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United States Government Accountability Office: 
GAO: 

Report to the Ranking Member, Committee on Ways and Means, House of 
Representatives: 

January 2015: 

Private Pensions: 

Participants Need Better Information When Offered Lump Sums That 
Replace Their Lifetime Benefits: 

GAO-15-74: 

GAO Highlights: 

Highlights of GAO-15-74, a report to the Ranking Member, Committee on 
Ways and Means, House of Representatives. 

Why GAO Did This Study: 

Since 2012, a number of large pension plan sponsors have given 
selected participants a limited-time option of receiving their 
retirement benefits in the form of a lump sum. Although sponsors' 
decisions to make certain lump sum “window” offers may be permissible 
by law, questions have been raised about participants' understanding 
of the financial tradeoffs associated with their choice. GAO was asked 
to review critical issues associated with these types of offers. 

This report focuses on 1) the prevalence of lump sum offers and 
sponsors' incentives to use them, 2) the implications for 
participants, and 3) the extent to which selected lump sum materials 
provided to participants include key information. To conduct this 
work, GAO identified sponsors offering lump sum windows and used 
social media to identify participants given offers. GAO reviewed 11 
informational packets acquired through interviews with selected plan 
sponsors and participants. GAO also analyzed lump sum calculations and 
interviewed federal officials and pension experts. 

What GAO Found: 

Little public data are available to assess the extent to which 
sponsors of defined benefit plans are offering participants immediate 
lump sums to replace their lifetime annuities, but certain laws and 
regulations provide incentives for use of this practice. Although the 
U.S. Department of Labor (DOL) has primary responsibility for 
overseeing pension sponsors' reporting requirements, it does not 
require sponsors to report such lump sum offers, making oversight 
difficult. Pension experts generally agree that there has been a 
recent increase in these types of offers. By reviewing the limited 
public information that is available, GAO identified 22 plan sponsors 
who had offered lump sum windows in 2012, involving approximately 
498,000 participants and resulting in lump sum payouts totaling more 
than $9.25 billion. Most of these payouts went to participants who had 
separated from employment and were not yet retired, but some went to 
retirees already receiving pension benefits. Sponsors are currently 
afforded enhanced financial incentives to make these offers by certain 
laws and regulations issued by the U.S. Department of the Treasury 
(specifically the Internal Revenue Service) governing the interest 
rates and mortality tables used to calculate lump sums. 

Participants potentially face a reduction in their retirement assets 
when they accept a lump sum offer. The amount of the lump sum payment 
may be less than what it would cost in the retail market to replace 
the plan's benefit because the mortality and interest rates used by 
retail market insurers are different from the rates used by sponsors, 
particularly when calculating lump sums for younger participants and 
women. Participants who assume management of their lump sum payment 
gain control of their assets but also face potential investment 
challenges. In addition, some participants may not continue to save 
their lump sum payment for retirement but instead may spend some or 
all of it. 

GAO reviewed 11 packets of informational materials provided by 
sponsors offering lump sums to as many as 248,000 participants and 
found that the packets consistently lacked key information needed to 
make an informed decision or were otherwise unclear. Using various 
sources, including financial advisors, federal agency publications, 
laws, and regulations, GAO identified eight key types of information 
that participants need to have a sound understanding of a lump sum 
offer. While GAO did not review the packets for compliance or legal 
adequacy, most packets provided a substantial amount of this key 
information. However, all of the packets GAO reviewed lacked at least 
some key information. For example, the relative value notices were 
often unclear about how the value of the lump sum compared to the 
value of the lifetime monthly benefit provided by the plan. Similarly, 
many packets did not clearly indicate the interest rate or mortality 
assumptions used, limiting participants' ability to assess how the 
lump sum payment was calculated. Further, few of the packets informed 
participants about the benefit protections they would keep by staying 
in their employer's plan—full or partial protections provided by the 
Pension Benefit Guaranty Corporation, the agency that insures defined 
benefit pensions when a sponsor defaults. This omission is notable 
because many participants GAO interviewed cited fear of sponsor 
default as an important factor in choosing the lump sum. 

What GAO Recommends: 

GAO recommends that DOL improve oversight by requiring plan sponsors 
to notify the agency when they implement lump sum windows, and 
coordinate with Treasury to clarify guidance on the information 
sponsors provide to participants. Further, Treasury should reassess 
regulations governing relative value statements, as well as the 
interest rates and mortality tables used in calculating lump sums. 
Agencies generally agreed with GAO's recommendations. 

View [hyperlink, http://www.gao.gov/products/GAO-15-74]. For more 
information, contact Charles Jeszeck at (202) 512-7215 or 
jeszeckc@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Little Is Known about the Extent of Lump Sum Windows, though Cost-
Saving Incentives May Be Encouraging Sponsor Use: 

Lump Sum Payments Can Lose Value for Participants in Various Ways: 

Lump Sum Window Materials We Reviewed Often Lacked Key Information 
Participants Need to Make an Informed Decision: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Lump Sum Calculations and Additional Figures: 

Appendix III: Agency Comments: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Eight Questions that Address Key Factors Participants Need to 
Know In Order to Make an Informed Benefit Choice: 

Table 2: Examples of Positive and Negative Ramifications of Accepting 
a Lump Sum: 

Table 3: Overview of GAO's Informational Review of 11 Lump Sum Offer 
Packets: 

Figures: 

Figure 1: Potential Percentage Reduction to Monthly Benefit with Lump 
Sum Purchase of Out-of-Plan Annuity: 

Figure 2: Potential Age When Benefits Would Stop with Lump Sum Spend-
down Matching Plan's Monthly Benefit, by Various Rates of Return: 

Figure 3: Top Three Reasons Cited by Participants for Accepting or 
Rejecting a Lump Sum: 

Figure 4: PPA Interest Rates Compared to Pre-PPA Interest Rates at 
Selected Ages, with Lump Sum Payment Based on a $10,000 Annual Benefit 
Due at Age 65: 

Figure 5: Effect of "Lookback" Rates on Lump Sum Payments at Selected 
Ages, with Payment Based on a $10,000 Annual Benefit Due at Age 65: 

Figure 6: Effect of Current versus Future Mortality Tables, with 
Payment Based on a $10,000 Annual Benefit Due at Age 65: 

Figure 7: Lump Sum Payments Based on § 417(e)(3) Methodology and Sex-
specific PBGC Group Annuity Methodology, with Payment Based on a 
$10,000 Annual Benefit Due at Age 65: 

Figure 8: Lump Sum Payments Based on § 417(e)(3) Methodology Using 
Plan Normal Retirement Age and Early Retirement Age, by Selected Ages, 
with Payment Based on a $10,000 Annual Benefit Due at Age 65: 

Abbreviations: 

CRS: Congressional Research Service: 

DOL: Department of Labor: 

EBSA: Employee Benefits Security Administration: 

ERISA: Employee Retirement Income Security Act of 1974: 

IRA: Individual Retirement Account: 

IRS: Internal Revenue Service: 

MAP-21: Moving Ahead for Progress in the 21st Century Act: 

PBGC: Pension Benefit Guaranty Corporation: 

PPA: Pension Protection Act of 2006: 

SEC: Securities and Exchange Commission: 

SOA: Society of Actuaries: 

TSR: Treasury Securities Rate: 

[End of section] 

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

January 27, 2015: 

The Honorable Sander Levin: 
Ranking Member: 
Committee on Ways and Means: 
House of Representatives: 

Dear Mr. Levin: 

Approximately 32 million U.S. workers and retirees participate in 
private sector single-employer defined benefit plans[Footnote 1]--the 
type of pension plan that generally provides a lifetime monthly 
benefit based on a formula specified in the plan. Under this type of 
plan, employer-sponsors typically bear the risks associated with 
investing the plan's assets and ensuring that sufficient funds are 
available to pay the benefits to plan participants as they come due. 
[Footnote 2] However, during 2012, a number of large private sector 
sponsors of defined benefit plans acted to reduce their pension 
liabilities by essentially transferring the liabilities to other 
parties. Through one particular type of risk transfer action, sponsors 
offered to pay some participants--including participants already 
retired and receiving a monthly pension--the estimated present value 
of their lifetime benefit in one immediate lump sum payment. This 
action, commonly referred to as a "lump sum window," presents certain 
participants with a choice of keeping their lifetime retirement 
annuity or taking the lump sum amount. Participants who accept the 
lump sum assume all the risks of managing the funds themselves. 
Further, their retirement benefits are no longer governed by the 
Employee Retirement Income Security Act of 1974 (ERISA), as amended, 
[Footnote 3] including the guarantees provided by the Pension Benefit 
Guaranty Corporation (PBGC), which insures benefits from private 
sector defined benefit plans up to certain statutory limits. In light 
of these and other consequences for those accepting lump sums, you and 
Representative George Miller requested that GAO study what is spurring 
sponsors to make such offers and the potential effect these offers 
have on participants' retirement security. 

