
insurance companies that sell annuities--guaranteed income payments 
for life or a specified term--either through 401(k) plans or in the 
retail market to individual investors. For example, state insurance 
regulators are responsible for enforcing state insurance laws and 
regulations, including those covering the licensing of agents, 
reviewing insurance products (including annuities) and their rates, 
and examining insurers' financial solvency and market conduct. In 
addition to state insurance regulators, the National Association of 
Insurance Commissioners (NAIC)--a voluntary association of the heads 
of insurance departments from the 50 states, the District of Columbia, 
and five U.S. territories--plays a role in insurance regulation. 
Although NAIC is not a regulator, it provides guidance and services 
designed to more efficiently coordinate interactions between insurers 
and state regulators.[Footnote 12] Additionally, although the Federal 
Insurance Office (FIO) is not directly involved in the supervision of 
private and public pension plans, it has a role in coordinating and 
developing insurance policies. FIO advises the Secretary of the 
Treasury on domestic and international insurance policy issues; and 
consults with states regarding insurance matters of national and 
international importance. FIO also coordinates federal efforts and 
develops federal policy on prudential aspects of international 
insurance matters. For example, FIO has been working with 
international regulators to develop a methodology and indicators for 
identifying global systemically important insurers, meaning that their 
failure might threaten global financial stability. 

Key Aspects of DC Systems in the United States and Selected Countries: 

In addition to the United States, the selected countries for this 
review--Australia, Canada, Chile, Singapore, Switzerland, and the 
United Kingdom--each have extensive or growing DC retirement systems. 
As shown in table 1, the key features of each country's predominant DC 
plan vary.[Footnote 13] 

Table 1: Key Features of DC Plans by Country: 

Country: Australia; 
Key features of DC system: Mandatory plans are known as superannuation 
funds, which may be established by a single employer, groups of 
employers in an industry, financial service companies, or even by 
individuals themselves; 
Contributions: There is a mandatory employer contribution rate of 9.25 
percent of an employee's earnings, which is scheduled to gradually 
increase to 12 percent by 2022; 
DC assets as a percentage of national gross domestic product, 2011: 
91.6%. 

Country: Canada; 
Key features of DC system: Employers can voluntarily sponsor plans, 
which may be administered by a single employer, groups of employers in 
an industry, or financial service companies; 
Contributions: Contribution rates by employer and employee vary by 
plan. DC plans typically require employee contributions of 5 percent 
of earnings and matching employer contribution; 
DC assets as a percentage of national gross domestic product, 2011: 
2.8%. 

Country: Chile; 
Key features of DC system: Mandatory individual retirement plans are 
managed by for-profit entities called Administradoras de Fondos de 
Pensiones (AFP); 
Contributions: Employers are not required to contribute to a 
participant's account; 
Employees are required to contribute 10 percent of applicable earnings 
and pay monthly administrative fees to their AFP; 
DC assets as a percentage of national gross domestic product, 2011: 
61.3%. 

Country: Singapore; 
Key features of DC system: Mandatory plans are administered by the 
Central Provident Fund (CPF) Board; 
Contributions: For participants under age 50, employers are required 
to contribute 16 percent and employees 20 percent. From age 50 and 
older, rates gradually reduce to 6.5 percent and 5 percent for the 
employer and employee, respectively at age 65. Contributions are 
credited to accounts for retirement and for other things, such as 
housing and health care; 
DC assets as a percentage of national gross domestic product, 2011: 
62.9%. 

Country: Switzerland; 
Key features of DC system: Mandatory occupational plans, which are 
administered by independent foundations and may be sponsored by a 
single employer industry associations, or insurance companies. These 
plans have minimum rates of returns on savings and a minimum 
conversion factor for annuities.[A]; 
Contributions: Age-based contributions range from 7 percent of income 
for younger employees to 18 percent for employees approaching 
retirement. Employers are required to pay at least half of these 
contributions; 
DC assets as a percentage of national gross domestic product, 2011: 
110.3%. 

Country: United Kingdom; 
Key features of DC system: Starting in October 2012, the United 
Kingdom began phasing in a requirement over 6 years that employers 
automatically enroll workers in a plan and make contributions to it. 
These plans can either be governed by a board of trustees or under a 
contract set up between participants and a financial service company; 
Contributions: In 2013, minimum contributions were 2 percent with at 
least 1 percent by the employer. These rates are scheduled to increase 
to 8 and 3 percent by October 2018, respectively; 
DC assets as a percentage of national gross domestic product, 2011: 
25.2%. 

Country: United States; 
Key features of DC system: Employers can voluntarily sponsor several 
types of DC plans. The most popular type of DC plan is 401(k) plan. 
These plans are administered by employers, who may hire private 
companies to service the plan; 
Contributions: Employers, employees, or both may make contributions to 
the individual employee accounts. Employers may choose to make 
additional contributions (such as contributing a percentage of each 
eligible employee's salary), match the amount contributed by the 
employee, or both. Under IRS tax rules, contributions are limited.[B]; 
DC assets as a percentage of national gross domestic product, 2011: 
20.9%. 

Source: GAO analysis of foreign documentation, interviews with 
industry experts, and data from the International Monetary Fund World 
Economic Outlook September 2011 database. GAO did not conduct an 
independent legal analysis of the laws, regulations, or policies of 
the countries selected for this review. 

[A] Officials in Switzerland said the majority of plans in Switzerland 
are hybrid plans. These hybrid plans are similar to cash balance 
plans, which in the United States are legally classified as DB plans 
because participants' benefits are determined by a benefit formula. 
However, a cash balance plan has certain features, such as notional or 
hypothetical "individual accounts," that make it resemble a DC plan. 

[B] In the United States, the maximum annual limit for employee 
individual contributions to a 401(k) plan was $17,500 for 2013. The 
catch-up contribution limit for employees aged 50 and over was $5,500. 

[End of table] 

Retirement Spend-Down Options: 

At retirement, participants in DC plans enter the distribution, or 
spend-down phase, during which they use their savings to meet their 
retirement needs.[Footnote 14] DC participants are typically offered 
one or more of three main types of spend-down options at retirement, 
although the availability of these options and the rules related to 
their use vary by country: 

* Lump sum payments are a single distribution of some or all of a 
participant's retirement savings. For example, in the United States, 
participants generally only have the option to withdraw all or part of 
their account balance, which can, at the participant's discretion, 
then be used to invest in retail financial markets, among other things. 

* Programmed withdrawals are a series of fixed or variable payments 
from a participant's account and may be administered either within a 
plan or in retail financial markets.[Footnote 15] Programmed 
withdrawals attempt to produce relatively stable annual income for the 
lifetime of the retiree. For example, a participant could set up their 
own programmed withdrawal strategy and decide to draw down a certain 
percentage of their assets each month or year to meet their retirement 
needs. Governments could also set minimum and maximum drawdown limits. 

* Annuities are guaranteed payments that are normally secured through 
a contract with an insurance company for either a set period or for 
the participant's lifetime. Annuities come in a variety of forms. 
[Footnote 16] For example, deferred annuities allow participants to 
delay the start date of payments to a later point in retirement. 
Variable annuity payments are not guaranteed and vary based on the 
performance of underlying investments selected by the participant. 
[Footnote 17] 

Text box: 

Factors that affect annuity payment calculations can vary by country; 
Annuity payment amounts may depend on a number of factors beyond 
simply the amount of retirement savings a participant can use to 
purchase the annuity less fees charged by insurers. These factors vary 
by country and may, depending on the country, include such factors as: 
* Age: Participants can generally expect to receive higher payments 
the higher the age at which payments commence; 
* Gender: Men typically receive higher payments compared to women of 
the same age, since studies have shown that women tend to live longer 
than men. This may not apply, however, in countries and market sectors 
that require annuities to be offered on a gender-neutral basis--such 
as for an annuity offered through a plan in the United States; 
* Health: Participants with certain health conditions or lifestyle 
habits such as smoking can in some cases obtain higher payments; 
* Interest rates: Participants who purchase annuities during periods 
of low interest rates may lock in lower payments than if they had 
purchased during a period of higher interest rates. 

[End of text box] 

Participants face trade-offs in choosing among spend-down options 
because no single option protects against all the various risks 
participants may encounter in retirement, such as longevity[Footnote 
18] and inflation risk. To choose suitable options, participants 
approaching retirement must weigh the strengths and shortcomings of 
each against their own unique retirement needs. They also need to 
consider their other sources of retirement income, including 
government benefits and personal savings.[Footnote 19] Table 2 
illustrates some of the trade-offs participants face in choosing among 
spend-down options. 

Table 2: Examples of Trade-offs That Participants Face in Choosing 
among Spend-Down Options: 

Spend-down option: Lump sum payments[A]; 
Protects you against some risks: 
* Provide immediate access to retirement savings, some of which can be 
used to pay off debt and cover the costs of unforeseen events, such as 
unexpected high medical costs; 
* Unused savings can be left as an inheritance; 
But may expose you to others: 
* Participant is responsible for ensuring that retirement savings last 
their lifetime[B]; 
* Lump sum payments do not protect against inflation[C]; 
* Participant assumes investment risk for any retirement savings they 
reinvest[D]. 

Spend-down option: Programmed withdrawals[E]; 
Protects you against some risks: 
* Enable participants to keep retirement savings invested; 
* Offer flexibility to choose the level and timing of payments drawn 
from the plan, sometimes subject to any minimum or maximum 
requirements; 
* Provide access to retirement savings to cover the costs of 
unforeseen events; 
* Unused savings can be left as an inheritance; 
But may expose you to others: 
* Payments from programmed withdrawals are not guaranteed to last for 
life; 
* Programmed withdrawals do not protect against inflation[C]; 
* Participant assumes investment risk for retirement savings 
invested[F]. 

Spend-down option: Annuities; 
Protects you against some risks: 
* Provide regular payments that can be guaranteed to last the 
participant's lifetime; 
* Protect against investment risk, which the insurance company 
assumes[G]; 
But may expose you to others: 
* The decision to purchase an annuity is often irreversible. When 
there is an option to discontinue an annuity, it may subject the 
participant to relatively high surrender charges; 
* Retirement savings used to purchase an annuity cannot be left as an 
inheritance; 
* The participant risks purchasing an annuity when interest rates are 
low, therefore receiving lower monthly payments than expected; 
* Participant is at some risk of inflation unless they purchase a 
fully inflation indexed annuity[H]. 

Source: GAO analysis. 

[A] A participant who takes a lump sum payment from a plan may later, 
at the participant's discretion, use these assets to purchase a retail 
annuity or invest in retail financial markets, among other things. 

[B] Depending on the tax treatment of retirement income, participants 
may also pay higher taxes by taking their retirement savings as a 
single payment in one year rather than as a series of payments spread 
over multiple years. 

[C] In taking a lump sum payment or a programmed withdrawal, the 
participant is responsible for identifying and developing strategies 
to protect against inflation, such as purchasing an inflation 
protected retail annuity or achieving the investment returns 
necessary, net of commissions and fees, to finance increasing 
withdrawals. 

[D] Participants can in some cases maintain preferential tax treatment 
on their retirement savings by rolling such savings into an individual 
retirement account (IRA), but as we have previously reported, the 
rollover process can be confusing for participants. See [hyperlink, 
http://www.gao.gov/products/GAO-13-30]. 

[E] In the United States, there is some limited indication that plan 
sponsors may allow participants to set up a programmed withdrawal 
within a 401(k) plan. We previously found that 401(k) plans generally 
have lower fees and better comparative information, as well as 
fiduciary requirements for selecting and managing investment options 
relative to IRAs, see [hyperlink, 
http://www.gao.gov/products/GAO-13-30]. 

[F] Another factor affecting the sustainability of programmed 
withdrawals is the sequence of investment returns--in other words, the 
order in which years of positive and negative investment returns occur-
-during the drawdown period. See GAO, Retirement Income: Ensuring 
Income throughout Retirement Requires Difficult Choices, [hyperlink, 
http://www.gao.gov/products/GAO-11-400] (Washington, D.C.: June 7, 
2011). 

[G] This is not the case for variable annuities. Payments for variable 
annuities vary based on the performance of investments. The insurance 
company continues to assume the longevity risk, but the investment 
risk is transferred to the annuitant. 

[H] Increasing payment annuities generally provide some protection 
against rising prices, but may not fully protect against inflation. 
For example, according to the Insured Retirement Institute, very few 
life insurance companies offer true inflation-protected annuities in 
the United States. 

[End of table] 

To effectively weigh the trade-offs between spend-down options, 
participants have to understand how interest rates, investment 
returns, and inflation, among other key factors, can affect their 
retirement income. Figure 1 below illustrates how investment returns 
can affect the retirement income a programmed withdrawal provides. In 
contrast, an annuity, once purchased, protects against investment risk 
over the course of retirement. Purchasing an annuity, however, may be 
irreversible, thereby potentially limiting the ability to leave an 
inheritance or cover unforeseen costs in retirement. And interest 
rates at the date of purchase can affect the size of payments from an 
annuity. In all cases, even modest inflation can erode the purchasing 
power of retirement income over the course of an extended retirement. 

Figure 1: Hypothetical Projection of Monthly Retirement Income for a 
65-Year-Old 401(k) Plan Participant: 

[Refer to PDF for image: illustrated line graph] 

For example: 
Man retires at age 65 with $200,000 in his 401(k) account: 

Monthly income: 

Retiree's age: 65; 
Annuity: $1,036.74; 
Programmed withdrawal (3% investment returns): $666.67; 
Programmed withdrawal (7% investment returns): $666.67. 

Retiree's age: 70; 
Annuity: $1,036.74; 
Programmed withdrawal (3% investment returns): $633.99; 
Programmed withdrawal (7% investment returns): $772.85. 

Retiree's age: 75; 
Annuity: $1,036.74; 
Programmed withdrawal (3% investment returns): $602.92; 
Programmed withdrawal (7% investment returns): $895.94. 

Retiree's age: 80; 
Annuity: $1,036.74; 
Programmed withdrawal (3% investment returns): $573.37; 
Programmed withdrawal (7% investment returns): $1,038.64. 

Retiree's age: 85; 
Annuity: $1,036.74; 
Programmed withdrawal (3% investment returns): $545.27; 
Programmed withdrawal (7% investment returns): $1,204.07. 

Retiree's age: 90; 
Annuity: $1,036.74; 
Programmed withdrawal (3% investment returns): $518.55; 
Programmed withdrawal (7% investment returns): $1,395.85. 

Retiree's age: 95; 
Annuity: $1,036.74; 
Programmed withdrawal (3% investment returns): $493.13; 
Programmed withdrawal (7% investment returns): $1,618.17. 

Retiree's age: 100; 
Annuity: $1,036.74; 
Programmed withdrawal (3% investment returns): $468.97; 
Programmed withdrawal (7% investment returns): $1,875.91. 

Retiree's age: 105; 
Annuity: $1,036.74; 
Programmed withdrawal (3% investment returns): $445.98; 
Programmed withdrawal (7% investment returns): $2,174.69. 

Retiree's age: 110; 
Annuity: $1,036.74; 
Programmed withdrawal (3% investment returns): $424.12; 
Programmed withdrawal (7% investment returns): $2,521.06. 

More online: 
See how investment returns and other factors can affect retirement 
income using our interactive retirement model. 