This review addresses (1) the extent to which sponsors of defined 
benefit plans are transferring risk through the use of lump sum 
windows, and the incentives for sponsors to take such actions, (2) the 
implications for participants who accept a lump sum payment, and (3) 
the extent to which sponsors' lump sum window information materials 
enable participants to make an informed decision. 

To identify the extent that sponsors are using lump sums windows, we 
collected and analyzed available information about lump sum offers 
implemented by plan sponsors during 2012. We obtained documents from 
the Securities and Exchange Commission (SEC), PBGC, the Pension Rights 
Center, consulting firms, and sponsors. To explore sponsors' 
incentives for making lump sum offers, we interviewed managers from 
three plan sponsors who took such actions, as well as other 
stakeholders, such as consultants, insurance company representatives, 
independent fiduciaries, and subject matter experts. To explore the 
implications for participants, we consulted retirement security 
experts and reviewed associated literature. We also used social media 
to identify and interview pension plan participants whose sponsor had 
offered them a lump sum payment. Specifically, we contacted alumni 
groups associated with sponsors whom we had identified as having 
carried out lump sum windows. We solicited input from plan 
participants who had been offered lump sums and administered a 
questionnaire to 37 participants who had contacted us. These 
individuals were associated with 11 plan sponsors. Of the group, we 
interviewed 33 to gather additional information. We also collected 
information materials provided to participants by all 11 of the 
sponsors. While not generalizable, participants' responses helped 
inform our discussion about the factors participants weighed when 
making benefit choices. In addition, we developed a lump sum 
calculator to generate lump sum amounts based on participant 
information obtained during our interviews. Using the calculator, we 
mimicked sponsor lump sum calculations to gain a better understanding 
of how certain provisions in federal law and regulations affect lump 
sum amounts, and we evaluated whether the rules advantage either 
sponsors or participants in how the amounts are calculated. Lastly, to 
determine the adequacy of the lump sum offer materials sponsors 
provide to participants, we identified key types of information 
participants need to make an informed decision based on a review of 
publications by federal agencies, financial advisors, and various 
other sources. We then evaluated the contents of 11 packets of 
information materials, each from a different sponsor's lump sum window 
offer, to determine whether the packets included this information. We 
also asked the participants we interviewed about the completeness and 
understandability of the information materials they had been given. 

We conducted this performance audit from March 2013 to January 2015 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: 

Pension De-risking and Risk Transfers: 

Sponsors of defined benefit pension plans are responsible for managing 
the financial risks associated with their plans' general 
administration. Such risks can include fluctuations in the value of 
plan assets and in interest rates, either of which can cause 
volatility in the plan's funded status and plan contributions. 
[Footnote 4] This type of volatility has been exacerbated by recent 
fluctuations in the national economy, while a 2006 accounting standard 
change caused pension funding status to take a more prominent role on 
private sector plan sponsors' balance sheets, making such volatility 
more visible.[Footnote 5] Over the past several decades, many sponsors 
have chosen to lessen their exposure to such financial risks by 
shifting away from defined benefit plans and choosing to offer or 
emphasize defined contribution plans, such as 401(k) plans, whereby 
the various risks are borne by the participants whose sustainable 
retirement income will depend on factors such as the participants' 
contribution decisions, the investment returns on their personal 
accounts, their spend-down decisions in retirement, and their 
longevity.[Footnote 6] Likewise, sponsors who have chosen to retain 
their defined benefit plans have taken steps to reduce their plans' 
financial risks by other means. In some cases, these steps have also 
resulted in the transfer of risk to participants. 

The steps sponsors can take to limit the financial risks they see 
posed by their plans are commonly referred to as pension "de-risking." 
Broadly speaking, de-risking actions can be divided into two groups, 
internal and external methods.[Footnote 7] Internal methods of de-
risking--although beyond the scope of our study--allow the plan 
sponsor to reduce risk without directly removing liabilities, or 
participants, from the plan. These methods may include restricting 
plan participation or modifying the benefit formula to reduce future 
benefit accruals. They may also include adjustments to the allocation 
of plan assets, such as by liability-driven investing. This may 
involve shifting away from equities and toward fixed income securities 
that match the duration of plan liabilities in order to shield the 
plan from risks associated with market fluctuations in both stock 
market values and interest rates. Although these internal methods 
allow sponsors to mitigate some of the risks associated with their 
plans, the existing liabilities remain in the plans and, as a result, 
continue to expose sponsors to certain remaining risks. For example, 
plan sponsors continue to be subject to the longevity risk of plan 
participants living longer than anticipated. 

External approaches, on the other hand, involve permanently removing a 
portion of pension liabilities from the plan, discharging the 
obligation to pay a lifetime annuity to plan participants. Two of 
these approaches can be appropriately termed "risk transfers" because 
the risks of providing pension income or managing pension assets are 
essentially transferred to another party outside the plan. One form of 
risk transfer--also beyond the scope of our study--is the purchase of 
a "buy-out" group annuity, whereby plan assets are transferred to an 
insurance company that then assumes the responsibility for making 
pension benefit payments to participants removed from the plan. When a 
sponsor implements an annuity buyout, the risks associated with 
providing promised pension benefits are shifted from the plan sponsor 
to the insurer. In 2012, two large plan sponsors, General Motors and 
Verizon, purchased group annuities from Prudential Insurance Company 
involving the transfer of a reported $32.6 billion in plan liabilities. 

A second form of risk transfer is a "lump sum window" offer--the form 
of risk transfer that is the focus of our study. Any lump sum window 
offer must satisfy applicable requirements under the Internal Revenue 
Code.[Footnote 8] In a lump sum window offer, the participant is 
offered a choice between three optional forms of his or her benefits 
accrued to date. Generally, the participants who are given the offer 
will be separated participants--participants no longer employed by the 
sponsor--waiting for their pension annuity to begin in the future, or 
retirees already receiving their pension annuity payments.[Footnote 9] 
The three options are as follows: 

1. Annuity at normal retirement age (or current annuity) - In the case 
of a separated participant not yet in pay status, this is their 
lifetime annuity promised under the plan that would begin at a future 
date, often age 65. In the case of a retiree in pay status, it is the 
lifetime annuity they are currently receiving. 

2. Immediate annuity (or alternate annuity) - In the case of a 
separated participant not yet in pay status, this is their lifetime 
annuity promised under the plan, with payments beginning at the time 
of the lump sum offer rather than at their normal retirement age. The 
payments are reduced by a specified factor to account for the earlier 
commencement of benefits. In the case of a retiree in pay status, it 
is the lifetime annuity they are currently receiving, but they may 
have the option of changing to another form of benefit offered under 
the plan.[Footnote 10] 

3. Lump sum - In the case of both a separated participant not yet in 
pay status or a retiree in pay status, this is the actuarial 
equivalent of the remaining expected payments of their lifetime 
annuity, given to them in a single immediate payment. 

The participant then has a limited amount of time, or window, to 
choose between the three options. When participants elect to receive 
their benefit as a lump sum, the risks involved in providing 
retirement income are thus transferred from the sponsor to the 
participants. 

ERISA and Federal Oversight: 

ERISA establishes protections for plan participants and their 
beneficiaries, and sets minimum funding standards for pension plans 
that are sponsored by private employers, among other provisions. One 
broad protection offered by ERISA is the requirement that sponsors be 
subject to fiduciary standards in their management and administration 
of the plan. As fiduciaries under ERISA, sponsors are required to 
administer the plan solely in the interest of participants and 
beneficiaries and for the exclusive purpose of providing benefits and 
defraying plan expenses.[Footnote 11] However, some functions, such as 
those related to establishing a plan and choosing its design features, 
are considered settlor functions that are not subject to ERISA's 
fiduciary standards. For example, a sponsor's decision to take risk 
transfer actions, such as offering a lump sum window, is a matter of 
plan design, generally making it a settlor function rather than a 
fiduciary function. However, once the sponsor embarks on 
implementation of the strategy, such action would fall within the 
realm of its fiduciary role, requiring the sponsor to operate in the 
best interest of participants and beneficiaries. 