See video explanations of how outside forces affect retirement income 
online at GAO.gov: [hyperlink, http://www.gao.gov/products/GAO-14-9]. 

Source: GAO analysis, actuarial data on life expectancy. 

Note: Annuities in this example convert 401(k) savings of $200,000--
the average 401(k) plan balance for individuals in their 60s with 30 
years of contributions, according to an Employee Benefit Research 
Institute analysis of 401(k) balances at the end of 2011--into monthly 
retirement income for a 65-year old male assuming interest rates of 2 
percent. We selected this interest rate based on federal Thrift 
Savings Plan annuity rates as of May 2013. The programmed withdrawals 
in the figure provide monthly income totaling 4 percent of the 
participant's account balance each year assuming annual investment 
returns of either three or seven percent. These returns are in line 
with average 10-year historical returns on Thrift Savings Plan funds 
that track major U.S. stock, corporate bond, and government securities 
indices. There is no assurance that future investment returns will 
match historical returns. This example does not account for inflation, 
which reduces the purchasing power of retirement income. Projected 
monthly income does not reflect any federal income taxes on 
distributions from tax-deferred accounts. This example also does not 
account for changes in behavior in response to investment returns, 
such as increasing the rate of withdrawals in order to maintain a 
standard of living or reducing the rate of withdrawals when faced with 
the prospect of running out of savings. 

To see the effect these factors can have on retirement income from the 
three main spend-down options, see the interactive retirement model 
available at [hyperlink, http://www.gao.gov/products/GAO-14-9. 

[End of figure] 

Strategies to Improve Retirement Outcomes Have Relied on Behavioral 
Economics: 

In the last decade, some experts have emphasized an aspect of 
behavioral economics to help improve retirement outcomes for 
participants in 401(k) plans. In these plans, individuals face greater 
responsibility and risks in managing their retirement income needs 
both during the accumulation and spend-down phases, such as having 
insufficient savings to support a comfortable retirement and not 
having the right tools to make sound financial decisions about how to 
use what they have accumulated.[Footnote 20] Our prior work found 
literature arguing that information or financial education, including 
improving financial literacy, is not necessarily the best or only 
approach to ensuring good retirement outcomes. They have proposed 
alternative strategies, sometimes in combination with information and 
financial education, that aim to help participants reach financial 
goals by making use of insights from behavioral economics--which 
blends economics and psychology--that indicate people are often prone 
to inertia and procrastination, and have difficulty processing complex 
information. For example, participants in 401(k) plans do not always 
receive timely, clear information to help them understand their 
options, as well as the risks and trade-offs of managing income 
throughout retirement. Even when such information is available, 
participants do not always make choices that are in their best 
interest. Insights from behavioral economics have led to strategies 
that use inertia to bolster or facilitate positive policy outcomes, 
such as default enrollment in 401(k) plans to increase retirement 
savings. Researchers and practitioners have proposed similar 
interventions for the spend-down phase, such as encouraging or 
"nudging" some participants toward annuitizing a portion of their 
retirement wealth. 

Countries Used Multiple Approaches to Broaden Participants' Retirement 
Options for the Spend-down Phase: 

Instituting Multiple Spend-down Options Helped Participants Address 
Varied and Changing Risks: 

Although DC systems in countries we reviewed often varied in their 
features, structure, and regulatory oversight,[Footnote 21] all six 
countries ensured that participants have institutionally-facilitated 
access to a mix of spend-down options through their plans to help them 
manage retirement risks.[Footnote 22] Five of the six countries make 
the three main spend-down options--lump sum payments that offer 
participants flexibility to access and use their retirement savings, 
programmed withdrawals that allow participants to keep their account 
balances invested and draw on savings as needed, and annuities that 
offer guaranteed retirement income and protection against investment 
risk--explicitly available to DC participants. The countries we 
reviewed also allow participants to combine spend-down options to meet 
changing needs over the course of an extended retirement. For example, 
within certain conditions, participants in Singapore can take a 
partial lump sum after age 55 and purchase an annuity that guarantees 
them some amount of retirement income for life. 

Other sources of retirement income, such as those from national 
pension systems, can address some retirement risks, but all the 
countries we reviewed recognize the importance of their DC system in 
improving retirement outcomes and have taken steps to increase 
participant access to multiple spend-down options. For example, 
Switzerland has a national pension system that provides some level of 
guaranteed retirement income, similar to the annuity option available 
to participants through their plan. Even with this system in place, in 
2005 Switzerland required plans to offer participants at least 25 
percent of their account balance as a lump sum payment, an option that 
had previously only been made at the discretion of the plan. One 
financial advisor we spoke with told us this policy change benefits 
participants who decide they already have sufficient retirement income 
and would accept lower annuity payments through their plan in exchange 
for more access to their savings at retirement. 

Text box: 

National pension system in Switzerland; Switzerland's national pension 
system has two components: an earnings-related public pension funded 
mainly by payroll contributions and an income-tested supplementary 
benefit funded by general revenues. Payment amounts for the earnings-
related benefit are based on lifetime earnings. Payments in retirement 
are indexed to prices and earnings. For information about the national 
pension systems in the other countries we reviewed, see appendix II. 
Source: The World Bank and OECD. 

[End of text box] 

Historically, five of the six countries tended toward one spend-down 
option,[Footnote 23] but all have more recently expanded access to 
additional options, in some cases substantially altering the 
retirement decisions of participants, as shown in figure 2. For 
example, Canada had traditionally "locked in" participants' assets for 
the purpose of securing a stream of retirement income, which 
participants could previously only do by purchasing an annuity. In the 
1990s, however, Canada expanded the spend-down options that would meet 
this locking-in requirement to include programmed withdrawals. 
[Footnote 24] Government officials and a financial professional in 
Canada told us this was done in response to participants' reluctance 
to lose access to their assets and their desire to leave an 
inheritance. Programmed withdrawals have since become the most widely 
used spend-down option in Canada. 

Figure 2: Timeline of Key Retirement Spend-down Policy Changes in Six 
Countries Leading to Facilitated Access to Multiple Options for DC 
Plan Participants: 

[Refer to PDF for image: illustrated timeline] 

Chile: 
Prior to 1990: Chile replaced a public retirement system with a DC 
system that offered all three spend-down options; 
Multiple spend-down options. 

Canada: 
Historically used annuities. 
1990s: Programmed withdrawals expand as alternative to annuities[A]; 
2000s: Restrictions on lump-sum payments eased; 
Multiple spend-down options. 

Australia: 
Historically used lump sum payments; 
2004 to 2007: Programmed withdrawals made easier and more attractive; 
2013: Starts work on removing barriers to deferred annuities; 
Multiple spend-down options. 

Switzerland: 
Historically used annuities; 
2005: Plans required to offer lump-sum payments[B]; 
Multiple spend-down options. 

United Kingdom: 
Historically used annuities; 
2011: Annuity requirements relaxed and programmed withdrawals expanded; 
Multiple spend-down options. 

Singapore: 
Historically used programmed withdrawals; 
2013: Government-managed annuity becomes default option; 
Multiple spend-down options. 

Source: GAO analysis of retirement systems in those countries; Art 
Explosion (flags). 

Note: GAO did not conduct an independent legal analysis of the laws, 
regulations, or policies of the countries selected for this study. 

[A] The introduction in some jurisdictions of programmed withdrawal 
arrangements with maximum limits on withdrawals gave participants an 
alternative to purchasing an annuity at retirement to meet Canada's 
restrictions on drawing down DC plan assets. Previously, participants 
could only meet these restrictions by purchasing an annuity. 

[B] Switzerland does not offer programmed withdrawals as a spend-down 
option for participants. 

[End of figure] 

While each of the six countries we reviewed has multiple spend-down 
options to help DC plan participants tailor a retirement income 
strategy to fit their unique circumstances, in the United States, 
401(k) plans generally only offer participants one option--a lump sum 
payment--leaving participants on their own to identify and develop 
strategies to manage retirement risks.[Footnote 25] Although some 
401(k) plan sponsors may offer all three of these options to 
participants, most do not offer annuities or programmed withdrawals 
similar to the systematic or formalized options[Footnote 26] offered 
in other countries.[Footnote 27] As a result, U.S. plan participants 
typically take a lump sum payment, and then have to make difficult 
choices in order for their financial assets to last throughout 
retirement. 

Countries Undertook Reviews of the Spend-down Phase to Help Address 
Participants' Retirement Needs: 

We also found that three of the six countries conducted reviews of 
participants' retirement needs and concerns in the spend-down phase, 
which resulted in governments taking actions that led to additional 
spend-down options to meet those specific needs. For example, in 2007 
and 2008, Singapore conducted a review of its retirement phase and 
determined a programmed withdrawal option designed to last 
approximately 20 years was not adequate to meet the needs of many 
participants based on their increasing longevity (see figure 3 for the 
key steps taken.)[Footnote 28] Singapore consulted with a broad 
spectrum of stakeholders, including working adults, community and 
social sector leaders, and insurance companies and industry 
associations, in designing a new spend-down option to better meet 
participants' needs. Singapore concluded from this consultation that 
Singaporeans wanted an annuity scheme that provided an income for life 
and that would replace the programmed withdrawal option, where payouts 
stop completely after about 20 years. As a result, in 2009 Singapore 
began offering government-managed annuities, known as the Central 
Provident Fund Lifelong Income Scheme for the Elderly (CPF LIFE), on 
an opt-in basis. In 2013, Singapore set one of these CPF LIFE 
annuities as the default option for certain participants. 

Figure 3: Steps Singapore Took to Strengthen Pathways to Multiple 
Spend-down Options: 

[Refer to PDF for image: illustration] 

Provide direction for spend-down phase: 
Singapore recognized the need to reform its spend-down phase because 
people were living longer. It set out to explore how to improve upon 
the current system with some form of longevity insurance. 

Analyze participants’ retirement needs: 
Singapore found their primary spend-down option was not adequate 
because more than half of participants were expected to outlive their 
programmed withdrawals. 

Consult directly with stakeholders: 
Singapore’s participants said they wanted spend down options that 
would, among other things: 
* Provide a steady income for life; 
* Offer options and flexibility to cater to different participants’ 
needs and circumstances. 

Strengthen access to multiple spend-down options: 
Based on the results of the public consultation, Singapore designed 
government-managed annuities with refundable premiums.[A] Singapore 
introduced these in 2009 on an opt-in basis. During the opt-in phase, 
Singapore conducted outreach through the media to help participants 
better understand their new spend-down options. 

Source: GAO analysis of documents from Singapore’s National Longevity 
Insurance Committee and Central Provident Fund. 

Note: GAO did not conduct an independent legal analysis of the laws, 
regulations, or policies of the countries selected for this study. 

[A] Participants can discontinue their annuity and get a refund of 
their premium less any monthly payments already made and a fee. 

[End of figure] 

Similarly, the United Kingdom undertook a review to address concerns 
with the spend-down phase, which resulted in policy changes that 
provided increased flexibility for participants to choose how to spend 
down their account assets. Specifically, the United Kingdom determined 
that its long-standing rules that effectively required individuals to 
purchase an annuity by the age of 75 were too restrictive for an 
increasing number of participants--who were both living longer and 
working longer--and for some was acting as a barrier to saving in DC 
plans. As part of the review, the United Kingdom consulted with a 
range of stakeholders, including individuals, service providers, and 
industry and consumer representatives, on how to ensure that 
participants make appropriate spend-down choices in the absence of the 
annuity requirement. Based on this review, the United Kingdom removed 
its annuitization requirement in 2011, making this option voluntary, 
and expanded access to programmed withdrawals in order to give 
participants more flexibility to choose spend-down options that best 
suit them.[Footnote 29] As a result, participants can remain invested 
in their plans and manage the timing and amount of withdrawals from 
their plans, within certain limitations, or delay the purchase of an 
annuity until interest rates are more favorable. Government officials 
and experts we spoke to agreed that most participants at present have 
not accumulated sufficient retirement savings to be eligible for and 
make full use of programmed withdrawals as a spend-down option. 
[Footnote 30] According to government officials and one financial 
service provider, annuities remain the most widespread form of 
distribution from DC plans in the United Kingdom.[Footnote 31] Despite 
current low rates of saving, the structure is in place to give workers 
more flexibility in planning for retirement as the DC system in the 
United Kingdom matures and workers accumulate larger account balances. 

U.S. Regulators Have Begun to Explore the Spend-down Phase, but Have 
Not Yet Strengthened Access to a Mix of Spend-down Options: 

In the United States, as shown in figure 4, similar to the steps taken 
by some of the other countries, DOL and Treasury have recently begun 
to explore the possibility of expanding 401(k) participants' access to 
spend-down options through their plans that offer lifetime income, but 
they have not yet made a concerted effort to help plan sponsors offer 
a mix of options to their participants. Most 401(k) plans typically 
only offer participants the option to take their benefits as lump sum 
payments, which leaves participants on their own, or to the retail 
market, to ensure their savings last throughout retirement. In 
recognition of the potential risk workers face under current 
conditions, DOL and Treasury undertook efforts in 2010 to collect 
detailed information from the public to determine what, if any, steps 
they could take to enhance the retirement security of 401(k) plan 
participants by facilitating access to, and use of, options designed 
to provide a stream of lifetime income after retirement.[Footnote 32] 
Through this process, DOL and Treasury received feedback from 
financial service providers and other stakeholders on the challenges 
plan sponsors face in offering a mix of spend-down options to 
participants through their respective plans.[Footnote 33] But the 
feedback also highlighted some existing flexibilities 401(k) plan 
sponsors have to offer multiple spend-down options. One large service 
provider described a range of spend-down options it offers 
participants, including programmed withdrawals and investment 
strategies that generate retirement income, such as mutual funds 
designed with built-in payment streams. Another service provider 
discussed how technology enables sponsors to offer participants access 
to competitive online annuity markets that can provide the benefit of 
competition and improved pricing at a reasonable cost. 

Figure 4: Steps DOL and Treasury Have Taken to Explore Spend-down 
Options for DC Plan Participants: 

[Refer to PDF for image: illustration] 

Provide direction for spend-down phase: 
In 2010, the Department of Labor (DOL) and the Department of the 
Treasury (Treasury) issued a Request for Information (RFI) on whether 
and how the United States could increase access to and use of lifetime 
income options by 401(k) participants. 

Analyze participants’ retirement needs: 
Consult directly with stakeholders: 
DOL and Treasury collected data from and consulted with a range of 
stakeholders through their RFI and a subsequent hearing. 

Strengthen access to multiple spend-down options: 
DOL and Treasury are using their review of data and consultation to 
update regulations on related issues,[A] but have not helped plan 
sponsors strengthen access to a mix of spend-down options by 
leveraging existing opportunities and addressing current barriers. 

Source: GAO analysis of documents from the Department of Labor. 

[A] For example, DOL is considering developing a rule that would 
require a participant's account balance to be expressed on his or her 
benefit statement as an estimated lifetime stream of payments. Pension 
Benefit Statements, 78 Fed. Reg. 26,727 (May 8, 2013). 

[End of figure] 

Since 2010, DOL and Treasury have begun taking steps to improve the 
information participants receive about the spend-down phase and expand 
access to spend-down options. For example, in May 2013, DOL proposed 
rules that would require 401(k) participants' benefits statements to 
show how their account balances would translate into a stream of 
lifetime income payments.[Footnote 34] And in February 2012, Treasury 
proposed rules that would make it easier to purchase deeply deferred 
annuities.[Footnote 35] However, in contrast to the steps taken by 
other countries, DOL and Treasury have not yet used the information 
they collected to develop and implement a strategy that would help 
401(k) plan sponsors leverage existing flexibilities and address 
challenges in offering their participants a mix of spend-down options 
that meet varying retirement needs. Without additional steps by U.S. 
regulators to help ensure sponsors are providing participants with 
access to a mix of options, most 401(k) plan participants are likely 
to continue taking a lump sum payment at retirement, regardless of 
whether this option is the most appropriate to meet their particular 
needs. By doing so, participants are at risk of either spending their 
assets too quickly and outliving their savings, or being too 
conservative with their assets, forcing them to accept a lower 
standard of living than necessary. Low rates of saving for retirement 
in the United States highlight the need to make the most of 
participants' 401(k) account balances. Simulations conducted by the 
Employee Benefit Research Institute in 2010 indicate that nearly half 
of workers in the United States above the age of 35 may be at risk of 
not having enough retirement income to meet their needs. Moreover, 
this problem may be more acute for those with lower incomes. When 
ranked by pre-retirement income, households in the lowest one-third 
may be at risk more than 70 percent of the time. Although all of the 
countries we reviewed are similarly coping with the challenge of small 
account balances, we found that offering a mix of options allows 
participants to select options that can best meet their unique 
circumstances. 

Strategies Used by the Countries We Studied Helped Participants Make 
More Informed Decisions: 

Several Approaches Used by Other Countries to Increase Participants' 
Knowledge and Understanding of Spend-down Options Could Help DOL's 
Efforts to Provide Information: 

Most of the countries we reviewed used various mechanisms such as 
communicating simple and consistent information in a timely manner to 
help participants make more informed spend-down decisions.[Footnote 
36] For example, in Australia, the government developed a booklet for 
participants that lays out the various spend-down options as they 
approach retirement with simple illustrative examples, together with 
the benefits and drawbacks of each, as shown in figure 5.[Footnote 37] 
As a result, participants have access to information to plan for 
retirement by weighing the pros and cons of different ways to manage 
and make the most of their retirement savings. 

Figure 5: Example of Information on Spend-down Options Developed for 
Participants Approaching Retirement in Australia: 

[Refer to PDF for image: illustration] 

Benefits: 

* Reduce or clear your debts: Withdrawing a lump sum may let you clear 
debts, or pay other necessary expenses, which will save you money in 
the long run. 

* Withdraw money in stages: You could withdraw a partial lump sum at 
regular intervals, or as you need it. This may have tax and Centrelink 
benefits, depending on your age. 

* Invest outside super: You may find it easier to take some or all of 
your money out of super and put it in a simple savings or investment 
product, such as a low-fee savings account or term deposit, or another 
investment that suits your needs. This may help ensure you have some 
cash for short to medium-term needs. For information about investments 
outside super, go to [hyperlink, http://www.moneysmart.gov.au] and 
click on the Investing tab. 

* Treat yourself: You might be able to pay for something that wasn't
affordable before, such as travel, home improvements or a car. 

Drawbacks: 

* Splurge risk: You may be tempted to overspend or live beyond your 
means until the money runs out. 

* Lower future income: Spending now will reduce your retirement income 
in the future. 

* Pay more tax: Tax may apply to investment earnings outside super. 
Investments can grow tax-free in a retirement income stream. 

Source: GAO presentation of Australian Securities & Investments 
Commission information. 

[End of figure] 

Additionally, in the United Kingdom, plans are required to send a 
"wake up" information pack to participants 4 to 6 months before their 
retirement date that explains the key spend-down options, which has 
helped participants better understand their options.[Footnote 38] The 
pack is also used to help plans meet the requirement to inform 
participants of their right to buy an annuity from a provider other 
than the one that holds their pension savings. In consultation with 
the government, the Association of British Insurers (ABI) developed a 
code of conduct, which requires its members--insurance companies--to 
communicate certain information to participants.[Footnote 39] 
According to ABI's code of conduct, as shown in figure 6, the 
information in the pack should be in plain, clear language and include 
a cover letter detailing the participant's options and additional 
literature, such as a brochure on retirement facts by the U.K. 
government. It points participants to sources of advice and support, 
such as regulated advisers and independent advice organizations. In 
addition, the U.K. financial regulator requires that plans send 
participants a follow-up pack 6 to 10 weeks prior to retirement, which 
emphasizes the need to make a decision, among other things. ABI 
expects its members, who are service plan providers, to send 
participants communications that are in line with these practices. 
U.K. pension regulators told us that they also expects trust-based 
plan communications to meet the standards developed by the ABI, so 
participants in plans administered by trusts and insurance companies 
receive comparable information. According to a 2009 ABI study, the 
wake up pack increased the proportion of participants feeling quite or 
very comfortable about understanding their retirement options from 70 
to 80 percent.[Footnote 40] Their study also found that participants 
generally thought the information in the pack was relevant to their 
situations. In addition, a 2013 ABI study found that 85 percent of 
people who read pre-retirement information agreed that information 
from their provider made them more aware of their options at 
retirement.[Footnote 41] 

Figure 6: United Kingdom Cover Letter Example of Best Practices for 
Communicating Spend-down Decisions and Options to Participants: 

[Refer to PDF for image: illustration of sections of letter] 

Gives reader an explanation of their decisions: 

The pension fund you have built up with us won’t automatically pay you 
an income when you retire. You will need to buy a retirement income 
product that provides you with that income. And to make the most of 
the money in your pension fund, you should shop around for the best 
possible income. 

Avoids jargon and defines potentially confusing terms: 

[3] Shopping around buying an annuity: 
An annuity is a financial product which turns some or all of the money 
in your pension fund into an ongoing income in retirement. 

Spells out reader’s rights: 

You do not have to buy an annuity from us. The Open Market Option 
(OMO) is your right to compare what we can offer you with what other 
pension companies can provide. 

Sets out information in an engaging way: 

If you do plan to buy an annuity, you should consider the following 
questions: 

Are you married or do you have a partner? Will they need an income if 
you die first? If so, you may want income from a ‘joint-life’ or 
‘guaranteed’ annuity. Make sure you and your spouse or partner discuss 
this together. 

Do you have a recognized medical condition? Are you a smoker? 

If so, you may be able to buy an annuity that pays more because of 
this. These options are known as an ‘enhanced’ or ‘impaired’ annuity. 

Do you want you income to increase over time, or adjust to rises in 
inflation? 

If so, think about buying an ‘escalating’ or ‘index-linked’ annuity. 
These start with a lower income but increase over time. 

Provides a list of multiple spend-down options: 

(10) Other pension options: 

If you don’t want to secure an income with your pension fund now, 
there are other options. 

These include short-term annuities, income withdrawal, investment-
linked annuities, phased retirement, and alternatively secured 
pensions. The enclosed booklet provides details... 

Explains the timeline and encourages reader to seek additional help: 

[x] weeks before your retirement date... 

We will write to you [x-x] weeks before your retirement date to give 
you an estimate of the value of your pension fund and an indication of 
the income we could offer you. 

(14) Getting help and advice: 

We recognize that this is a big decision and we strongly recommend you 
seek financial advice if you feel you need help. This need not involve 
a fee -- many advisers will offer a commission-only service with no up-
front fee. Details of where to go for impartial advice are given on 
page [X] of the enclosed booklet. 

Alternately contact us at: [Firm to add contact details for further 
inquiries]. 

Source: GAO analysis of an Association of British Insurers (ABI) 
template for service providers. 

[End of figure] 

Countries we reviewed did not rely solely on the disclosure of 
information but also found ways to show how the information provided 
to participants applied to their particular circumstances. In 
particular, two of the six countries--Chile and the United Kingdom--
help participants see how their savings would translate into a stream 
of retirement income by requiring plans to provide participants with 
monthly or yearly projections in their benefit statements, a 
comparison which can be useful for making retirement decisions. 
[Footnote 42] Since 2005, Chile has required pension plans to estimate 
retirement income in the annual statements using multiple assumptions 
about the participant's expected retirement date, as shown in figure 
7. For older participants about 10 years from retirement, one estimate 
assumes the participant stops working at the normal retirement age, 
while a second estimate assumes that the participant postpones 
retirement and continues to make contributions for 3 more years. 
[Footnote 43] According to Chilean pension officials, the aim of these 
scenarios is to help participants compare their current income to 
expected future retirement income and to encourage them to make 
additional voluntary contributions in case their retirement income 
looks low. In fact, a 2011 study of the impact of providing these 
personalized pension projections to Chilean participants suggests that 
the receipt of this information resulted in participants making 
additional contributions to improve their retirement prospects. 
[Footnote 44] 

Figure 7: Example of Chile's Benefit Statement Illustrating Projected 
Income: 

[Refer to PDF for image: illustration of sections of statement] 

Provides estimated retirement income under different scenarios: 

What would your retirement benefit be if you retire at age 60? 
You would receive an estimated pension of $99.527. 

What would your retirement benefit be if you retire at age 63? 
You would receive an estimated pension of $123.994. 

For the calculation of the estimated pension, an annual 5% fund return 
is assumed, that you contribute half of the remaining months until 
retirement and that you have a beneficiary spouse two years older. The 
calculated retirement benefit corresponds to an immediate life annuity. 

Provides information on improving prospects based on participant's 
circumstances: 

You can increase your pension: 

* If you are self-employed, you can directly contribute in your AFP; 

* Remember that you can retire after reaching the legal retirement 
age. If you delay your retirement, your pension will increase; 

* Learn about the Voluntary Pension Savings (VPS) and the Voluntary 
Savings Account (Cuenta 2); 

* Learn about the benefits from the Solidarity Pillar and the minimum 
pension guarantee by the State. 

Source: Superintendence of Pensions, Chile. 

[End of figure] 

Finally, enabling participants to compare across various spend-down 
options and products within an option also helps them to plan for 
retirement. For example, we found that two of the six countries--Chile 
and the United Kingdom--provide electronic quotations to help near-
retirees make informed decisions. 

* The Chilean government introduced its central electronic quotation 
system (SCOMP)[Footnote 45] in 2004, which lowers participant search 
costs and gives them easy access to transparent, reliable information 
by showing different spend-down options in a comparable format. The 
SCOMP offers individuals who are ready to retire comparable quotations 
for the programmed withdrawals and annuity options in a single 
document replacing the traditional way people looked for and bought 
retirement products through brokers. The SCOMP has enabled 
participants to more easily receive a larger amount of quality 
information by making all possible offers available to them without 
the need to hire financial intermediaries such as sales agents and 
brokers.[Footnote 46] 

* A similar benefit is available in the United Kingdom through the 
Money Advice Service[Footnote 47] set up by the government, which 
allows participants to compare a range of illustrative annuity quotes 
on a voluntary basis. This service offers free and unbiased advice on 
financial matters. Specifically, Money Advice Service's website 
provides comparable annuity quotes from participating insurance 
companies, once an individual answers a set of standard questions. The 
individual is then presented with a table listing insurance companies 
and his or her annuity quotes, both in monthly, quarterly, and yearly 
amounts. The U.K. developed the service to provide those who do not 
know how to or cannot afford to get advice about annuities from other 
sources, particularly those with relatively small account balances. 
U.K. regulators told us that although participants may benefit from 
seeing quotes, most participants' plan balances are too small for the 
service to be useful for them. However, this service may become more 
important as more workers are automatically enrolled in plans and 
assets grow.[Footnote 48] 

In the United States, plans must provide participants certain 
disclosures related to their benefits and options under the plan. For 
example, benefit statements with the individual's account balance are 
required to be provided to 401(k) plan participants at least 
quarterly.[Footnote 49] However, the disclosures do not require that 
participants receive information about their spend-down options before 
they make a decision. As a result, 401(k) plan participants may lack 
key information, such as the benefits and drawbacks of various spend-
down options, needed to make an informed decision, and which could 
affect their retirement outcomes. In addition, although plan sponsors 
are permitted to provide information and education to participants, 
there is no specific guidance for sponsors to provide participants 
approaching retirement with information on spend-down options. 
Consequently, some plan sponsors may not provide participants with 
sufficient information, which may result in participants potentially 
making decisions that fail to sustain their incomes throughout 
retirement. 

DOL has begun to consider including lifetime income projections in 
benefit statements, which may yield positive outcomes for 
participants. Currently, 401(k) plan benefit statements generally only 
show a participant's account balance, and according to DOL officials 
participants may have difficulty predicting how long their savings 
will last. An April 2013 study funded by DOL found that more than half 
of a sample of plan statements did not include projections of the 
participant's balance at retirement, estimates of the retirement 
income they might be able to expect at retirement, or the 
"relationship between future outcomes and current savings or 
investment behavior."[Footnote 50] In May 2013, DOL announced that it 
was considering developing proposed regulations regarding DC plan 
benefit statements, and solicited public comments to inform its 
thinking as it considers possible regulatory proposals.[Footnote 51] 
One idea is to show a participant's current account balance and an 
estimated lifetime stream of payments based on such balance, assuming 
the participant is at normal retirement age as of the date of the 
statement, even if he or she is younger. The second idea is aimed at 
participants who have not yet reached normal retirement age, which 
shows a projected account balance at normal retirement age and then 
converts to an estimated lifetime stream of payments. As shown in 
Chile, including lifetime income projections on plan statements, 
similar to those being considered by DOL, can help participants 
envision and understand the lifetime monthly income that can be 
generated from an account balance. 

Most of the Countries We Reviewed Use Incentives to Encourage Certain 
Kinds of Participant Behavior: 

Recognizing that disclosure of information alone is not always 
sufficient to ensure good retirement outcomes, several countries also 
use subtle incentives or nudges to promote particular kinds of 
behavior. In particular, two countries we reviewed--Singapore and 
Switzerland--use defaults to exploit inertia and promote a specific 
option.[Footnote 52] In Switzerland, for example, some plans use 
annuities as the default spend-down option allowing for the 
possibility of opting out. One study suggests the take-up rate of 
annuities is higher in such plans relative to those where the lump sum 
option is the default.[Footnote 53] In contrast, the United Kingdom is 
attempting to address participants' inertia in shopping for annuities. 
Until recently, most participants purchased an annuity from their 
existing service provider, partly because the wake up pack they 
received shortly before retiring included an application for an 
annuity with that provider, although it might not have offered the 
best rate. Working together, the U.K. government and ABI agreed that 
to promote the search for better annuity rates providers should not 
include an annuity application in the pack.[Footnote 54] 

In addition, tax incentives are also used to encourage or deter the 
use of certain spend-down options. For example, in 2007, the 
Australian government removed the favorable tax treatment enjoyed by 
annuities, which caused the relatively small market for life annuities 
to virtually disappear, and negatively affected the market for term 
annuities as well, according to researchers. In addition, researchers 
found that a series of reforms between 2005 and 2007 contributed to 
the rapid increase in the demand for programmed withdrawals.[Footnote 
55] For example, the reforms exempted from taxes all earnings or 
investment returns on assets kept in superannuation funds to support 
programmed withdrawals, provided that minimum age-based annual 
drawdowns are satisfied. A report by the Australian pension regulators 
showed an increase in the proportion of retirement income taken as 
programmed withdrawals from one third in 2005 to one half by 2012. 
[Footnote 56] Over the same period, the proportion of superannuation 
funds offering programmed withdrawals increased from 35 percent to 80 
percent. 