The administration of ERISA is divided among three federal agencies: 
the Department of Labor (DOL), the Department of the Treasury 
(specifically the Internal Revenue Service [IRS]), and the Pension 
Benefit Guaranty Corporation (PBGC). DOL takes primary responsibility 
for ERISA reporting and disclosure requirements. In addition, DOL 
promulgates regulations and produces guidance related to reporting and 
disclosure. Within DOL, the mission of the Employee Benefits Security 
Administration (EBSA) includes efforts to ensure the security of 
Americans' retirement benefits by assisting and educating plan 
participants, plan sponsors, service providers, and fiduciaries. To 
that end, EBSA develops regulations and enforces the law, including 
ERISA's fiduciary standards.[Footnote 12] As GAO has reported 
previously, certain disclosures are specifically required to be 
written in a manner calculated to be understood by the average 
participant, and for disclosures that do not include such a 
requirement, DOL officials have noted that ERISA's basic fiduciary 
standards require that fiduciaries consider how understandable the 
disclosures are.[Footnote 13] 

ERISA also created the ERISA Advisory Council to advise the Secretary 
of Labor.[Footnote 14] The council has carried out its role by 
studying testimony and deliberating on various topics and submitting 
recommendations regarding the Secretary's functions under ERISA. Due 
to the recent heightened interest in risk transfers and their 
perceived increase in popularity, the council held hearings in 2013 
exclusively focused on such actions and the effects they may have on 
plan participants.[Footnote 15] In its final report summarizing the 
hearings, the council observed that there had been an increased level 
of activity by sponsors to reduce or eliminate the risks associated 
with their pension plan liabilities and concluded with several 
recommendations to DOL. For example, the council recommended that 
disclosures associated with lump sum windows include information which 
enables a participant to make an informed decision. In addition, the 
council recommended DOL consider collecting relevant information at 
the time sponsors take risk transfer actions. 

For its part, the IRS determines whether private sector pension plans 
qualify for preferential tax treatment under the Internal Revenue 
Code. Qualified pension plans receive favorable tax treatment, 
generally including the deferral of taxes on contributions and 
investment earnings until benefits are received. To be qualified, a 
plan must meet a number of requirements. Plan sponsors can request a 
determination letter that addresses the qualified status of the plan. 
In addition, a plan sponsor can request that the IRS address a unique 
issue requiring immediate guidance that is not likely to be provided 
through the determination letter process. If the IRS determines that 
it is in the interest of good tax administration to respond to this 
request, its response, known as a private letter ruling, will 
interpret and apply tax laws to the sponsor's represented set of 
facts. By law, this specific ruling may not be used or cited as 
precedent by other taxpayers or by IRS personnel.[Footnote 16] 

Also, to protect the value of each participant's pension benefit, the 
Internal Revenue Code prescribes the interest rate and mortality table 
that the sponsor must use to calculate the minimum amount of any lump 
sum option.[Footnote 17] A plan may pay a larger lump sum, but it may 
not pay less than this prescribed minimum. Further, sponsors are 
required to provide several specific pieces of information to the 
participant as part of the offer.[Footnote 18] For example, sponsors, 
when distributing pension benefits in any form, are required to 
provide notices to participants detailing tax implications, rollover 
options,[Footnote 19] and a description of the financial effect of 
electing an optional form of benefit. As part of this description, the 
participant must receive a statement comparing the relative value of 
the new form of benefit to their original benefit. For instance, when 
an optional lump sum would replace a monthly annuity, participants 
must be shown how the lump sum compares to the value of that annuity. 
[Footnote 20] Also, in order to receive the benefit in a form other 
than an annuity, such as a lump sum, the participant (and if married, 
the spouse) must receive and sign a waiver consenting to this 
alternative form of payment.[Footnote 21] 

The PBGC, also established by ERISA, acts as an insurer of private-
sector defined benefit pension plans by guaranteeing participants' 
benefits up to certain statutory limits. In the case of covered single-
employer plans, PBGC protects participants if the plan terminates with 
insufficient assets to pay all benefits, such as in the bankruptcy of 
a plan sponsor with an underfunded plan. Under ERISA, plan sponsors 
pay premiums to PBGC to help fund its guarantees. The law currently 
requires sponsors to pay both a per-participant flat rate premium and 
a variable rate premium based on the plan's level of underfunding. 
PBGC also collects a termination premium from sponsors who terminate 
their plans under certain criteria. 

In both the case of a sponsor's buyout through a group annuity 
purchase and the case of a participant's acceptance of a lump sum 
payment, the participant loses the protections of ERISA and the 
guarantees offered by PBGC. Group annuities provided by an insurance 
company are guaranteed by state benefit guaranty associations up to 
certain levels established by the state. Lump sum payments carry no 
guarantees with respect to the amount and duration of future 
retirement income they may ultimately provide. 

Little Is Known about the Extent of Lump Sum Windows, though Cost-
Saving Incentives May Be Encouraging Sponsor Use: 

Data are lacking about the prevalence of lump sum windows, as there 
are no requirements that sponsors report when they use this practice. 
However, experts in the field of retirement pensions, including DOL's 
ERISA Advisory Council, generally maintain that since 2012 an 
increasing number of sponsors have used lump sum window offers to shed 
plan liabilities. The offers we identified included offers made to 
separated vested participants not yet receiving benefits, as well as 
offers targeted to retirees who were already receiving benefit 
payments. While lump sum windows have the effect of reducing the size 
of sponsors' pension plans, thereby reducing sponsors' financial risk, 
the recent reported increase in use may reflect enhanced financial 
cost-saving incentives for such actions. These include changing 
federal laws and regulations governing the interest rates and 
mortality tables used to calculate lump sums, and those affecting PBGC 
premium rates. Likewise, other longstanding rules may also serve as 
incentives to act. Sponsors must also take into account their unique 
business circumstances and certain disincentives associated with lump 
sum windows. 

Full Extent of Lump Sum Offers Is Unknown: 

Comprehensive data on the details and the number of lump sum window 
offers are not publicly available. Although DOL takes primary 
responsibility for ERISA reporting requirements, neither it nor the 
other two agencies that oversee ERISA provisions, IRS and PBGC, are 
required to track or compile comprehensive data on such offers. As a 
result, the information currently required to be reported by sponsors 
when they implement lump sum windows is insufficient to provide a 
complete picture of the extent of the practice.[Footnote 22] For 
example, whenever lump sums are paid out from a pension fund, the 
sponsor is required to report the payout to IRS.[Footnote 23] However, 
such reporting does not distinguish payouts associated with a lump sum 
window from other types of payouts from pension funds, such as monthly 
annuity payments. In addition, some sponsors may choose to disclose 
limited information about lump sum window offers within their annual 
corporate reports and some may do so as part of periodic filings to 
the SEC. However, absent more specific requirements to report on lump 
sum window offers, meaningful data on the extent of their use do not 
exist. 

Nevertheless, pension experts generally agree that sponsors' use of 
lump sum windows has become more frequent in recent years. In 
summarizing its 2013 hearings on pension de-risking, the ERISA 
Advisory Council concluded that the testimony they had heard served to 
confirm that risk transfer actions, such as lump sum windows, are on 
the rise. Studies cited by leading pension consulting firms, albeit 
without full disclosure of their data and study methods, have 
furthered this perception. Citing proprietary data, one firm has 
estimated that nearly 200 sponsors implemented lump sum windows during 
2012.[Footnote 24] That firm reported that its survey of 180 plan 
sponsors found that 26 percent had implemented a lump sum window in 
2012, and another 41 percent were in the process of, or considering, 
taking such action between 2013 and 2015.[Footnote 25] Another firm 
reported that its study indicated that of 223 sponsors surveyed, 12 
percent had recently implemented a lump sum window. Of the remaining 
sponsors, 43 percent were reported to have said they were very or 
somewhat likely to do so in 2014.[Footnote 26] 

Through our own search of publicly available data, we were able to 
identify 22 plan sponsors who had offered lump sum windows to their 
plan participants in 2012.[Footnote 27] While this likely represents 
only a portion of the actual number of sponsors offering lump sum 
windows during this time, these 22 cases alone involved offers to 
approximately 498,000 participants.[Footnote 28] Public data on the 
dollar amount of lump sums paid were limited, but for the 16 sponsors 
providing this information, we found the total payouts to be just over 
$9.25 billion in 2012. Based on its study of lump sum windows 
completed during 2012, a pension consulting firm reported acceptance 
rates ranging between 25 and 85 percent, with a majority being between 
45 and 65 percent.[Footnote 29] Most (19 of 22) of the lump sum 
windows we identified only targeted participants who were not yet 
receiving their retirement annuity. However, three of the actions 
involved lump sums being offered to retired participants who had 
already begun receiving annuity payments. 