Countries Also Assist Participants Who Rely on Financial Advisors: 

Three of the countries we reviewed implemented policies to strengthen 
safeguards regarding financial advisors, so that DC plan participants 
seeking professional advice have the opportunity to receive fair and 
objective information that enables them to better manage their 
retirement income. These countries recognized that spend-down 
decisions can be complex for participants, who may choose to rely on 
the assistance of a financial advisor to help make appropriate 
choices. As a result, countries such as the United Kingdom have taken 
steps to protect DC participants against inappropriate fees and 
unscrupulous advice in making spend-down decisions. For example, since 
January 1, 2013, financial advisors in the United Kingdom are 
prohibited from receiving commissions on products they sell in order 
to reduce the sale of costly and unfit products and minimize conflicts 
of interest. Instead, they now have to explain to participants how 
much advice will cost and reach agreement with the participant on a 
price and method of payment, such as an upfront fee or installments. 
Since 2008, Chile requires that those who previously worked as annuity 
brokers broaden their knowledge to all aspects of pensions before 
being registered as advisors. This knowledge enables them to provide 
participants and their beneficiaries with comprehensive information 
needed to make informed decisions about their benefits based on their 
needs and interests. 

Countries' Regulation and Oversight of Spend-down Options Offer 
Lessons for U.S. Regulators: 

Most of the Countries We Reviewed Used Withdrawal Rules to Help 
Protect Participants from Outliving Their Savings: 

Most of the countries we reviewed imposed income requirements or 
withdrawal limits on lump sum payments to help those who take this 
option mitigate retirement risks.[Footnote 57] For example, in three 
of the six countries, participants must meet retirement income 
requirements if they wish to withdraw all or part of their DC plan 
assets as a lump sum. Specifically, in order for participants in Chile 
to be eligible to access part of their account, they would need to 
accumulate enough income to finance 100 percent of the maximum pension 
with a government supplement and a 70 percent or higher replacement 
rate based on the last 10 years of their salaries.[Footnote 58] 
According to the Chilean pensions regulator, participants who meet 
these conditions can withdraw any amount in excess of the amount 
needed to meet the minimum.[Footnote 59] Under these rules, relatively 
few participants have taken partial lump sum payments and, of those 
who did, the amounts were generally quite small. In contrast, 
Australia does not place an upper limit on the amount participants can 
withdraw as a lump sum. According to researchers and government 
officials, participants in Australia who choose this option may run 
the risk of outliving their savings and becoming solely reliant on 
government benefits for retirement income. However, some researchers 
and government officials we spoke with said retirees in Australia may 
actually be overly cautious in spending down their assets and face the 
opposite risk of accepting a lower standard of living than is 
necessary to meet their retirement needs. In the United States, lump 
sum distributions from 401(k) plans are subject to few restrictions. 
During our 2011 review of the choices retirees make in managing their 
assets, we found that some U.S. plan participants prefer to have 
access to their full 401(k) plan retirement savings, such as by 
rolling their assets over into an individual retirement account (IRA) 
or withdrawing them when they retire. At retirement, 401(k) plan 
participants may withdraw their full account balance as a lump sum and 
may be required to pay federal and state income taxes on that amount. 
[Footnote 60] 

Of the five countries that offer programmed withdrawals, four 
countries regulate them to help prevent participants from spending 
their savings too quickly. For example, Chile's 2008 pension reforms 
introduced an additional actuarial factor in the government 
calculation of the maximum withdrawal amount to account for longevity 
risks. The maximum withdrawal amount is calculated so payments do not 
drop below a certain floor, 30 percent of the first payment, by the 
time participants reaches the age of 98. As a result of these reforms, 
a retiree's benefits can vary year to year based on life expectancy 
estimates and projected returns on investments, but will not fall 
below a certain amount.[Footnote 61] Canada also limits the annual 
amount a participant can withdraw from programmed withdrawal products. 
Regulators in some Canadian jurisdictions impose an annual maximum 
withdrawal, which helps to ensure participants have a regular income 
up to age 90. 

Most 401(k) plan participants in the United States do not have access 
to programmed withdrawal products through their plans similar to the 
ones we found in other countries. The primary programmed withdrawal 
option that U.S. plan participants may be aware of is the required 
minimum distributions in tax-deferred plans, such as 401(k) plans, 
when a participant reaches 70 ½.[Footnote 62] If a plan offers a 
systematic withdrawal and the participant designs and manages their 
programmed withdrawal, the extent to which their strategy is 
successful at providing income throughout retirement depends on a 
number of factors, such as the rate of drawdown, future investment 
returns, inflation, and longevity. For an illustration about how some 
of these factors may affect retirement income, see the additional 
materials at [hyperlink, http://www.gao.gov/products/GAO-14-9]. 

DOL Continues to Look at Barriers Plan Sponsors Face in Offering 
Annuities to 401(k) Plan Participants, Which Do Not Exist in the 
Countries We Reviewed: 

DOL is in the process of reviewing regulatory barriers that may 
prevent or discourage 401(k) plan sponsors from offering annuities to 
participants. In the United States, 401(k) plan sponsors who offer an 
annuity to their participants through their plan are subject to 
fiduciary standards in their selection of an annuity provider, which 
require them to act solely in the interest of the plan's participants 
and their beneficiaries. In 2008, DOL issued new final regulations, in 
the form of a safe harbor, for the selection of annuity providers to 
help plans prudently choose them and to some extent encourage plans to 
offer annuities.[Footnote 63] In proposing the safe harbor DOL 
speculated that an annuity option would give more participants the 
opportunity to annuitize their savings, while not impeding them from 
choosing other options.[Footnote 64] Even with this safe harbor, 
according to some U.S. retirement experts and plan service providers, 
sponsors of 401(k) plans may be hesitant to offer an annuity to their 
participants because of the additional burden and the potential 
liability sponsors may incur. In 2010, some respondents to DOL's 
request for information on lifetime income options, which included 
some questions related to the existing safe harbor provision, 
suggested that DOL revise one condition of the safe harbor that 
requires sponsors to assess the ability of an insurance company to 
make all future payments under an annuity contract. Respondents in 
favor of DOL revising the condition noted that it could help ease some 
DC plan sponsors' concerns about offering an annuity as a spend-down 
option. Additionally, this could help participants who would otherwise 
purchase an annuity in the retail market gain access to group prices, 
which are typically lower than individual prices.[Footnote 65] In 
December 2012, the ERISA Advisory Council reported on the importance 
to the retirement community that DOL develop guidance designed to 
provide meaningful assistance to plan sponsors and participants by 
modifying the existing safe harbor provision that governs the 
selection of an annuity provider. In its report, the ERISA Advisory 
Council also encouraged DOL to partner with NAIC to help with its 
effort to develop a more workable safe harbor for the selection of 
annuities and other lifetime income products.[Footnote 66] In 2012, 
DOL began working with the NAIC ERISA Retirement Income Working Group 
as they consider possible options for easing plan sponsor concerns 
with the financial soundness of annuity providers as related to the 
DOL safe harbor for the selection of an annuity provider and fiduciary 
responsibilities. 

In the countries we reviewed, employers are not expected to assess an 
annuity provider's ability to make future payments before contracting 
with them to offer an annuity through their plans. According to 
regulators in each of the countries we reviewed, there are no 
requirements for employers to assess the financial stability of an 
insurer and countries generally rely on insurance regulations and 
industry standards to oversee and monitor insurance companies, 
including those that sell annuities.[Footnote 67] For example, in 
Canada, regulators told us that insurers must meet solvency 
requirements[Footnote 68] and financial market conduct standards, and 
all insurers are members of an association that promotes consistent 
insurance practices and standards by issuing guidelines to its 
members. Moreover, in four of the six countries regulators and 
industry practitioners told us that the main responsibility of 
employers is to contribute to the plan during accumulation, and their 
obligations typically cease at retirement.[Footnote 69] In the United 
Kingdom, where plans are required to inform participants of their 
right to shop around for an annuity, there are no requirements to 
assess the potential annuity provider the participant may select 
through the plan. According to U.K. government officials, plan 
trustees and participants do not have the expertise to assess the 
solvency of an annuity provider and are not expected to do so. 
Furthermore, they noted that this responsibility lies with the bank 
and insurance company regulators, so plans offering and participants 
purchasing an annuity are assured of the provider's solvency. 
Additionally, because plans do not need to take steps to assess 
annuity providers, there are no additional administrative costs 
associated with offering an annuity through the plan. As some of the 
countries we reviewed illustrate, the absence of a requirement for 
plan sponsors to assess annuity providers allows plans to more easily 
provide participants a way to annuitize their retirement savings, if 
they so choose. 

Conclusions: 

The DC systems in the countries we reviewed differ from the United 
States in a number of ways, and not all the lessons they have to offer 
would apply here, but their experiences illustrate additional steps 
DOL and Treasury could consider to help 401(k) plan sponsors make the 
most of existing flexibilities to offer multiple spend-down options 
through their plan and broaden participants' retirement options. By 
2015, participants whose retirement savings will be primarily made up 
of what they accumulated in their 401(k) plans will either be eligible 
to retire or approaching retirement and many will be faced with the 
challenge of ensuring they do not outlive their retirement savings. 
Yet, most of these participants' 401(k) plans will offer lump sum 
payments as the primary spend-down option for participants, leaving 
them to their own devices to figure out how to make their savings meet 
their needs and last throughout their retirement. Some participants 
may prefer having complete access to their retirement savings upon 
retirement. Others, however, could benefit from knowing that there are 
options offered through the plan--other than a lump sum payment--that 
might be optimal for them. The experiences of other countries have 
shown that participants benefit from being able to select among 
multiple, competitively priced and easily accessible options to 
address their diverse and changing retirement needs. Although DOL and 
Treasury have taken some initial steps to explore how the United 
States might expand the options available to 401(k) participants at 
retirement, they could do more to ensure that plan sponsors offer 
flexible options to participants, enabling them to choose the spend-
down option that best fits their particular circumstances. 

Our work also shows that information provided in an easy to understand 
format at appropriate times before a participant retires can help 
participants think about and plan for the amount they will need on a 
monthly basis during retirement. Receiving information on projected 
income with their account statements helps workers develop and focus 
on retirement income targets, which in turn can lead to positive 
changes in participant behavior, such as working longer to improve 
their prospects for a successful retirement. Comparing available spend-
down options and longevity risk can also help participants understand 
the advantages and disadvantages of each option available to them. In 
addition, as illustrated in our interactive retirement model, learning 
to understand the effects of interest rates, inflation, and returns on 
each type of spend-down option can help participants begin to 
interpret financial information that can impact their retirement 
income. Given that DOL is considering various approaches to improve 
401(k) plan participants' understanding of retirement income, it is 
clear that including information about spend-down options and 
estimated income can further help participants make more sound 
decisions about their retirement income. 

Finally, unlike within 401(k) plans in the United States, in the 
countries we reviewed annuities were generally an option available to 
participants through their plans. Because few 401(k) plans in the 
United States choose to offer annuities to participants, they may be 
missing a beneficial spend-down option that can provide lifetime 
income at discounted group prices. As DOL continues to look at the 
barriers to 401(k) plans offering annuities, the lack of requirements 
for plan sponsors in other countries to assess an annuity provider's 
ability to make future payments--relying instead on the adequacy of 
insurance regulation--may be something to explore. Our work shows that 
offering annuities to participants can be done in an easy cost-
effective manner enabling participants, if they prefer to consider 
this spend-down option and not dismiss it as being too expensive to 
obtain. 

Recommendations for Executive Action: 

As DOL and Treasury continue their efforts to determine the actions 
needed to enhance the retirement security of 401(k) plan participants, 
we recommend they consider the approaches taken by other countries to 
formalize access to multiple spend-down options for U.S. plan 
participants that address varying retirement risks and needs. To the 
extent possible, lessons from other countries should be used to help 
DOL and Treasury ensure plan sponsors have information about their 
flexibilities and the ability to facilitate access to a mix of 
appropriate options for 401(k) plan participants. 

In addition, as DOL considers changes to participant benefit 
statements and other disclosures, we recommend that the Secretary of 
DOL consider strategies other countries have employed to help 
participants make sound decisions, such as providing timely 
information at or before retirement about available spend-down options 
and projections of future retirement income. 

We also recommend that as DOL continues to review regulatory barriers 
to lifetime income options for 401(k) plan participants it consider 
other countries' approaches to plans offering annuities, such as their 
reliance on existing solvency requirements and insurance industry 
standards to provide assurances rather than place responsibility on 
plan sponsors to make an assessment of an annuity provider's financial 
stability. As DOL considers the approaches of other countries and 
continues to work with NAIC, which facilitates interactions between 
insurance companies and state insurance regulators, DOL may wish to 
consult with the Federal Insurance Office, which coordinates federal 
efforts on prudential aspects of international insurance matters. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to DOL and Treasury for comment. 
Both agencies provided technical comments that were incorporated, as 
appropriate. DOL also provided written comments, which are reproduced 
in appendix III. In its written response, DOL generally agreed with 
our recommendations and stated that it will take steps to address 
these recommendations in its ongoing efforts. Moreover, DOL will be 
focusing on two areas for further consideration that we highlighted in 
our report, participant education and providing regulatory assistance 
to plan sponsors considering an annuity option in defined contribution 
plans. 

Regarding our recommendation that DOL and Treasury consider the 
approaches of other countries to formalize access to multiple spend-
down options for 401(k) plan participants, DOL commented that 
expanding access to additional options involves plan design features, 
which historically have not been subject to DOL's regulatory authority 
under Title I of ERISA. DOL noted that it will evaluate whether there 
are available regulatory approaches to address this recommendation. As 
we addressed in the report, participants can benefit from having 
access to a mix of options allows participants to select options that 
can best meet their unique circumstances. Therefore, we support DOL's 
efforts to look into available regulatory approaches to address our 
recommendation and would encourage the agency to fully consider the 
steps it could take within the scope of its current authority. 

With respect to our recommendation to consider the strategies of other 
countries to help participants make sound retirement decisions, DOL 
agreed that participants should have timely information at or before 
retirement about available spend-down options and projections of 
future retirement income and stated that they will explore their 
options for actions. As we illustrated in our report, having timely 
information and projections of future income can help plan 
participants make more informed retirement saving decisions. We would 
again encourage DOL to fully consider what steps it could take within 
the scope of its current authority. 

Finally, with respect to our third recommendation that DOL consider 
other countries' approaches as it reviews regulatory barriers to 
lifetime income options to 401(k) plan participants, DOL stated that 
it will evaluate the available regulatory approaches to address our 
recommendation. We also suggested that DOL consult with NAIC and FIO 
in its efforts. DOL commented that it began working with a NAIC 
Working Group to consider possible options for easing plan sponsor 
concerns with the financial soundness of annuity providers in 
connection with DOL's safe harbor for the selection of annuity 
providers and fiduciary responsibilities. DOL noted that the NAIC 
Working Group plans on providing EBSA with a list of "best practices" 
for fiduciaries when asking states for information about insurers, and 
that it will continue to work with NAIC, Treasury, FIO, and others as 
it evaluates regulatory approaches to address our recommendation. In 
response to DOL's comment, we revised our draft to reflect the status 
of DOL's efforts to collaborate with NAIC on the safe harbor for the 
selection of annuity providers. We commend DOL for its initiative to 
develop a more workable safe harbor, but continue to encourage DOL to 
review alternative approaches taken by other countries, such as their 
reliance on existing solvency requirements and insurance standards. As 
shown in our report, these approaches can ease the burden on plan 
sponsors. As a result of DOL's review and potential action, 401(k) 
plans could more easily offer annuities to plan participants, which 
allow them greater flexibility to choose spend-down options that meet 
their needs and preferences. 