According to many pension experts, the lump sum windows implemented by 
Ford Motor Company and General Motors Company in 2012 could be viewed 
as a new approach to the practice, as they were reported to be the 
first known instances of lump sum offers to retirees in payment status 
rather than to separated vested participants not yet retired. Prior to 
implementation, it was also widely reported that both sponsors had 
requested and obtained IRS private letter rulings stating that their 
actions would "not fail to satisfy" certain provisions of the Internal 
Revenue Code.[Footnote 30] According to the letters, one important 
question was whether such lump sums would violate existing rules 
governing the amount and benefit payment period.[Footnote 31] In both 
private letter rulings, IRS concluded that such actions were 
permissible because the lump sum option was being offered pursuant to 
a plan amendment and only during a limited window period.[Footnote 32] 

Cost Savings Provide Incentive for Sponsors to Offer Lump Sum Windows: 

Substantial financial advantages exist for plan sponsors considering 
implementing lump sum windows. In general, sponsors' use of lump sum 
windows reduces the size of their pension plans, which can result in 
reduced financial volatility for the sponsor's cash flow, income 
statement, and balance sheet, as well as reduced administrative burden 
and costs. However, changing federal laws and regulations concerning 
interest rates, mortality tables, and PBGC premiums may be providing 
additional cost-saving incentives for more plan sponsors to offer lump 
sums to their plans' participants in recent years. Moreover, certain 
longstanding rules can also afford savings to sponsors by allowing 
them to offer lower lump sums by choosing an advantageous interest 
rate and excluding certain additional plan benefits, such as early 
retirement subsidies, when calculating lump sums. Lump sum windows 
also offer sponsors an opportunity to reduce oversized plan 
liabilities, such as in cases where the pension plan is large relative 
to the size of the plan sponsor's business. They also offer sponsors 
an opportunity to target specific groups of individuals, such as 
vested terminated participants who may have had no prior relationship 
to the plan sponsor because they were in a plan that had been taken 
over as part of a merger or acquisition deal. At the same time, 
implementation of lump sum windows also involves costs. Sponsors have 
to weigh both the incentives and disincentives before taking such 
actions in order to determine if implementing a lump sum window 
addresses their unique business goals in a cost-effective manner. 

Recent and Impending Rule Changes That Provide Incentives for Lump Sum 
Windows: 

The federal laws and regulations regarding how lump sums are 
calculated have been changing in recent years. From the sponsor's 
perspective, these changes make it more advantageous to implement a 
lump sum window at this time. Rules concerning interest rates have 
become more favorable, making it more advantageous to implement a lump 
sum window now and in the future than it was in the past. Impending 
changes to mortality tables provide an incentive to implement a lump 
sum window now to realize a potential financial cost-savings, an 
opportunity that will likely disappear when new mortality tables are 
adopted. Rising PBGC premiums also provide an ongoing and rising 
incentive for some plan sponsors to remove liabilities from the plan 
via a lump sum window or some other means. 

Switch to More Favorable Interest Rates: 

Recent changes to the rules regarding how lump sums are calculated 
allow the use of interest rates that can result in lower lump sums for 
participants, which would be advantageous to plan sponsors trying to 
minimize the cost of implementing a lump sum window offer. Prior to 
enactment of the Pension Protection Act of 2006 (PPA), sponsors were 
required to calculate lump sums using interest rates on 30-year 
Treasury bonds. Since PPA, sponsors have been allowed to use generally 
higher corporate bond interest rates,[Footnote 33] which can serve to 
lower the amount of the lump sums offered to many 
participants.[Footnote 34],[Footnote 35] A consulting firm estimated 
that, because of the general reduction in lump sum amounts resulting 
from this rule change, one of their client sponsors paying out $40 
million in lump sums could potentially save about $10 million due to 
the switch to the higher rates. The PPA switch from Treasury bond 
rates to corporate bond rates became fully effective in 2012, and some 
experts believe that this timing may partly explain the reported 
recent increase in risk transfers since 2012.[Footnote 36] 

Text box: 

Illustration of How PPA Rules on Interest Rates Can Affect Lump Sums: 

Bob is 45, has a lifetime deferred retirement pension of $10,000 a year 
starting at age 65, and was offered a lump sum in October 2012. 

Prior to PPA, Bob's immediate lump sum would have been $62,643, 
calculated based on a 30-year Treasury interest rate of 3.65 
percent.[A] 

After PPA, Bob's immediate lump sum would be $32,453, calculated based 
on a corporate bond interest rate of 6.02 percent, or 48 percent less 
than it would have been under rules prior to PPA[B]. 

Source: GAO analysis. GAO-15-74. 

[A] For this comparison, Treasury and corporate bond interest rates as 
of August 2011 were used for the October 2012 calculation, as permitted 
under current law. For more details on our analysis of how the change 
to interest rates under PPA affects lump sum amounts, see Appendix II. 

[B] Under PPA, different interest rates are used to discount future 
benefits based on the number of years in the future the benefits will 
be paid. For a 45-year-old individual, with benefits assumed to be paid 
20 or more years in the future, a single interest rate of 6.02 percent 
is used for this October 2012 calculation. Note that the negative 
impact of the PPA rule change on lump sum amounts will typically be 
greater for younger participants than older participants. 

[End of text box] 

In addition, the Moving Ahead for Progress in the 21st Century Act 
(MAP-21) allowed more sponsors to take advantage of this rule change 
by temporarily raising the interest rates that can be used to value 
plan liabilities,[Footnote 37] significantly improving many plans' 
reported funded status, which in turn allowed more plan sponsors to 
consider offering lump-sum payouts.[Footnote 38] 

Current Mortality Tables: 

The mortality tables which sponsors must use in determining minimum 
lump sum amounts provide another incentive to conduct a lump sum 
window at this time. This is because the tables currently required for 
this purpose under IRS regulations do not reflect the accelerated rate 
of longevity improvements that have occurred in recent years. These 
longevity improvements have been reflected in updated mortality tables 
recently released by the Society of Actuaries (SOA) and they are 
expected to be adopted by IRS for lump sum calculations, but possibly 
not until 2016.[Footnote 39] The new SOA tables reflect a longer life 
expectancy for individuals, and when used to calculate lump sums will 
yield correspondingly larger lump sum amounts.[Footnote 40] Thus, 
sponsors making lump sum offers prior to IRS's anticipated adoption of 
the new tables can realize substantial financial savings since their 
lump sum calculations will still be based on older tables. According 
to SOA, the new mortality tables reflect a 10.4 to 11.3 percent longer 
life expectancy for individuals age 65 in 2014[Footnote 41]--increases 
that could translate into lump sums that are markedly greater than 
those based on the current tables used for 2014 lump sum calculations. 
[Footnote 42] Therefore, sponsors with lump sum payouts exceeding, for 
example, $100 million could potentially save millions of dollars by 
taking action before the adoption of new mortality tables, all other 
factors remaining the same. 

Prior to SOA's release of the new tables, in August 2013, IRS 
announced that the currently required tables will continue to be used 
for the calculation of minimum lump sum payments in 2014 and 2015, and 
IRS officials we interviewed said there is currently no timetable for 
when it will adopt new tables. They said nothing precludes IRS from 
adopting new tables prior to 2016, but they said it will not occur 
until the agency completes its issuance process. Several pension 
experts are of the opinion that the switch is not likely to occur 
until at least 2016. Until then, sponsors can continue to use the 
current mortality tables and generate relatively lower lump sums, 
providing a window of opportunity to implement a lump sum window at 
lower cost than in the future. 

Text box: 

Illustration of How Use of Current versus New Mortality Tables Can 
Affect Lump Sums: 

Jane is 45, has a lifetime deferred retirement pension of $10,000 a 
year starting at age 65, and was offered a lump sum in October 2012. 

Jane's immediate lump sum would be $35,944, calculated based on the 
new mortality tables reflecting more up-to-date longevity estimates. 

Jane's immediate lump sum is $32,453, calculated based on current 
mortality tables, or 10 percent less than it would be using the new 
tables[A]. 

Source: GAO analysis. GAO-15-74. 

[A] Note that the negative impact on lump sums amounts of using current 
mortality tables to calculate lump sum amounts will generally be less 
for younger participants than older participants. For the relative 
impact of using current mortality tables across several ages, see 
Appendix II. 

[End of text box] 

Rising PBGC Premiums: 

Recent federal legislation that has increased PBGC premium rates, as 
well as scheduled additional future increases, creates another 
potential cost-saving incentive for sponsors to conduct a lump sum 
window offer.[Footnote 43] PBGC premiums are based, in part, on the 
number of participants in a plan, so reducing the number of 
participants via a lump sum window directly reduces the total amount 
of the annual premium for that sponsor. The flat rate portion of the 
single-employer premium rose 63 percent--from $35 to $57 per 
participant--between 2012 and 2015. Further, this rate is scheduled to 
increase another 12 percent, to $64 per participant, in 2016, for an 
overall rate increase of 83 percent from 2012 to 2016.[Footnote 44] 
Thus, for each participant that had been removed from a plan prior to 
2015, the sponsor reduced its 2015 PBGC single-employer, flat rate 
premium costs by $57. Likewise, removal of participants in 2016 will 
result in similar savings.[Footnote 45] 

Terminated vested participants can be a particularly attractive group 
through which to achieve PBGC premium savings through a lump sum offer 
since they often represent a large portion of a population but a small 
portion of the participant liabilities.[Footnote 46] According to a 
leading consultant's analysis of selected plans, terminated vested 
participants can represent less than one-sixth of the total amount of 
liabilities in single-employer pension plans but nearly a third of the 
total plan participant counts.[Footnote 47] As a result, terminated 
vested participants can account for a significant portion of a plan's 
ongoing administrative expense, such as PBGC premiums. A sponsor can 
generate significant administrative cost savings, especially for large 
plans, if they can remove participants and their associated premium 
costs from the plan. Experts differ in their opinion of the extent to 
which rising PBGC premium rates act as an incentive for sponsors to 
implement a lump sum window. Notably, two of the sponsors we spoke to 
said the rate increases did not factor into their decision to any 
great extent. However, one said they were a concern and that the 
impending premium increases could prompt them to take further action 
in the future. 

Longstanding Rules That Provide Incentives for Lump Sum Windows: 

In addition to recent and impending changes in federal rules, certain 
longstanding federal rules can also act as financial incentives to 
sponsors considering implementing a lump sum window by potentially 
reducing the size of lump sum amounts or by allowing the sponsor to 
avoid potential plan costs. 

Ability to Choose a "Lookback" Rate: 

One longstanding IRS rule that can sometimes provide a significant 
financial incentive for offering a lump sum window is the provision 
that permits plan sponsors to select the interest rate used for lump 
sum calculations from up to 17 months prior to the month of the lump 
sum offer. This interest rate is commonly known as a "lookback" rate. 
[Footnote 48] IRS officials we interviewed pointed out that when used 
for the calculation of lump sums that are part of a plan's ongoing 
design (not a lump sum window situation), this rule can work to the 
advantage of either the plan sponsor or the plan participant at 
different points in time, depending on whether interest rates have 
decreased or increased since the "lookback" month. However, when used 
in association with a one-time lump sum window with a fixed payment 
date, the "lookback" rate can be selectively used to financial 
advantage by plan sponsors when interest rates have decreased. 
[Footnote 49] This is because it allows sponsors to choose favorable 
interest rates that are higher than prevailing rates, resulting in 
smaller lump sum payouts.[Footnote 50] In 2012, as interest rates were 
declining, this rule allowed plans to look back to higher rates from 
as early as August 2011. Of the 11 sponsors whose information packets 
we examined, all sponsors who disclosed the interest rates used for 
the lump sum calculations had used sponsor-favorable "lookback" 
interest rates from between 11 and 16 months prior to the lump sum 
payment date. 

Text box: 

Illustration of How the "Lookback" Rules on Interest Rates Can Affect 
Lump Sums: 

Dan is 45, has a lifetime deferred retirement pension of $10,000 a 
year starting at age 65, and was offered a lump sum in October 2012. 

Dan's immediate lump sum would have been $46,967, calculated based on 
prevailing interest rates as of September 2012, the month prior to the 
lump sum offer. 

Dan's immediate lump sum instead is $32,453, calculated based on 
"lookback" rates as of August 2011, or 31 percent less than it would 
have been using a rate as of the month prior to the offer[A]. 

Source: GAO analysis. GAO-15-74. 

[A] Note that the negative impact of the "lookback" rule on lump sum 
amounts will often be greater for younger participants than older 
participants. For the relative impact of the "lookback" rule across 
several ages, see Appendix II. 

[End of text box] 

Ability to Exclude Certain Additional Plan Benefits: 

Another longstanding rule that provides an incentive for offering a 
lump sum window is the rule that allows sponsors to exclude certain 
additional plan benefits when calculating the amount of the lump sum. 
These additional plan benefits that are sometimes provided by pension 
plans include subsidized early retirement benefits, subsidized joint-
and-survivor benefits, and supplemental early retirement benefits. [Footnote 51] Although a separated participant, in the absence of a lump sum window, might have gone on to be eligible for and collect such additional benefits in the future, or might already be eligible for such benefits, the lump sum may still be calculated assuming the participant would have collected a normal retirement benefit without any additional benefits.[Footnote 52] 

Text box: 

Illustration of How the Exclusion of Early Retirement Subsidies Can 
Affect Lump Sums: 

Pam is 45, has a lifetime deferred retirement pension of $10,000 a 
year starting at age 65, but also qualifies for a subsidized, 
unreduced early retirement benefit starting at age 60. She was offered 
a lump sum in October 2012. 

Pam's immediate lump sum would have been $54,301, if the lump sum is 
calculated assuming that Pam would have retired at age 60, i.e., if 
the early retirement subsidy had been included in the lump sum 
calculation. 

Pam's immediate lump sum would be $32,453, if the lump sum is 
calculated assuming that Pam would have retired at age 65, i.e., if 
the early retirement subsidy was not included in the lump sum 
calculation, or 31 percent less than it would have been if the 
subsidized, unreduced early retirement benefit was included. 

Source: GAO analysis. GAO-15-74. 

[End of text box] 

Other Considerations: 

In addition to these potential incentives, sponsors and experts say 
the decision to implement a lump sum window is often driven by how 
large the sponsor's pension liabilities have become in comparison to 
the overall size of the business. This consideration takes on 
particular importance when a business downsizes or, conversely, 
acquires other companies. Indeed, two of the three sponsors we spoke 
to said recent restructuring of their companies had resulted in their 
plan's liabilities becoming unacceptably large relative to the overall 
size of the business. Both had recently experienced significant 
downsizing of their core business, yet both had retained large amounts 
of benefit obligations owed to participants. This particular issue was 
also mentioned by one of the sponsors who requested an IRS private 
letter ruling prior to offering lump sums to retirees in pay status. 
The sponsor had stated that the pension obligations reported on the 
company's financial statements had become "disproportionately large" 
and very sensitive to swings in interest rates. They explained that 
such volatility increases the cost of financing, makes cash flow 
management more difficult, and makes the company less competitive in 
the marketplace.[Footnote 53] The sponsors we talked to said their 
decision to reduce their pension liabilities was a means to shore up 
their overall balance sheet. 