As arranged with your office, unless you publicly announce its 
contents earlier, we plan no further distribution of this report until 
30 days from the date of this letter. At that time, we will send 
copies to the Secretary of Labor, the Secretary of the Treasury, and 
other interested parties. In addition, the report is available at no 
charge on the GAO website at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-7215 or jeszeckc@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made key contributions 
to this report are listed in appendix IV. 

Signed by: 

Charles A. Jeszeck, Director: 
Education, Workforce, and Income Security Issues: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

Our objectives for this review were to examine selected countries' (1) 
approaches to offering retirement spend-down options; (2) key 
strategies to help participants make sound decisions; and (3) 
approaches to regulating and overseeing options. 

To address these objectives, we conducted in-depth reviews of 
retirement spend-down phase strategies in countries with extensive or 
growing defined contribution (DC) systems to determine lessons for the 
United States based on best practices used in other countries. We 
selected the following countries for this review: Australia, Canada, 
Chile, Singapore, Switzerland, and the United Kingdom (U.K.). In 
selecting the six countries, we considered if the country had (1) 
developed innovative spend-down phase policies or options; (2) a 
clearly defined and well-established oversight structure for the DC 
plan spend-down phase and providers, such as insurance companies; and 
(3) if the country's approach to the spend-down phase was uniquely 
different from the other countries in our scope. To determine which 
countries to include, we conducted an initial review of the universe 
of countries with well-developed account based retirement systems. We 
reviewed comparative studies of DC systems published by GAO, 
academics, the Organisation for Economic Co-operation and Development 
(OECD), The World Bank, and other industry experts, such as 
international benefits consulting firms, to determine which countries 
have extensive or growing DC systems and if those countries had 
developed innovative spend-down policies or options. We solicited 
recommendations on countries with innovative spend-down phase 
approaches or options from representatives of the OECD, The World 
Bank, U.S. government officials, academics, and industry practitioners 
who work with multi-national companies that operate in other countries 
with DC plans. We then examined the characteristics of each country's 
DC system for policies, practices, and requirements related to 
retirement spend-down options. Based on our initial review, we 
excluded countries in which the DC plan is structured in a 
substantially different manner from that of U.S. 401(k) plans or not 
well-developed relative to other pension options, or in which the 
spend-down phase was not well-defined. We also determined that the six 
countries selected could potentially provide lessons for the United 
States given their experience and unique approach to the spend-down 
phase. 

For each of the six countries we selected, we reviewed publicly 
available research and reports about each country's pension systems--
particularly information on spend-down options, oversight framework, 
and initiatives to educate participants about options. We also 
interviewed pension experts, service providers, regulatory agencies 
and other government officials from the countries selected. We did not 
conduct an independent legal analysis to verify the information 
provided about the laws, regulations, or policies of the countries 
selected for this study. Instead, we relied on appropriate secondary 
sources, interviews with relevant officials, and other sources to 
support our work. We submitted key report excerpts to agency officials 
in each country for their review and verification, and we incorporated 
their technical corrections as necessary. 

In addition to addressing these objectives, we also developed a 
retirement model to help provide contextual information on spend-down 
options and certain factors that may affect retirement income from 
these options. The retirement model to allow users to view retirement 
income under a range of circumstances provided by three main spend-
down options: (1) a lump sum payment of their account balance; (2) a 
programmed withdrawal with payments that are either fixed or set as a 
proportion of the remaining account balance; and (3) an immediate 
annuity that makes level payments with no joint or survivor benefit. 
We developed, in consultation with GAO's Chief Actuary and an external 
actuary with expertise in annuity pricing, a formula that was 
calibrated to approximate annuity payments similar to those found in 
U.S. retail annuity markets in July, 2013.[Footnote 70] We simulated 
retail annuity prices because participants in most 401(k) plans do not 
have access to institutionally priced annuities within plans. For 
instance, to purchase an annuity, these participants would instead 
have to roll over a lump sum payment of their account balance into an 
IRA and purchase an annuity as an individual investor in U.S. retail 
markets. To set the ranges within which users can adjust assumptions 
about interest rates, investment returns and inflation, we analyzed 
historical data on economic indicators from the Federal Reserve 
Economic Database, including 10-year Treasury constant maturity rates, 
and investment returns from Thrift Savings Plan funds that track broad 
stock, fixed income, and government securities indices. To ensure the 
annuity rates generated from our model reflected U.S. retail market 
rates as of July 31, 2013, we calibrated rates using quotes from 
ImmediateAnnuities.com. We did not assess the reliability of data used 
to set ranges or calibrate rates, mainly because the information 
generated from the interactive tool provides illustrative context for 
the report and is not material to findings, conclusions, or 
recommendations. In addition, retirement income depicted in the 
interactive tool does not reflect any federal income taxes on 
distributions from tax-deferred 401(k) accounts.[Footnote 71] Dollar 
amounts in the interactive tool are for illustrative purposes only and 
should not be considered as quotes for spend-down products or taken as 
financial advice. 

We conducted this performance audit from June 2012 to November 2013 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Key Features of DC Pension Systems in Australia, Canada, 
Chile, Singapore, Switzerland, and the United Kingdom: 

Australia: 

At a glance: 

Since 1992, Australia has had a mandatory defined contribution (DC) 
pension system, known as the superannuation guarantee.[Footnote 1] 
Employees generally designate a plan, known as a superannuation fund, 
to which the employer is required to direct contributions. Employees 
who do not designate a fund are placed in a default accumulation 
option, known from 2013 as MySuper. In 2010, Australia announced plans 
to gradually increase mandatory contributions from 9 to 12 percent of 
workers’ wages by 2022. The average account balance at normal 
retirement age is about AUD 119,000 (approximately $110,000) as of 
2012. 

* Total system assets: AUD 1.4 trillion ($1.3 trillion) as of 2012. 

* Percentage of workers with DC accounts: not available during our 
review. 

Types of plans: 

Industry funds are generally non-profit entities[Footnote 2] 
established by a single employer or group of employers. Industry funds 
generally offer 5 to 15 investment options designed to meet most 
participants’ needs and in recent years many have become available to 
the public rather than being restricted to the employees of particular 
employers. 

Corporate funds are set up by an employer for their employees, 
although many meet their obligations by contributing to industry or 
retail funds on behalf of their employees. 

Retail funds are for-profit entities usually run by banks or 
investment companies. They often have a large number of mid to higher 
priced investment options and are open to anyone. 

Self-managed superannuation funds are available to individuals who 
create and manage their own plan, which entails establishing a trust 
and a bank account. Up to four people can be in a self-managed fund, 
however each individual must be a trustee or director of the trustee 
company and no “arms-length” employees are permitted, according to 
APRA officials. 

DC Spend-down options: 

* Lump sums: Participants may take some or all of their account 
balance as a lump sum payment. 

* Programmed withdrawals: Participants have the flexibility to 
structure the timing and amount of withdrawals subject only to annual 
required minimum withdrawals. These options are known as account-based 
income streams or account-based pensions. 

* Annuities: Only a small number of annuities are purchased annually, 
and most are term annuities that provide payments over a fixed period 
rather than lifetime annuities that guarantee payments for the 
participant’s life. 

Providers: 

Spend-down options may be provided by employers or a group of 
employers, banks, insurance companies, or financial service providers. 

Regulators: 

* The Australian Prudential Regulatory Authority (APRA) is responsible 
for prudential regulation of all superannuation funds except for self-
managed superannuation funds and some public sector schemes. Reforms 
implemented in July 2013 will enhance APRA’s ability to set and 
enforce prudential standards. According to officials, APRA’s authority 
prior to this had largely been limited to issuing, setting conditions 
on, and revoking licenses to operate superannuation funds. APRA is 
also responsible for the prudential regulation of other financial 
services entities, such as banks and insurance companies. 

* The Australian Securities and Investments Commission licenses and 
monitors financial services businesses to ensure they operate 
efficiently, honestly, and fairly. This includes superannuation 
trustees who hold a license with the commission. It also operates a 
website that provides consumers information to help them make smart 
choices about their personal finances, including spend-down decisions, 
[hyperlink, http://www.moneysmart.gov.au]. 

The Australian Taxation Office is responsible for regulating self-
managed superannuation funds, which it does by providing information 
to trustees on how to set up and manage their fund, checking that the 
fund complies with standards and laws, and taking enforcement actions 
to correct breaches of the law. 

National pension system: 

Australia’s Age Pension is a pay-as-you-go public pension funded out 
of general revenues. The Age Pension is designed to provide biweekly 
retirement income equal to about 28 percent of average wages,[Footnote 
3] as well as other benefits such as assistance for health care and 
transportation, to residents of Australia age 65 and older.[Footnote 
4] The Age Pension is means tested for both income and assets, so 
accumulations in superannuation will reduce biweekly payments from the 
Age Pension. According to APRA officials, the Age Pension is 
essentially a “safety-net” provided for those unable to provide for 
themselves. 

Australia Footnotes: 

[1] According to APRA officials, the term “guarantee” in this context 
reflects the policy intent that all could be guaranteed to be included 
in the mandatory arrangements, as opposed to the historical approach 
which was that superannuation was provided at the discretion of 
employers. There is no guarantee of investment performance. 

[2] Industry and corporate funds are non-profit entities in that 
dividends are not paid to shareholders of the trustee company. The 
directors of the trustee company represent the interests of the fund 
members and the employer-sponsor(s) in equal numbers, although an 
independent director may also be appointed. 

[3] Australia uses male total average weekly earnings as a measure of 
average wages. 

[4] Women born before 1949 become eligible at age 64½. 

Source: GAO analysis of foreign agency documents and interviews with 
Australian officials and industry experts; State Department (base 
map); Art Explosion (flags). 

Note: GAO did not conduct an independent legal analysis of the laws, 
regulations, or policies of the countries selected for this review. 

[End of Australia features] 

Canada: 

At a glance: 

Although, most private voluntary occupational pension plans have been 
DB, almost all new plans are DC, and a typical DC plan would require 
employee contributions of 5 percent of earnings and matching employer 
contribution. 

* Total system assets: 47.42 billion Canadian dollars (about $45.16 
billion) as of 2011 

* Percentage of workers with DC accounts: 5 percent as of 2011 

Types of plans: 

Voluntary private plans are known as registered private pension plans 
and can either be DC plans or DB plans. In general, money payable to a 
member of a plan can only be used to provide retirement income, even 
if a member leaves the plan. Once benefits are vested, they are 
usually “locked-in,” which helps to ensure that a member will have 
regular income at retirement, and creditors cannot seize locked-in 
pension benefits. 

Source: GAO analysis of foreign agency documents and interviews with 
Australian officials and industry experts; State Department (base 
map); Art Explosion (flags). 

Note: GAO did not conduct an independent legal analysis of the laws, 
regulations, or policies of the countries selected for this review. 

Highlights of the spend-down phase: 

DC Spend-down options: 

* Lump sums: Partial lump sums may be available under certain 
conditions. These conditions vary by jurisdiction. 

* Programmed withdrawals: Registered income funds and life income 
funds are available to participants, depending on the jurisdiction. 
Minimum distribution requirements, beginning at age 71, apply to these 
products. In addition, where life income funds are available, 
participants’ accounts may be subject to maximum distribution 
requirements, set as fixed percentages of account balances, at each 
age, designed to last up to a certain age. In a few jurisdictions, 
regulators have allowed plans to offer a type of programmed 
withdrawal, known as a variable benefit. Instead of transferring a 
participant’s balance to a third party, assets remain in the plan and 
are distributed by the plan. 

* Annuities: An array of other life annuities is available in the 
retail market. The most common form is a single life pension with a 
minimum guarantee of 5 or 10 years of payments. A plan administrator 
must purchase an annuity for a participant of a DC plan if the member 
does not elect to exercise of their options. According to regulators, 
the take-up rate for annuities is relatively low. 

Providers: 

Programmed withdrawal products are generally offered by financial 
institutions, such as banks and trustee companies. Private insurance 
companies offer annuities. 

Regulators: 

Plans are generally regulated at the provincial level, so policies 
vary by province and the federal level. At the federal level, the 
Office of the Superintendent of Financial Institutions regulates and 
supervises private pension plans in federally regulated areas of 
employment, such as banking, telecommunications and inter-provincial 
transportation. It is also the regulator for pension plans established 
with respect to employment in the Yukon, the Northwest Territories, 
and Nunavut. 

National pension system: 

Canada has a two-tier social security system that provides the 
majority of retirement income for the average worker. The system 
includes the Old Age Security program, which provides monthly payment 
to residents who are 65 years of age and over as well as a guaranteed 
income supplement—a family income-tested benefit—to low-income 
pensioners; and the Canada Pension Plan, which pays a monthly 
retirement pension to people who have worked and contributed to the 
Canada Pension Plan.[Footnote 1] The amount of the Canada Pension Plan 
benefit a person is entitled to depends on how much and for how long 
that person contributed to the plan. 

Canada Footnote: 

[1] The Canada Pension Plan operates in every province and territory, 
except Quebec, which has its own similar pension program, the Quebec 
Pension Plan. 

Source: GAO analysis of foreign agency documents and interviews with 
Australian officials and industry experts; State Department (base 
map); Art Explosion (flags). 

Note: GAO did not conduct an independent legal analysis of the laws, 
regulations, or policies of the countries selected for this review. 

[End of Canada features] 

Chili: 

At a glance: 

Chile instituted a DC pension system in 1981. Workers who entered the 
labor market after that date are mandated to contribute to an 
individual DC account. 

* Total system assets: 77.5 trillion Chilean pesos (about $162 
billion) as of 2012 

* Percentage of workers with DC accounts: About 59 percent of those in 
the labor force currently contribute as of 2012 

Types of plans: 

Workers are free to choose a licensed for-profit service provider, 
known as an AFP (Administradoras de Fondos de Pensiones) to manage 
their individual accounts. Currently, there are six AFPs. New entrants 
to the labor force are defaulted to the AFP with the lowest fee as 
determined by a bidding process, which takes place every 2 years. They 
are required to remain in this AFP for 2 years, after which they can 
freely choose a service provider. 

Highlights of the spend-down phase: 

DC Spend-down options: 

* Lump sums: Participants may take some of their account balance as a 
lump sum payment provided the remaining balance is enough to generate 
a pension equal to 100 percent of the maximum pension with solidarity 
support, 261,758 Chilean pesos (about $520) monthly as of December 
2012, and 70 percent of the participant’s average monthly taxable wage 
for the previous 10 years. 

* Programmed withdrawals: AFPs administer this option with the monthly 
amount determined annually by a government formula based on account 
balance, expected rate of return, inflation, and gender-specific life 
expectancy. 

* Annuities: Administered by life insurance companies, the annuity 
calculation is based on age and gender-specific life expectancy. 
Participants can combine options such as temporary programmed 
withdrawals with a deferred annuity, or purchase an immediate annuity 
with a portion of their account balance and programmed withdrawals 
with the rest. Annuities are inflation-indexed. Annuities are not 
allowed if the pension they generate is smaller than the Basic 
Solidarity pension, which as of December 2012 was 80,528 Chilean pesos 
(about $160) monthly. 

Providers: 

* AFPs administer programmed withdrawals. Insurance companies offer 
annuities to participants. 

Regulators: 

* The Superintendent of Pensions closely supervises and regulates 
AFPs, including issuing licenses for them to participate in the 
system. On an ongoing basis, the Superintendent of Pensions monitors 
plan providers for compliance with investment option guidelines, 
reserve requirements, fee structure, and other requirements. 

* The Superintendent of Securities and Insurance supervises insurance 
companies, which includes setting rules and regulations about solvency 
principles and monitoring insurance company offers through the SCOMP 
system.[Footnote 1] Together with the Superintendent of Pensions, it 
maintains a list of approved pension advisors. 

National pension system: 

Chile has a public pension system with two components targeted at the 
poorest 60 percent of the population age 65 and over who meet 
residency requirements. There is a Basic Solidarity Pension for 
individuals who have not contributed to individual accounts and pass 
the means test. Participants who contributed to individual accounts 
and pass the means test receive a Pension Solidarity Complement if 
their monthly pension is below a threshold amount of 261,758 Chilean 
pesos (about $520) as of December 2012. 

Chili Footnote: 

[1] SCOMP is the Spanish acronym for Electronic Consultation and Offer 
System for Annuities and Phased Withdrawals. It is an electronic 
quotation system that shows participants different spend-down options 
in a comparable format. 

Source: GAO analysis of foreign agency documents and interviews with 
Australian officials and industry experts; State Department (base 
map); Art Explosion (flags). 

Note: GAO did not conduct an independent legal analysis of the laws, 
regulations, or policies of the countries selected for this review. 

[End of Chili features] 

Singapore: 

At a glance: 

Singapore’s mandatory DC system, the Central Provident Fund (CPF), was 
established in 1955 to provide financial security for employees in 
their retirement. The system is comprised of individualized accounts 
fully funded by both employer and employees. Contributions are 
distributed among three types of individual accounts. 

* Total system assets: 230,158 million Singaporean dollars (SGD) 
(about $181,227 million) as of 2012. 

* Percentage of workers with DC accounts: over 80 percent of the 
resident workforce. 

Until age 55, CPF savings are maintained in three accounts: 

* Ordinary account savings can be used for housing, investment, and 
other approved purposes. 

* Special account maintains savings that are set aside for retirement 
and can be used for investment in retirement-related financial 
products. 

* Medisave account savings help CPF members meet their own or their 
immediate family’s hospitalization expenses. 

The retirement account is created for CPF members when they reach the 
age of 55. Savings from the ordinary and special accounts up to the 
minimum sum amount (148,000 SGD as of 2013) are transferred to this 
account. This amount is set aside for the purpose of providing members 
with steady income post-retirement. 

Highlights of the spend-down phase: 

DC Spend-down options: 

* Lump sums: At age 55, participants may withdraw their CPF savings in 
excess of the minimum sum of $148,000 SGD (about $116,535) in their 
retirement account and a minimum of 40,500 SGD (about $31,900) in 
their medisave account. Participants who do not have savings in excess 
of the minimums are allowed to withdraw $5,000 SGD (approximately 
$3,900). 

* Programmed withdrawals: Prior to 2013, the primary spend-down option 
was a programmed withdrawal administered by the CPF Board designed to 
last for approximately 20 years from the participants “drawdown age,” 
which is currently 65. 

* Annuities: In 2009, Singapore introduced a new government-managed 
life annuity system, known as CPF Lifelong Income Scheme For the 
Elderly (CPF LIFE), to address the challenges of increasing life 
expectancy and an aging population. From 2013, participants with 
retirement account balances of at least 40,000 SGD (about $31,500) are 
automatically placed on CPF LIFE. The government offers two types of 
annuities, a basic and standard plan. The standard plan is the default 
plan for participants. The standard plan provides higher monthly 
payments as compared to the basic plan, but leaves a smaller bequest 
for the participant’s family and other beneficiaries 

Providers: 

The CPF Board administers the CPF Fund and CPF LIFE. Private insurance 
companies offer a variety of annuity products in the retail market. 

Regulators: 

CPF Board was established by law to be the trustee and administrator 
of CPF. The CPF Board is also responsible for investing participants’ 
savings in special securities issued by the government. The CPF Board 
works closely with the Ministry of Manpower and other relevant 
Ministries on policies that affect CPF, even though the power to 
initiate changes to provisions on CPF schemes rests with the Minister 
of Manpower. 

National pension system: 

CPF is the main source of retirement income for workers. Singapore 
does not have a multi-pillar retirement system that is similar to the 
United States. There is no state pay-as-you-go social security. 
However, there is other government social spending, which indirectly 
helps retirees with costs, such as health care and housing. 

 
Source: GAO analysis of foreign agency documents and interviews with 
Australian officials and industry experts; State Department (base 
map); Art Explosion (flags). 

Note: GAO did not conduct an independent legal analysis of the laws, 
regulations, or policies of the countries selected for this review. 

[End of Singapore features] 

Switzerland: 

At a glance: 

Since 1985, Switzerland has had a mandatory system of occupational 
pension plans for workers with incomes above a certain threshold. 
[Footnote 1] Participants do not have a choice of plan, but are placed 
in their employer’s plan. The government regulates minimum 
contributions, and minimum returns on contributions during 
accumulation. In 2005, Switzerland extended to some extent coverage of 
the mandatory system to low-income and part-time workers. 

* Total system assets: SFr. 625.9 billion dollars (about $658.8 
billion) as of 2011 

* Percentage of workers with DC accounts: About 74 percent of the 
labor force 

Types of plans: 

Mandatory occupational plans are administered by independent 
foundations and may be sponsored by a single employer or group of 
employers. Plans are managed by boards of trustees with equal employer 
and employee representations. The organization of plans also varies by 
degree of risk coverage with respect to longevity, premature death or 
disability. 

Autonomous plans bear all the risk. 

Autonomous plans with reinsurance hand over some of the risk to a 
reinsurance company. 

Semiautonomous plans include two cases: (1) a plan hands over only the 
risk of death or disability to an insurance company and consequently 
still bears the risk of longevity; and (2) the plan buys the old-age 
pensions from the insurer too. 

Fully insured plans are plans in which all the risks are covered by an 
insurance company. 

Savings associations by construction bear no actuarial risks, because 
only old-age savings are accumulated. 

Highlights of the spend-down phase: 

DC Spend-down options: 

* Lump sums: Since 2005, plans have been required to offer 
participants at least 25 percent of their mandatory retirement savings 
as a lump sum payment. 

* Programmed withdrawals: Programmed withdrawals are not available to 
plan participants. 

* Annuities: Switzerland requires that annuities have disability and 
survivor benefits. Pension funds may voluntarily index annuity 
payments for inflation if they are financially able to do so. In the 
mandatory portion of the DC system, annuities must be the default 
option. Although official data are not available, researchers estimate 
that participants annuitize about 80 percent of their account balance. 

Providers: 

Spend-down options may be administered by independent foundations that 
manage plans. 

Regulators: 

* Oberaufsichtskommission (OAK Commission) came into being in 2012 to 
harmonize regional oversight and regulation of trust-based pension 
plans. The Commission also oversees the Guarantee Fund that protects 
participants in the event that a pension plan becomes insolvent, as 
well as the Substitute Occupational Benefit Institution that extends 
coverage to employers who do not meet their pension obligation and 
those who are not otherwise covered and who wish to voluntarily be 
covered, such as the self-employed, among others. 

* The Swiss Financial Market Supervisory Authority is responsible for 
overseeing insurance companies. It ensures that insurance companies 
comply with laws and regulations and fulfill their licensing 
requirements. 

* The Federal Social Office of Insurance plans, manages, and monitors 
Switzerland’s social insurance systems to ensure they function 
effectively. 

National pension system: 

Switzerland’s old age and survivors’ insurance (AHV/AVS) is a pay-as-
you-go public pension that is funded by payroll contributions and 
general revenues. The system has two components: an earnings-related 
public pension funded mainly by payroll contributions and an income-
tested supplementary benefit funded by general revenues. Payment 
amounts for the earnings-related benefit are based on lifetime 
earnings. Payments in retirement are indexed to prices and earnings. 
The government coordinates benefits between AHV/AVS and occupational 
pension plans so that combined, they replace about 60 percent of 
preretirement income for workers with lower incomes. 

Switzerland Footnote: 

[1] Officials in Switzerland said the majority of plans in Switzerland 
are hybrid plans. These hybrid plans are similar to cash balance 
plans, which in the United States are legally classified as DB plans 
because participants’ benefits are determined by a benefit formula. 
However, a cash balance plan has certain features, such as notional “
individual accounts” that are similar to DC plans. 

Source: GAO analysis of foreign agency documents and interviews with 
Australian officials and industry experts; State Department (base 
map); Art Explosion (flags). 

Note: GAO did not conduct an independent legal analysis of the laws, 
regulations, or policies of the countries selected for this review. 

[End of Switzerland features] 

United Kingdom: 

At a glance: 

Voluntary DC plans make up most of the private pension system in the 
U.K. An individual may be a member of a number of different pension 
plans simultaneously. From October 2012, in a staged process, 
employers were required to automatically enroll their eligible 
employees into a pension plan—including a new low-cost DC pension 
saving plan called the National Employment Savings Trust—and provide a 
minimum contribution. 

* Total system assets: £385.9 billion (about $584.70 billion) as of 
2010. 

* Percentage of workers with DC accounts: about 17 percent of 
employees as of 2012. 

Types of plans: 

Trust-based plans (41 percent of DC participants) These are employer-
sponsored plans and are usually non-profit entities managed by a board 
of trustees that typically hire one or more service providers for 
recordkeeping and investment management services. The trustees are 
responsible for selecting and vetting the investment options. 
Contract-based plans (59 percent of DC participants) For contract-
based plans, an employee deals directly with a for-profit service 
provider that performs both recordkeeping and investment management 
services. The service provider selects which investment options are 
available to the participant. These plans are owned entirely by the 
worker. 

Highlights of the spend-down phase: 

DC Spend-down options: 

* Lump sums: Participants may take up to 25 percent of plan assets as 
a tax-free lump sum, subject overall to 25 percent of the individual’s 
lifetime tax-free pension allowance and individual plan rules. 

* Programmed withdrawals: Under a capped drawdown, participants have 
the ability to withdraw up to 120 percent of the value of an amount 
equal to what they would get from a level payment single-life annuity 
each year. Plan administrators are responsible for reviewing these 
withdrawals every 3 years and resetting maximum withdrawal limits as 
needed. Participants who can demonstrate secure income of at least 
£20,000 (about $30,300) per year may take withdrawals without limit 
while leaving the balance of the fund invested. This option is known 
as flexible drawdown. 

* Annuities: Participants can choose from a number of different 
options for single-life and joint-life annuities, including level or 
escalating payments, a guarantee period, and impaired or enhanced 
rates. 

Providers: 

Plan administrators, which may be a trustee or for-profit provider, 
are responsible for administering programmed withdrawals. Private 
insurance companies offer a variety of annuity products in the retail 
market. 

Regulators: 

* The Pensions Regulator is solely responsible for regulating trust-
based plans and coordinates with other entities on regulating contract-
based plans. It has the authority to oversee the administration of 
these plans and contributions made to them. For DC plans, its 
statutory objectives include protecting the benefits of plan 
participants and promoting and improving understanding of good 
administration of plans. 

* The Financial Conduct Authority and the Prudential Regulatory 
Authority share oversight of contract-based plans and financial 
service providers. The Financial Conduct Authority was the successor 
to the former authority, the Financial Services Authority. It is 
responsible for ensuring fairness in the conduct of firms towards 
their employers and participants, overseeing smaller insurers, as well 
as asset managers and advisory firms. The Prudential Regulatory 
Authority, the smaller of the two new entities, is a subsidiary of the 
Bank of England and tasked with monitoring the safety and soundness of 
larger insurers, banks, and asset managers. 

National pension system: 

The basic state pension is a regular payment from the government once 
an individual reaches a certain age.7 The amount depends on the number 
of qualifying years, at least 30 years, individuals have of National 
Insurance contributions. As of August 2013, the maximum full basic 
state pension is £110.15 per week (about $167). There is also an 
earnings-related element called the state second pension, which give 
individuals who earn lower wages or cannot work as much as other the 
change to receive a better state pension. Under current rules, there 
is a cap on annual earnings of £40,040 (about $60,700). 

United Kingdom Footnote: 

[1] The date an individual reaches basic state pension age depends on 
when he or she was born. For men born before December 6, 1953, the 
current age is 65. For women born after April 5, 1950 but before 
December 6, 1953, the age is between 60 and 65. The age men and women 
are eligible for benefits is expected to increase to age 66 by October 
2020. 

Source: GAO analysis of foreign agency documents and interviews with 
Australian officials and industry experts; State Department (base 
map); Art Explosion (flags). 

Note: GAO did not conduct an independent legal analysis of the laws, 
regulations, or policies of the countries selected for this review. 

[End of United Kingdom features] 

[End of section] 

Appendix III: Comments from the Department of Labor: 

U.S. Department of Labor: 
Assistant Secretary for Employee Benefits Security Administration: 
Washington, D.C. 20210: 

October 31, 2013: 

Charles A. Jeszeck: 
Director, Education, Workforce, and Income Security: 
United States Government Accountability Office: 
Washington, DC 20548: 

Dear Mr. Jeszeck: 

Thank you for the opportunity to review the Government Accountability 
Office's (GAO) draft report entitled "Other Countries' Experiences 
Offer Lessons in Policies and Oversight of Spend-down Options for the 
U.S." We appreciate GAO's interest in helping 401(k) plan participants 
sustain an income throughout retirement. As your report points out, 
American workers are primarily saving for retirement through 401(k) 
plans, which have become the dominant type of plan private sector 
employers are offering in the United States. 

In recognition of the foregoing, the Department is considering what 
steps it could take to facilitate access to, and use of, lifetime 
income options in defined contribution plans. Lifetime income or other 
similar arrangements could help reduce the risk that retirement 
savings will be exhausted. As your report notes, in February 2010, the 
Department, in conjunction with the Department of the Treasury, 
published a Request for Information (RFI) soliciting public input on a 
variety of issues relating to offering and selecting lifetime income 
products. As your report also notes, later, in May 2013, the 
Department published an Advance Notice of Proposed Rulemaking (ANPRM) 
soliciting public input on an approach EBSA has developed for pension 
benefit statements to show an estimated lifetime stream of payments in 
addition to a lump sum account balance. In addition to lifetime income 
illustrations, the volume of public comments received in response to 
the RFI suggested support for further consideration or action by the
Department of Labor in two other areas: participant education; and 
assistance in compliance with fiduciary standards in selecting annuity 
providers in defined contribution plans. 