The other sponsor we interviewed told us that, in their case, their 
business had grown due to the acquisition of other companies. However, 
with the mergers had come additional pension liabilities and costs 
associated with the defined benefit plans of the acquired companies. 
They said they were now burdened with pension costs associated with 
separated vested participants who had never been directly associated 
with their corporation. This sponsor told us they implemented a lump 
sum window primarily on the advice of their pension consultant, who 
presented the action as a cost-effective means of reducing 
administrative burden and costs associated these types of separated 
participants.[Footnote 54] 

Disincentives to Offering a Lump Sum Window: 

Implementing a lump sum window is not cost-free for plan sponsors. 
Despite the potential incentives, many experts point out that the 
decision to implement a lump sum window will be based on each 
sponsor's unique business considerations, and potential downsides must 
be considered. Disincentives include the administrative costs 
involved, future costs associated with adverse selection, the need to 
make sizable immediate payments, interest rate uncertainty, and 
foregone potential returns.[Footnote 55] 

* Administrative costs. Conducting a lump sum window requires sponsors 
to collect and verify data on their participant population to properly 
value their benefit obligations, which in some cases may involve the 
reconciliation of thousands of participant data records. In addition, 
participant communications, including information materials, must be 
prepared, and call centers may need to be set up, requiring staffing 
and training. If these administrative tasks are performed in-house, it 
will take time and resources; if outsourced to a third party, the 
sponsor will likely incur service fees. 

* Adverse selection. When lump sums are offered, it is possible that 
relatively unhealthy participants will be more likely to accept the 
lump sum and, conversely, healthier participants will choose to keep 
their existing deferred annuity. If so, the remaining plan 
participants may outlive the mortality assumptions used to value 
liabilities, requiring additional plan funding in the future to cover 
benefit payments. 

* Sizable immediate payments. The payment of lump sums results in an 
immediate depletion of plan assets. In such cases, it is possible that 
the sponsor might have to sell assets at a poor time, when their 
position in the market is low. In addition, lump sum payouts could 
reduce the funded ratio of an underfunded plan, potentially increasing 
minimum required contributions. 

* Interest rate uncertainty. Future interest rate increases can reduce 
the lump sum amounts to be paid, so that the sponsor might have 
achieved greater benefits if action had been postponed. However, the 
potential effect of interest rate increases on the value of plan 
assets would also be a consideration. For example, if a sponsor 
anticipates that interest rates will rise in the future, they will 
need to determine whether the cost savings associated with paying 
lower lump sum amounts then is offset by the potential for investment 
losses on plan assets before the lump sum window is executed. 

* Foregone potential returns. Lump sum payments can come at the 
expense of future market earnings, if future rates of return on the 
assets would have exceeded the interest rate used to calculate the 
lump sums. Foregone potential returns is a flipside of risk reduction, 
as reduced risk often means reduced potential rewards as well. 

Lump Sum Payments Can Lose Value for Participants in Various Ways: 

When participants of defined benefit pension plans accept lump sums, 
they are waiving their right to receive a lifetime income stream from 
their pension plan and must manage the payment received on their own 
from that point forward. Some may try to replicate an income stream by 
using their lump sum to purchase an annuity on the retail market. 
Others may roll over their lump sum into an Individual Retirement 
Account (IRA) and then invest and withdraw funds at their discretion. 
Still others may choose to use the lump sum to pay off debt or 
purchase consumer goods. While the participant may manage or spend 
their lump sum in ways that are beneficial to their circumstances, 
participants in all three of these situations are at risk of losing 
value from their retirement savings in various ways. 

Annuitizing a Lump Sum Payment May Not Fully Replace the Value of the 
Plan's Annuity: 

In cases where participants accept the lump sum and then wish to 
replicate a lifetime income stream by purchasing an annuity on their 
own, the amount of their monthly benefit could be significantly lower 
than what would have been provided by their plans. It might seem 
counterintuitive for an individual to use a lump sum to purchase a 
lifetime annuity, since the individual could have just kept the 
lifetime annuity he or she already had from the defined benefit plan. 
Most of the participants we interviewed who accepted lump sum payments 
told us that they did not trust the security of their plan benefit 
(discussed further in the next section), and some said they were 
encouraged by others to purchase a retail annuity. 

Differences between Retail and Plan Annuities: 

Using the lump sum to purchase a retail annuity could result in 
significantly less annuity income than what would have been provided 
by the plan because different factors are at play for sponsors 
converting pension annuities to lump sums than for insurance companies 
selling lifetime annuities on the retail market.[Footnote 56] Insurers 
in the retail market use different interest rate assumptions and 
mortality tables than those used by plan sponsors to calculate minimum 
required lump sums, and also include other factors such as profit 
margins in their pricing. Additionally, unlike plan sponsors, insurers 
can price annuities differently for men and women when selling 
annuities outside the qualified retirement plan environment. 

We estimated potential reductions in monthly retirement income if a 
participant were to accept a lump sum window offer and then use the 
lump sum to purchase a retail annuity.[Footnote 57] In the absence of 
sufficient data on retail annuity prices, we based annuity purchase 
rates on estimated group annuity rates published by PBGC. Retail 
annuities for individuals are typically more expensive than group 
annuities. Figure 1 illustrates the potential reduction in monthly 
retirement income.[Footnote 58] Income is reduced at all ages shown in 
the figure. The reduction is up to 68 percent for the youngest female 
(age 35), although a 35-year-old may be less likely to purchase a 
replacement income annuity. At ages at which people are more typically 
at or approaching retirement, the reductions are 24 percent and 17 
percent for 65-year-old females and males, respectively, and 41 and 36 
percent for 55-year-old females and males, respectively. Differences 
between the prices of market-based annuities and the valuation of a 
plan lump sum payment can be pronounced for reasons such as 1) 
discount rate (interest rate) differences and mortality assumption 
differences, 2) gender differences, and 3) differences between group 
and retail annuity pricing. 

Figure 1: Potential Percentage Reduction to Monthly Benefit with Lump 
Sum Purchase of Out-of-Plan Annuity: 

[Refer to PDF for image: vertical bar graph] 

Age of recipient: 35; 
Percentage difference in 2012 lump sum value: 
Women: -68%; 
Men: -64%. 

Age of recipient: 45; 
Percentage difference in 2012 lump sum value: 
Women: -60%; 
Men: -55%. 

Age of recipient: 55; 
Percentage difference in 2012 lump sum value: 
Women: -41%; 
Men: -36%. 

Age of recipient: 65; 
Percentage difference in 2012 lump sum value: 
Women: -24%; 
Men: -17%. 

Age of recipient: 75; 
Percentage difference in 2012 lump sum value: 
Women: -21%; 
Men: -11%. 

Age of recipient: 85; 
Percentage difference in 2012 lump sum value: 
Women: -20%; 
Men: -7%. 

Source: GAO analysis of U.S. Department of the Treasury (Internal 
Revenue Service) and Pension Benefit Guaranty Corporation(PBGC) data. 
GAO-15-74. 

Note: This figure illustrates the potential percentage reduction in 
monthly retirement income that a plan participant might experience by 
accepting a lump sum window offer and then using the lump sum to 
purchase an annuity outside the plan. Lump sum payment amounts were 
based on the minimum required methodology using assumptions that we 
found prevalent in participant materials. In the absence of sufficient 
data on retail annuity prices, we based annuity purchase rates on 
estimated group annuity rates published by PBGC. Retail annuities are 
typically more expensive than group annuities, which would make the 
reductions in monthly retirement income even bigger than those 
illustrated here. Annuity payments are assumed to commence at age 65 
for those younger than age 65. See appendix II for a more detailed 
discussion of this methodology. 

[End of figure] 

Differences in Actuarial Factors: 

As illustrated in figure 1, on average, lump sum values were 
insufficient to meet the group annuity purchase rates in order to 
replace the coverage in the retail market. This is likely due in large 
part to differences in the actuarial factors used to value minimum 
lump sums, as set by law and regulation, versus those used by 
insurance companies to price annuities. One such factor is the 
discount rates, or interest rates used to convert future projected 
annuity payments into a lump sum amount or an annuity price.[Footnote 
59] The generally higher lump sum discount rates have the effect of 
making the lump sum less than the amount needed to purchase a 
corresponding annuity, with the gap increasing at younger ages. 
[Footnote 60] A second factor is the mortality (or longevity) 
assumption. As noted earlier, the mortality assumption for determining 
minimum lump sums has not kept up with increases in longevity and, all 
else equal, has the effect of making lump sums today lower than they 
would be with up-to-date tables. In contrast, insurance companies will 
factor this increased longevity into their pricing, so that this 
factor will also tend to make minimum lump sums insufficient to 
purchase a corresponding annuity. 