In the report, GAO recommends that, as the Department of Labor and the 
Department of the Treasury continue their efforts to determine the 
actions needed to enhance the retirement security of 401(k) plan 
participants, they consider the approaches taken by other countries to 
formalize access to multiple spend-down options for U.S. plan 
participants that address varying retirement risks and needs. To the 
extent possible, lessons from other countries should be used to help 
the Departments ensure plan sponsors have information about their 
flexibilities and the ability to facilitate access to a mix of 
appropriate options for 401(k) plan participants. Second, GAO 
recommends that, as the Department considers changes to participant 
benefit statements and other disclosures, the Secretary of Labor 
consider strategies other countries' have employed to help 
participants make sound decisions, such as providing timely 
information at or before retirement about available spend-down options 
and projections of future retirement income. 

The first recommendation, referencing six other countries' approaches 
to expand access to additional options, involves plan design features 
which historically have not been subject to the Department's 
regulatory authority under Title I of ERISA. Accordingly, the 
Department will have to evaluate whether there are available 
regulatory approaches to address the first recommendation. We agree 
that participants should have timely information at or before 
retirement about available spend-down options and projections of 
future retirement income. We will include this in our evaluation of 
regulatory approaches that may be available within our existing 
statutory authority to address the second recommendation. 

Further, EBSA participates in multinational pension research and 
policy discussions and thereby derives insights for consideration in 
its own policy development. We will continue this activity, and look 
into the experiences of other countries as we develop proposed 
regulations. 

GAO's third recommendation is that, as the Department continues to 
review regulatory barriers to lifetime income options for 401(k) plan 
participants, it consider other countries' approaches to plans 
offering annuities, such as their reliance on existing solvency 
requirements and insurance industry standards to provide assurances 
rather than place responsibility on plan sponsors to make an 
assessment of an annuity provider's financial stability. In the Fall 
of 2012, the NAIC Life Insurance Committee appointed the NAIC ERISA 
Retirement Income Working Group to work with the U.S. Department of 
Labor, the White House Council of Economic Advisors (CEA), the U.S. 
Department of the Treasury and any other appropriate federal agencies, 
in coordination with the NAIC Government Relations Leadership Council 
(GRLC). The goal of the Working Group is to consider possible options 
for easing plan sponsor concerns with the financial soundness of 
annuity providers in connection with the DOL safe harbor for the 
selection of annuity providers and fiduciary responsibility 
requirements. Since that time, EBSA has had several meetings with 
representatives of the NAIC, the National Organization of Life & 
Health Insurance Guaranty Associations (NOLHGA), the Department of the 
Treasury and the CEA. The Working Group plans on providing EBSA with a 
list of "best practices" for fiduciaries when asking states for 
information about insurers. EBSA will continue to work with the NAIC, 
NOHLGA, CEA and the Treasury Department, including the Treasury 
Department's Federal Insurance Office, as we evaluate regulatory 
approaches to address this third recommendation. We believe these 
actions also address the December 2012 ERISA Advisory Council report 
recommendation that the Department partner with NAIC in our effort to 
develop a more workable safe harbor for the selection of annuities and 
other lifetime income products. 

EBSA is committed to protecting the employer-sponsored benefits of 
American workers, retirees, and their families. We appreciate having 
had the opportunity to review and comment on the draft report. Please 
do not hesitate to contact us if you have questions concerning this 
response or if we can be of further assistance. 

Sincerely, 

Signed by: 

Phyllis C. Borzi: 
Assistant Secretary: 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Charles Jeszeck, (202) 512-7215 or jeszeckc@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Tamara Cross (Assistant 
Director), Tom Moscovitch, Lacy Vong, and Seyda Wentworth made key 
contributions to this report. Also contributing to this report were 
James Bennett, Alicia Cackley, Grace Cho, Katie Delgado, Holly Dye, 
Kathy Leslie, Sheila McCoy, Ernest Powell, Jr., Stephen Sanford, 
MaryLynn Sergent, Jessica Smith, Roger Thomas, Frank Todisco, Kathleen 
van Gelder, and Walter Vance. 

[End of section] 

Related GAO Products: 

Insurance Markets: Impacts of and Regulatory Response to the 2007-2009 
Financial Crisis, [hyperlink, http://www.gao.gov/products/GAO-13-583]. 
Washington: D.C.: June 27, 2013. 

401(k) Plans: Labor and IRS Could Improve the Rollover Process for 
Participants, [hyperlink, http://www.gao.gov/products/GAO-13-30]. 
Washington, D.C.: March 7, 2013. 

Retirement Security: Annuities with Guaranteed Lifetime Withdrawals 
Have Both Benefits and Risks, but Regulation Varies across States, 
[hyperlink, http://www.gao.gov/products/GAO-13-75]. Washington, D.C.: 
December 10, 2012. 

401(k) Plans: Increased Educational Outreach and Broader Oversight May 
Help Reduce Plan Fees, [hyperlink, 
http://www.gao.gov/products/GAO-12-325]. Washington, D.C.: April 24, 
2012. 

Defined Contribution Plans: Approaches in Other Countries Offer 
Beneficial Strategies in Several Areas, [hyperlink, 
http://www.gao.gov/products/GAO-12-328]. Washington, D.C.: March 22, 
2012. 

GAO, Retirement Income: Ensuring Income throughout Retirement Requires 
Difficult Choices, [hyperlink, 
http://www.gao.gov/products/GAO-11-400]. Washington, D.C.: June 7, 
2011. 

401(k) Plans: Improved Regulation Could Better Protect Participants 
from Conflicts of Interest, [hyperlink, 
http://www.gao.gov/products/GAO-11-119]. Washington, D.C.: January 28, 
2011. 

Private Pensions: Changes Needed to Better Protect Multiemployer 
Pension Benefits, [hyperlink, http://www.gao.gov/products/GAO-11-79]. 
Washington, D.C.: October 18, 2010. 

Retirement Savings: Automatic Enrollment Shows Promise for Some 
Workers, but Proposals to Broaden Retirement Savings for Other Workers 
Could Face Challenges, [hyperlink, 
http://www.gao.gov/products/GAO-10-31]. Washington, D.C.: October 23, 
2009. 

401(k) Plans: Policy Changes Could Reduce the Long-term Effects of 
Leakage on Workers' Retirement Savings, [hyperlink, 
http://www.gao.gov/products/GAO-09-715]. Washington, D.C.: August 28, 
2009. 

Private Pensions: Alternative Approaches Could Address Retirement 
Risks Faced by Workers but Pose Trade-offs, [hyperlink, 
http://www.gao.gov/products/GAO-09-642]. Washington, D.C.: July 24, 
2009. 

[End of section] 

Footnotes: 

[1] In 2012, the Advisory Council on Employee Welfare and Pension 
Benefit Plans, also known as the ERISA Advisory Council, reported that 
the percentage of private employers offering single-employer DB plans 
has decreased to less than 9 percent. In contrast, the percentage of 
private employers offering DC plans has increased to more than 88 
percent. See ERISA Advisory Council, Examining Income Replacement 
During Retirement Years In a Defined Contribution Plan System, 
(Washington, D.C.: December 2012). Another study calculated that 68 
percent of workers covered by employer retirement plans only had 
access to DC plans in 2010 based on U.S. Board of Governors of the 
Federal Reserve System, Survey of Consumer Finances (1983 and 2010). 
Alicia H. Munnell, Anthony Webb, and Francis M. Vitagliano, The 
Economic Implications of the Department of Labor's 2010 Proposals for 
Broker-dealers, Center for Retirement Research at Boston College 
Working Paper 2013-4 (February 2013). 

[2] We have reported on numerous issues that have hampered 
participants' efforts to save for their retirement, such as fees, 
participant inertia, and limited financial literacy. For more on these 
issues, see GAO, 401(k) Plans: Labor and IRS Could Improve the 
Rollover Process for Participants, [hyperlink, 
http://www.gao.gov/products/GAO-13-30] (Washington, D.C.: Mar. 7, 
2013); 401(k) Plans: Increased Educational Outreach and Broader 
Oversight May Help Reduce Plan Fees, [hyperlink, 
http://www.gao.gov/products/GAO-12-325] (Washington, D.C.: Apr. 24, 
2012); 401(k) Plans: Improved Regulation Could Better Protect 
Participants from Conflicts of Interest, [hyperlink, 
http://www.gao.gov/products/GAO-11-119] (Washington, D.C.: Jan. 28, 
2011); and Retirement Savings: Automatic Enrollment Shows Promise for 
Some Workers, but Proposals to Broaden Retirement Savings for Other 
Workers Could Face Challenges, [hyperlink, 
http://www.gao.gov/products/GAO-10-31] (Washington, D.C.: Oct. 23, 
2009). 

[3] In addition, in the United States, although DB plan participants 
must be offered a life annuity option at retirement, there is a 
growing trend in traditional DB plans to offer participants lump sum 
payout options. While we note that the challenge of managing the spend-
down phase is not solely an issue for DC plans, the spend-down phase 
in the context of DB plans is outside the scope of this report. 

[4] According to the Organisation for Economic Co-operation and 
Development (OECD), between 1960 and 2010, the average life expectancy 
at age 65 increased by around 3.9 years for men (from about 12.7 to 
16.6 years) and 5.4 years for women (from about 14.7 to 20.1 years), 
among OECD countries. Furthermore, the United Nations projects life 
expectancy at age 65 will increase to 20.3 years for men and 24.6 
years for women in 2050. 

[5] Most occupational retirement plans in Switzerland are hybrid plans 
that incorporate some DC features, such as individual accounts, within 
a DB plan structure. Switzerland mandates the rate of return credited 
to participants' contributions during the accumulation phase as well 
as the terms for pricing annuities that participants can purchase with 
these savings. 

[6] GAO, Defined Contribution Plans: Approaches in Other Countries 
Offer Beneficial Strategies in Several Areas, [hyperlink, 
http://www.gao.gov/products/GAO-12-328] (Washington, D.C.: Mar. 22, 
2012); Private Pensions: Changes Needed to Better Protect 
Multiemployer Pension Benefits, [hyperlink, 
http://www.gao.gov/products/GAO-11-79] (Washington, D.C.: Oct. 18, 
2010); and Private Pensions: Alternative Approaches Could Address 
Retirement Risks Faced by Workers but Pose Trade-offs, [hyperlink, 
http://www.gao.gov/products/GAO-09-642] (Washington, D.C.: July 24, 
2009). 

[7] U.S. Department of Labor, Employee Benefits Security 
Administration, Private Pension Plan Bulletin: Abstract of 2011 Form 
5500 Annual Reports, Version 1.0 (Washington, D.C.: June 2013). 

[8] Additionally, ERISA provides for the establishment of the ERISA 
Advisory Council to advise the Secretary of Labor and make 
recommendations on the Secretary's functions under ERISA. 

[9] Selection of Annuity Providers--Safe Harbor for Individual Account 
Plans, 73 Fed. Reg. 58,447 (Oct. 7, 2008)(codified at 29 C.F.R. § 
2550.404a-4). 

[10] Request for Information Regarding Lifetime Income Options for 
Participants and Beneficiaries in Retirement Plans, 75 Fed. Reg. 5253 
(Feb. 2, 2010). 

[11] Longevity Annuity Contracts, 77 Fed. Reg. 5443 (Feb. 3, 2012)(to 
be codified at 26 C.F.R. pt. 1). 

[12] NAIC services include providing detailed insurance data to help 
regulators understand insurance sales and practices; maintaining a 
range of databases useful to regulators; and coordinating regulatory 
efforts by providing guidance, model laws and regulations, and 
information-sharing tools. 

[13] Countries we reviewed, including the United States, have taken 
steps to address the challenges of the accumulation phase for their 
participants. For example, in order to increase the adequacy of 
workers' accumulations, Australia is increasing the level of mandatory 
employer contributions to DC plans, known as superannuation funds, 
from 9.25 percent in 2013 to 12 percent by 2020. To increase 
participation and savings in DC and other employer-sponsored 
retirement plans, in October 2012 the United Kingdom began 
implementing a mandate on employers to automatically enroll workers 
into retirement plans and make contributions on their behalf. In the 
United States, to increase participation in 401(k) plans, Congress, 
IRS, and DOL took steps to promote the adoption of automatic 
enrollment and appropriate default investment options for the 
accumulation phase. 

[14] Participants in 401(k) plans may make withdraws on their 
retirement savings account before retirement under certain limited 
conditions, typically referred to as leakage. For additional 
information on the incidence, amount, and relative significance of 
different forms of 401(k) plan leakages, see GAO, 401(k) Plans: Policy 
Changes Could Reduce the Long-term Effects of Leakage on Workers' 
Retirement Savings, [hyperlink, 
http://www.gao.gov/products/GAO-09-715] (Washington, D.C.: Aug. 28, 
2009). 

[15] In the United States, programmed withdrawals may be referred to 
as "systematic withdrawals". 

[16] This report provides examples of some annuities in the United 
States and countries we reviewed, and is not an exhaustive list of all 
types of annuities. 

[17] Variable annuities may include riders, such as guaranteed 
lifetime withdrawal benefits, to provide various protections or 
additional features, subject to certain restrictions. In the United 
States, these newer products have raised some questions about their 
cost, complexity, vesting rules, and protections of state guaranty 
associations, among other issues. For additional information about the 
consumer benefits and risks of newer annuity products in the United 
States, see GAO, Retirement Security: Annuities with Guaranteed 
Lifetime Withdrawals Have Both Benefits and Risks, but Regulation 
Varies across States, [hyperlink, 
http://www.gao.gov/products/GAO-13-75] (Washington, D.C.: Dec. 10, 
2012). 

[18] Longevity risk is the risk of living longer than anticipated at 
the time of retirement. In such cases, even large savings may be 
exhausted and prove inadequate. 

[19] In addition to government benefits and personal savings, in the 
United States, other potential sources of retirement income include 
other financial assets, such as pension income from DB and DC plans 
and nonfinancial assets such as home equity. 

[20] Possible explanations for low savings rates--even in countries 
where participation in retirement plans is mandatory--include low 
incomes, which constrain an individual's ability to save for 
retirement in light of more short-term competing demands, and 
discontinuous or interrupted work histories, where unemployment or 
exiting the labor market may be due to childbearing or care giving 
needs and can interrupt retirement plan contributions. Where 
participation is voluntary, plan coverage may be low, because 
employers may not be offering a pension plan, or even if they do, 
employees may not join, or may choose to opt out if they are 
automatically enrolled. 

[21] Each country's retirement system reflects that country's unique 
historical and political experience, making generalizations difficult. 
For example, widespread choice by participants of lump sum payments in 
Australia may in part reflect the country's long-standing tradition of 
providing retirement benefits in a single payment, a practice that 
predates Australia's current mandated DC system. 

[22] GAO did not conduct an independent legal analysis of the laws, 
regulations, or policies of the countries selected for this study. 

[23] Chile instituted pathways to all three main spend-down options at 
the inception of their DC system in 1981. 

[24] Retirement plans in Canada are generally regulated at the 
provincial level, so policies such as locking-in provisions requiring 
participants to purchase an annuity vary by province. 

[25] In the United States, participants who do not have access to 
annuities or programmed withdrawals through their plan may roll over 
their account balance into an IRA, where they can develop their own 
systematic withdrawal strategy, or purchase an annuity in the retail 
market. 

[26] U.S. participants that remain invested in their 401(k) plan past 
age 70 ½ are required to comply with certain provisions of the 
Internal Revenue Code that set required minimum distributions from tax-
deferred accounts, such as 401(k) plans, generally by April 1 in the 
year following the year in which the participant reaches age 70 ½. 
Although considered a minimum distribution, this is different than the 
formalized programmed withdrawals that other countries offer to 
participants when retiring prior to age 70. 

[27] According to an IRS survey of 1,200 randomly selected plan 
sponsors, for plan years 2006 through 2008 only 38 percent of 401(k) 
plans in the United States offered programmed withdrawals, only 19 
percent offered qualified joint and survivor annuities, and only 11 
percent offered single life annuities. The total percent of plans 
offering some kind of annuity may be less than 30 percent because the 
percentages may include plans that reported offering both qualified 
joint and survivor annuities and single life annuities. Department of 
the Treasury, IRS Tax Exempt and Government Entities Division, Section 
401(k) Compliance Check Questionnaire: Final Report, (Washington, 
D.C.: March 2013). 

[28] Singapore appointed a committee in 2007 to study the needs of 
participants and design government-managed annuities. The committee 
examined mortality data in Singapore and found that more than half of 
participants were at risk of outliving their programmed withdrawals if 
they retired at age 65. The committee created retirement simulations 
comparing retirement provided by the existing programmed withdrawal 
option against that of the proposed annuities under varying conditions. 

[29] The government also cited participants' negative perceptions of 
annuities as a reason for this change. The government attributed these 
perceptions in part to a decline in the size of payments from 
annuities in response to falling interest rates and increases in 
longevity. The government also attributed negative perceptions to a 
lack of understanding about how annuities work. Regulators, 
policymakers, and the pension industry in the United Kingdom have 
taken steps to raise awareness among participants about strategies for 
getting more income from annuities, for example, by shopping for 
annuities that provide larger payments to individuals with certain 
health conditions or lifestyles that may reduce their longevity. Sales 
of enhanced annuities, which are annuities that provide larger 
payments because the annuitant has a shorter life expectancy, have 
grown rapidly since their introduction in 1995. According to Towers 
Watson, sales of enhanced annuities increased from £419.6 million 
($635.8 million) in 2001 to nearly £4.5 billion ($6.8 billion) in 2012. 

[30] In order to take programmed withdrawals without restriction, 
known as flexible drawdown, participants must document that they have 
a secure pension--for example, from an annuity--of at least £20,000 
(about $30,300) per year. Participants that do not meet this 
requirement may take capped drawdowns, generally limited to 120 
percent of the value of an equivalent single-life level annuity. 

[31] According to the financial service provider, in 2011, programmed 
withdrawals accounted for about £2 billion ($3 billion) in DC plan 
distributions, whereas annuities account for about £12 billion ($18.1 
billion). See Mark J. Warshawsky, DC Plan Payout Practices and 
Policies in Canada, Switzerland, U.K., Australia, and Singapore, 
Towers Watson Insider (Arlington, VA: January 2013). 

[32] See 75 Fed. Reg. 5253 (Feb. 2, 2010). The agencies asked for 
information on issues such as advantages and disadvantages of 
receiving benefits in the form of lifetime payments, types of lifetime 
income products currently available to participants through their 
plan, and regulatory barriers to offering lifetime income, among other 
issues. In September 2010, DOL and Treasury held a joint hearing to 
discuss their request for information and further consider specific 
issues relating to spend-down options intended to produce retirement 
income for participants. 

[33] For example, one respondent said that IRS rules requiring minimum 
distributions from 401(k) plans beginning at age 70 ½ can act as a 
barrier to some lifetime income options such as "deeply" deferred 
annuities that begin payments at an advanced age, such as 80 or 85. 
Respondents also described challenges for participants in comparing 
annuity prices and features. Respondents also cited participants' 
reluctance to choose lifetime income options even when they are made 
available, which some attributed to a lack of understanding of these 
options. 

[34] These lifetime payment projections would be based on both the 
current value of their account and the projected value of their 
account balance at the normal retirement age. As part of this advance 
notice of proposed rulemaking, DOL requested comments from the public 
on whether and how this could be done. Pension Benefit Statements, 78 
Fed. Reg. 26,727 (May 8, 2013). 

[35] Longevity Annuity Contracts, 77 Fed. Reg. 5443 (Feb. 3, 2012)(to 
be codified at 26 C.F.R. pt. 1). At present, 401(k) participants who 
use a portion of their account balance to purchase a deeply deferred 
annuity may risk violating IRS rules requiring minimum distributions 
from IRAs beginning at age 70 ½. In April 2013, the Australian 
government announced that it would encourage the take-up of deferred 
annuities by providing these products with the same concessional tax 
treatment that superannuation assets in programmed withdrawal products 
receive. This reform, which was to apply starting on July 1, 2014, has 
not yet been implemented. 

[36] GAO did not conduct an independent legal analysis of the laws, 
regulations, or policies of the countries selected for this study. 

[37] Australian Securities and Investments Commission, "Financial 
Decisions at Retirement: How to make the most of your money and avoid 
costly mistakes," accessed July 26, 2013, [hyperlink, 
http://www.MoneySmart.gov.au]. 

[38] In particular, the pack highlights the various annuity options, 
including the enhanced annuities that potentially offer a much higher 
income for individuals with health or lifestyle conditions that may 
result in a shorter life expectancy. 

[39] ABI is a trade association made up of insurance companies in the 
United Kingdom. It has over 300 member companies, accounting for 90 
percent of the U.K. insurance market. The associations speaks on 
behalf of U.K. insurers and works work with government, regulators and 
policymakers--both in the United Kingdom and internationally--to 
ensure the insurance industry meets the highest standards. ABI, 
Consumers in the Retirement Income Market: Code of Conduct on 
Retirement Choices (London, U.K.: March 2012). 

[40] Kevin Crouch, Ian Sparham, and Richard Fincham, Pre-retirement 
Wake-up Pack: Results of Customer Research, ABI Research Paper No 18 
(London, U.K.: ABI, 2009). 

[41] Kevin Crouch, Gemma Allen, Fiona Whitehead, Anthony Carter and 
Rachel Levy, Retirement Choices: Baseline to Measure Effectiveness of 
the code of Conduct, ABI, (London, U.K., May 2013). 

[42] Similarly, the Australian Securities and Insurance Commission 
issued new guidelines in 2011 for DC plans that choose to include 
retirement estimates in participants' annual benefit statements. These 
estimates supply the projected retirement savings in a lump sum format 
at age 65 and the annual stream of income that this lump sum balance 
is expected to provide from age 65 to 90. 

[43] For younger workers, their statements will include estimates of 
expected pension income under two scenarios where the participant (1) 
makes no additional contributions and (2) continues contributing until 
the normal retirement age. 

[44] Eduardo Fajnzylber and Gonzalo Reyes, Knowledge, Information and 
retirement saving decisions: Evidence from a large scale intervention 
in Chile, Working Papers from Adolfo Ibáñez University, School of 
Government (May 2011). 

[45] SCOMP is the Spanish acronym for Electronic Consultation and 
Offer System for Annuities and Phased Withdrawals. 

[46] Although all quotes appear in one document, many participants 
seem to have difficulty making a decision about the spend-down option 
by themselves and often use a financial intermediary to help, 
according to focus groups conducted by the Chilean government. As a 
result, the government is taking steps to simplify and shorten the 
document. SCOMP was introduced to increase transparency but also 
competition among annuity providers. 

[47] The Money Advice Service was set up as an independent body in 
April 2010 as the Consumer Financial Education Body, which was 
established under the Financial Services Act in 2010 with statutory 
functions to enhance people's understanding and knowledge of financial 
matters, and their ability to manage their own financial affairs. The 
Money Advice Service was launched in April 2011 with online, 
telephone, and United Kingdom-wide face-to-face services. 

[48] Since 2012, most U.K. employers were required to automatically 
enroll some or all of their workers into a qualifying plan that meets 
certain minimum standards and pay contributions on their behalf. The 
U.K. government established the National Employment Savings Trust 
(NEST) to help employers meet this new requirement. According to a 
report by the U.K. Department for Work and Pensions, NEST is a low-
cost, trust-based, occupational pension scheme focused on people with 
low to moderate earnings and employers that the existing pensions 
industry does not serve well. 

[49] The administrator of an individual account plan shall provide a 
pension benefit statement at least quarterly to a participant or 
beneficiary in a participant-directed 401(k) plan and annually to 
participants or beneficiaries who have accounts in which they do not 
have the right to direct the investments of assets in those accounts. 
29 U.S.C § 1025(a)(1)(A)(i) and (ii). 

[50] Jack Clift, Lauren A. Fleishman-Mayer, Angela Hung, Caroline 
Tassot, and Joanne Yoong, Designing Better Pension Benefit Statements: 
Current Status, Best Practices and Insights from the Field of Judgment 
and Decisionmaking (RAND Corporation, April 19, 2013). 

[51] Pension Benefit Statements, 78 Fed. Reg. 26,727 (May 8, 2013). As 
of August 2013, DOL was reviewing comments submitted in response to 
this advance notice of proposed rulemaking. 

[52] Singapore has made annuity payments from CPF LIFE the default 
option for participants with account balances above a threshold, 
following recent pension reforms, recognizing that the previous 
standard practice of programmed withdrawals over 20 years was no 
longer adequate to ensure lifelong retirement income in light of 
increasing longevity. Participants with account balances below the 
threshold, on the other hand, are defaulted into the programmed 
withdrawal option. 

[53] The researchers analyzed the spend-down selections of 
participants from 10 Swiss companies in the public and private sector 
between 1996 and 2006. Nine of the 10 companies offered an annuity as 
the default spend-down option, while the tenth company offered a 
partial lump sum payment as the standard option. Overall the default 
option was preferred by more than two-thirds of the sample. 
Participants at the company that offered a partial lump sum as the 
standard option, however, only chose an annuity about 10 percent of 
the time. See Monika Butler and Federica Tappa. "The Choice Between an 
Annuity and a Lump Sum: Results from Swiss Pension Funds," Journal of 
Public Economics, 91 (2007): 1944-66. 

[54] Although people have had the right to shop around for annuities, 
referred to as "Open Market Option," since 1978, and pension providers 
have been recommended to include a letter reiterating that right in 
the wake up pack since 2004 most people were still using their current 
pension provider to supply their annuity at retirement. 

[55] Around the same time, reforms eliminated taxes on all retirement 
spend-down options taken on or after age 60. The introduction of key 
legislation was a significant factor leading to the expansion of the 
market for programmed withdrawals, according to researchers Bateman, 
Hazel and John Piggott. "Too Much Risk to Insure: the Australian 
(non-) Market for Life Annuities," in Olivia Mitchell, John Piggott 
and Noriyuki Takayama (eds.), Revisiting Retirement Payouts (Oxford 
University Press, 2011), 81-105. In more recent years, sales of 
annuities in Australia appear to have recovered somewhat. In June 
2013, Challenger Limited, Australia's largest provider of annuities 
projected sales of lifetime annuities for the year of over $220 
million (AUD 240 million), approaching the roughly $260 million (AUD 
280 million) in annuities sold by all insurers in Australia in 2004, 
prior to the reforms. 

[56] Australian Prudential Regulation Authority, Annual Superannuation 
Bulletin June 2012 (Sydney, Australia: Jan. 9, 2013). 

[57] GAO did not conduct an independent legal analysis of the laws, 
regulations, or policies of the countries selected for this study. 

[58] According to Chilean pensions regulators, both eligibility 
conditions should be met jointly so if the equivalent amount of 70 
percent of income is lower than the maximum pension with a supplement, 
known as the Pension Solidarity Complement, the participant will not 
be allowed to take a partial lump sum. For additional information 
about Chile's pension system, see appendix II. 

[59] The rules for accessing a partial lump sum distribution were 
initially designed as part of early retirement rules. Subsequently, 
the Chilean government became concerned that the earlier workers 
retired, the more likely it was that over time it would have to 
supplement a retiree's benefit with government pension benefits. As a 
result, the accumulation conditions were revised in 2004 and 2008 from 
50 percent of the minimum to 150 percent. In accordance with the 
introduction of the new solidarity pillar in the 2008 reform, the 
requirement of financing a pension equal or higher than 150 percent of 
the minimum pension guarantee was amended to financing a pension equal 
or higher than 100 percent of the maximum pension with the Pension 
Solidarity Complement. 

[60] When 401(k) plan participants separate from their employers, 
leaving their plan savings in the plan, rolling or moving the money 
into a new qualified employer plan, or rolling the money into an IRA, 
would preserve the tax-deferred status of their plan savings. Lump sum 
distributions are subject to ordinary income tax. Participants who 
take an early distribution, those taken before age 59 ½, generally pay 
a 10 percent additional income tax and incomes taxes on the lump sum 
distribution amount, in order to discourage the use of plan funds for 
the purposes other than retirement and ensure that the favorable tax 
treatment for plan funds is limited to those that are, in fact, used 
to provide retirement income. See [hyperlink, 
http://www.gao.gov/products/GAO-13-30] for more information. 

[61] In Chile, retirees who chose the programmed withdrawal option and 
exhaust their funds by outliving their actuarial life expectancy could 
also be eligible for government-guaranteed benefits. 

[62] Participants that remain invested in their 401(k) plan past age 
70 ½ are required to comply with certain provisions of the Internal 
Revenue Code that set required minimum distributions from tax-deferred 
accounts, such as 401(k) plans, generally by April 1 in the year 
following the year in which the participant reaches age 70 ½. 

[63] Selection of Annuity Providers--Safe Harbor for Individual 
Account Plans, 73 Fed. Reg. 58,447 (Oct. 7, 2008) (codified at 29 
C.F.R. § 2550.404a-4). 

[64] Selection of Annuity Providers for Individual Account Plans, 72 
Fed. Reg. 52,021, 52,023 (Sept. 12, 2007)(to be codified at 29 C.F.R. 
§ 2550.404a-4). 

[65] In the United States, annuities offered in pension plans must be 
offered on a gender-neutral basis. Arizona Governing Committee v. 
Norris, 463 U.S. 1073 (1983). By contrast, annuities offered in the 
retail market, including IRAs that are not employer-sponsored, are not 
subject to the same rule, and these annuities may vary based on 
gender. Women may find more favorable single-life annuity rates 
through pension plans, but men may find more favorable rates through 
the retail market. 

[66] See ERISA Advisory Council (December 2012). 

[67] It should be noted that, with the exception of Canada, the other 
countries we reviewed have national regulatory frameworks for 
insurance. In the United States, insurance regulations are governed at 
the state level. 

[68] We did not assess the adequacy of solvency requirements in the 
countries we reviewed because this was beyond the scope of this study. 
Our recent work found that the effects of the financial crisis on 
insurers and policyholders were generally limited, with a few 
exceptions. For more information, see GAO, Insurance Markets: Impacts 
of and Regulatory Response to the 2007-2009 Financial Crisis, 
[hyperlink, http://www.gao.gov/products/GAO-13-583] (Washington: D.C.: 
June 27, 2013). 

[69] In Switzerland, where plans are legally required to provide a 
minimum benefit, plan sponsors have some financial responsibility for 
annuity payments, according to Swiss regulators. 

[70] In the United States, annuities offered in pension plans must be 
offered on a gender-neutral basis. Arizona Governing Committee v. 
Norris, 463 U.S. 1073 (1983). By contrast, annuities offered in the 
retail market are not subject to the same rule, and these annuities 
may vary based on gender. 

[71] In general, 401(k) contributions and investment earnings on those 
contributions are not taxed as income until the employee withdraws 
them from the plan. 

[End of section] 

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