Differences Based on Gender: 

The reduction in retirement income, or the gap between the amount of 
the lump sum offered and the amount needed, varies significantly by 
both the age and gender of the participant. Regarding gender 
differences, for example, figure 1 shows a 36 percent reduction in 
income for a 55 year-old male, compared to a 41 percent reduction for 
a 55-year-old female, from accepting a lump sum and purchasing an 
annuity. This gender differential occurs because federal law requires 
a sponsor calculating the amount of the lump sum payment to assume 
both men and women have the same life expectancy,[Footnote 61] while 
an insurer offering retail annuities outside the qualified retirement 
plan environment generally can charge different rates to men and 
women. On average, women live longer than men and thus collect 
benefits over a longer period of time. The insurer will thus require a 
woman to pay more than a man of the same age to purchase an equivalent 
lifetime monthly benefit. 

Differences in Pricing: 

Most participants accepting the lump sum payment, but then wishing to 
still have an annuity, will be subject to purchasing a more costly 
individual retail annuity rather than a group annuity.[Footnote 62] 
One reason for this cost difference is that the individual retail 
annuity market is also subject to adverse selection, which means that 
when given a choice, relatively healthier individuals will tend to 
purchase or select annuities, increasing average costs because such 
individuals are expected to live longer. According to the American 
Academy of Actuaries, adverse selection can add about a 10 percent 
increase to the annuity price. Retail annuities can also include 
additional distribution, administrative and sales charges that can add 
further to their cost differential over group annuities. Moreover, 
certain individuals, particularly older retirees, may find that 
regardless of cost, they do not have the ability to purchase a 
lifetime annuity on their own. For example, one retail annuity site we 
examined would not offer lifetime annuities to individuals older than 
age 85. An expert also told us that some insurers will not sell a 
retail annuity for less than a certain price. 

Certain Participants Contacted about Purchasing Annuities: 

Although in many instances the acceptance of a lump sum payment with 
the intention of purchasing a retail annuity essentially results in 
the exchange of a cheaper plan annuity to purchase a more expensive 
retail annuity, some participants have received contacts encouraging 
them to do so. One financial planner we spoke with told us that he 
noticed that a few participants who had been offered lump sums were 
approached by financial service providers trying to sell retail 
annuity products. Additionally, our interviews of participants found 
that a few (3) participants had received unsolicited contacts about 
purchasing an annuity with the lump sum. However, none of the 
participants that accepted a lump sum actually purchased an annuity 
with most of their lump sum payment. The financial planner, who 
advised participants affiliated with two prominent lump sum window 
offers in 2012, said he counseled many of the participants considering 
the purchase of a retail annuity to simply stay in their plan and 
receive lifetime annuity income through the plan.[Footnote 63] 

Rolling Over a Lump Sum into an IRA Brings Added Control, but also 
Management Risks and Challenges: 

Participants who elect lump sum payments and roll them over into IRAs 
now have the ability to control and manage their own funds. But they 
must also manage the risks and challenges associated with decisions 
regarding the investment and withdrawal of the funds that were 
previously the responsibility of their DB plan sponsor.[Footnote 64] 
They may find it difficult to earn a rate of return that allows them 
to accumulate and withdraw the monies in amounts that replicate the 
benefit they gave up under the plan, or to provide protection over 
their entire retirement period should they live to an old age. As with 
any investment strategy, the participant will face a tradeoff between 
maximizing return with riskier investments, such as stocks, versus 
maintaining their assets with lower return, lower volatility 
investments, such as bonds. 

Risks and Challenges of Asset Management: 

Participants who roll over their lump sums into IRAs will face risks 
in managing and investing the monies for later drawdown. Specifically, 
by making this choice, participants must contend with 1) the potential 
of outliving their assets; 2) complex decisions concerning the 
investment of the lump sum and the drawdown of the assets; and 3) the 
difficulty of finding trusted advice. 

Outliving Assets: 

A major risk that participants face overall is that they may outlive 
their lump sum assets. Figure 2 shows how long a hypothetical lump 
sum, based on a $10,000 annual ($833 monthly) benefit, would last for 
a 45-year-old participant if the participant invested the lump sum and 
drew down the monies beginning at age 65. The illustration shows that 
the age at which the drawdown exhausts the monies is highly sensitive 
to the rate of return. For example, at an annualized 2 percent rate of 
return, the participant's monies will exhaust after 5 years at age 70. 
However, at an annualized 7 percent rate of return, the participant's 
monies will last an additional 30 years, exhausting after 35 years at 
age 100. While these drawdown scenarios are not specific to a 
participant's gender, they do highlight that women may be particularly 
vulnerable to outliving their assets as women tend to have longer life 
expectancies than men. 

Figure 2: Potential Age When Benefits Would Stop with Lump Sum Spend-
down Matching Plan's Monthly Benefit, by Various Rates of Return: 

[Refer to PDF for image: multiple line graph] 

Age of retiree: 45; 
Account balance: 
Rate of return, 1%: $32,453; 
Rate of return, 2%: $32,453; 
Rate of return, 3%: $32,453; 
Rate of return, 4%: $32,453; 
Rate of return, 5%: $32,453; 
Rate of return, 6%: $32,453; 
Rate of return, 7%: $32,453. 

Age of retiree: 50; 
Account balance: 
Rate of return, 1%: $34,144; 
Rate of return, 2%: $35,923; 
Rate of return, 3%: $38,960; 
Rate of return, 4%: $39,757; 
Rate of return, 5%: $43,993
Rate of return, 6%: $46,275; 
Rate of return, 7%: $46,872. 

Age of retiree: 55; 
Account balance: 
Rate of return, 1%: $35,895; 
Rate of return, 2%: $39,698; 
Rate of return, 3%: $46,630; 
Rate of return, 4%: $48,543; 
Rate of return, 5%: $59,340; 
Rate of return, 6%: $65,600; 
Rate of return, 7%: $67,291. 

Age of retiree: 60; 
Account balance: 
Rate of return, 1%: $37,734; 
Rate of return, 2%: $43,869; 
Rate of return, 3%: $55,812; 
Rate of return, 4%: $59,271; 
Rate of return, 5%: $80,041; 
Rate of return, 6%: $92,997; 
Rate of return, 7%: $96,605. 

Age of retiree: 65; 
Account balance: 
Rate of return, 1%: $38,835; 
Rate of return, 2%: $47,646; 
Rate of return, 3%: $65,967; 
Rate of return, 4%: $71,537; 
Rate of return, 5%: $107,130; 
Rate of return, 6%: $131,001; 
Rate of return, 7%: $137,857. 

Age of retiree: 70; 
Account balance: 
Rate of return, 1%: $0; 
Rate of return, 2%: $113; 
Rate of return, 3%: $24,263; 
Rate of return, 4%: $32,097; 
Rate of return, 5%: $86,361; 
Rate of return, 6%: $126,049; 
Rate of return, 7%: $137,857. 

Age of retiree: 75; 
Account balance: 
Rate of return, 1%: $0; 
Rate of return, 2%: $0; 
Rate of return, 3%: $0; 
Rate of return, 4%: $0; 
Rate of return, 5%: $58,346; 
Rate of return, 6%: $119,030; 
Rate of return, 7%: $137,857. 

Age of retiree: 80; 
Account balance: 
Rate of return, 1%: $0; 
Rate of return, 2%: $0; 
Rate of return, 3%: $0; 
Rate of return, 4%: $0; 
Rate of return, 5%: $20,559; 
Rate of return, 6%: $109,079
Rate of return, 7%: $137,857. 

Age of retiree: 85; 
Account balance: 
Rate of return, 1%: $0; 
Rate of return, 2%: $0; 
Rate of return, 3%: $0; 
Rate of return, 4%: $0; 
Rate of return, 5%: $0; 
Rate of return, 6%: $94,973; 
Rate of return, 7%: $137,857. 

Age of retiree: 90; 
Account balance: 
Rate of return, 1%: $0; 
Rate of return, 2%: $0; 
Rate of return, 3%: $0; 
Rate of return, 4%: $0; 
Rate of return, 5%: $0; 
Rate of return, 6%: $74,975; 
Rate of return, 7%: $137,857. 

Age of retiree: 95; 
Account balance: 
Rate of return, 1%: $0; 
Rate of return, 2%: $0; 
Rate of return, 3%: $0; 
Rate of return, 4%: $0; 
Rate of return, 5%: $0; 
Rate of return, 6%: $46,626; 
Rate of return, 7%: $137,857. 

Age of retiree: 100; 
Account balance: 
Rate of return, 1%: $0; 
Rate of return, 2%: $0; 
Rate of return, 3%: $0; 
Rate of return, 4%: $0; 
Rate of return, 5%: $0; 
Rate of return, 6%: $6,438; 
Rate of return, 7%: $137,857. 

Source: GAO analysis. GAO-15-74. 

Note: Hypothetical example of a 45-year-old participant who has 
accrued a future pension benefit of $10,000 per year ($833 monthly) 
starting at age 65, but who gives up the guaranteed lifetime pension 
benefit in exchange for a lump sum of $32,453. (Lump sum amount based 
on August 2011 § 417(e)(3) interest rates, and § 417(e)(3) mortality, 
for the 2012 plan year.) The hypothetical participant then rolls the 
lump sum into an interest-bearing account until retirement, and spends 
down the account, beginning at age 65, by the original pension amount 
of $833 per month. 

[End of figure] 

Managing Assets Prior to and through Retirement: 

Participants face challenges in managing the many complex decisions 
involving their lump sum during both the accumulation phase prior to 
retirement and the spend-down phase after they begin drawing down 
their lump sum. These decisions are further complicated by the ups and 
downs of financial markets, including fluctuating rates of return, 
effect of fees, and deciding when and how much to withdraw, especially 
when spouses or other beneficiaries need to be taken into 
consideration. 

* Fluctuating rates of return. Unlike the constant rates of return 
reflected in the preceding spend-down scenario (see figure 2), 
participants' investments may fluctuate, and the sequence of 
fluctuating rates of return can pose additional risks. For example, 
due to net cash outflows from a retiree's spend-down of his or her 
lump sum, the lump sum account has a diminishing asset base that can 
be particularly at risk if the retiree encounters periods of low 
returns or losses, as the account will have less time to recover from 
such downturns. Further, the continued draw-down of the account during 
such periods means that assets might have to be sold at depressed 
values, and less money will remain in the account to benefit from any 
future market upturn.[Footnote 65] 

* Effect of fees. As prior GAO work on fees has shown, fees can 
significantly decrease retirement assets. Even a small fee deducted 
from one's assets annually could represent a large amount of money 
years later had these funds remained in the account to be reinvested. 
This means that participants will have to carefully consider fees as 
they review alternative investment options. Compared to participant 
controlled investment in account-based pension plans, this can be more 
difficult in the retail market.[Footnote 66] 

* Loss of budgeting signal. A monthly pension has the advantage of 
providing a retiree a budgeting signal as to how much can reasonably 
and safely be spent each month. During the spend-down phase, this 
valuable information is lost when a participant converts a monthly 
pension into a single lump sum. The retiree may spend more of the lump 
sum each month than is sustainable. In addition, the retiree may have 
to make large unforeseen expenditures at certain times without 
realizing the likely negative impact on the exhaustion date of the 
lump sum, whereas for a retiree receiving a monthly pension, a large 
expenditure can be seen relative to the monthly pension amount and may 
lead the retiree to take other remedial measures.[Footnote 67], 
[Footnote 68] Additionally, in some cases the retiree may 
unnecessarily restrict his or her standard of living by spending less 
each month than a steady pension would have permitted. 

* Diminished capacity. Managing assets through retirement may be 
particularly challenging for retirees who experience diminished 
physical or mental capacity as they age. For example, a retiree with 
dementia may find it more difficult to manage the many decisions 
involved with investing and drawing down an IRA compared to the 
relative simplicity of receiving a monthly pension check. As one 
scholar has noted, if the retiree misuses a monthly pension check, 
another check will arrive the following month. However, if the retiree 
makes investments that result in significant losses for their IRA, 
there may be no additional funds for future withdrawal.[Footnote 69] 

* Planning for spouses. Our previous illustration assumes the money is 
drawn down for an individual's lifetime. Acceptance of a lump sum over 
$5,000 for married or formerly married individuals requires spousal 
consent to waive the right to a future annuity based on the combined 
lifetime of participant and spouse, known as a joint and survivor 
annuity. However, this does not preclude the participant from 
including a spouse or beneficiary in his retirement planning. If the 
participant wishes to account for his spouse's lifetime as well, he 
may need to add more years of spend-down, either by lowering the 
amount paid out per month or taking on additional investment risk in 
an attempt to achieve greater returns. 

Finding Trusted Professional Advice: 

Participants assuming responsibility for managing their funds may find 
dealing with all these challenges difficult and may seek out 
professional advice to assist them. According to a DOL official, many 
participants are unlikely to understand the full complexity of 
accepting a lump sum and may not be well-equipped to manage the lump 
sum assets on their own. Ideally, a financial planner should be able 
to help people navigate the myriad decisions required to accept and 
manage a lump sum payment. However, participants could face additional 
challenges finding trusted advice in managing their assets if they do 
not feel comfortable managing investment and drawdown decisions on 
their own. Others might find it challenging to afford a financial 
planner. In previous work, we have found that participants can receive 
conflicted advice because the financial interests of those giving 
advice may not be aligned with the best interests of the participant. 
[Footnote 70] 

Those offering investment advice to participants may be motivated by 
financial gain through sales of preferred financial products, 
commissions, or other fees for services.[Footnote 71] A few (4) 
individuals we interviewed noted that their advisor might have 
benefited more financially had they elected the lump sum, noting that 
the advisor was interested in managing a large sum of money. 

Side bar: 

Participant Quote: "After I received the lump sum offer there were 
sharks everywhere trying to convince me to let them manage the money. 
They really came out of the woodwork." - 60-69 year old woman. 
Source: GAO's interviews with participants. GAO-15-74. 

[End of side bar] 

Results of our participant questionnaire reveal that participants 
given lump sum offers often received unsolicited financial advice, for 
example, from financial planners, investment advisors, or even other 
plan participants. About a quarter (10 of 37) of the participants who 
completed our questionnaire reported being contacted by individuals 
not formally connected with the pension plan who offered unsolicited 
services directly related to the lump sum payment. For example, 
participants reported being contacted by individuals offering to 
provide tax advice, help create a retirement or financial plan, or 
invest the funds. Some (9) participants noted unsolicited mail and 
email invitations they received at the time of the lump sum offer, and 
being contacted by individuals offering to help them manage the money. 
[Footnote 72] 

Reasons Participants May Choose Rollover IRAs: 

According to prior GAO work, sponsors' service providers often may 
direct participants leaving employment to move their retirement 
savings to IRAs without any detailed knowledge of the participant's 
financial situation.[Footnote 73] Participants may interpret 
information about their service providers' retail investment products 
as a suggestion to choose such products, which may or may not suit 
their ultimate retirement goals. Available evidence suggests that many 
participants who take lump sums choose to roll their funds into an 
IRA. No official statistics with respect to the disposition of lump 
sum window payments exist, but one retirement consultant's survey 
suggests that just over half of participants roll over the full amount 
of their lump sum into an IRA.[Footnote 74] For example, the survey 
found that among 30 sponsor-clients representing 150,000 participants 
who were offered lump sum window elections in 2012, 51 percent of the 
participants who accepted lump sums directly rolled over their 
distribution into a 401(k) or an IRA.[Footnote 75] 

Using Lump Sums for Immediate Expenditures May Have Benefits but also 
Consequences for Retirement: 

One of the most critical decisions that participants must make with 
their lump sums is whether they will continue to manage their lump sum 
payments as part of their retirement planning goals. When participants 
choose to use the lump sums to pay off debts or spend the money on 
consumer goods, rather than keep the funds in the tax-qualified 
retirement system, this is often referred to as "leakage."[Footnote 
76] However, this "leakage" may be appropriate for some participants. 
They may have other uses for their payment that are beneficial to 
their circumstances, for example, paying health care expenses, paying 
for additional education that may lead to more secure employment, or 
bequeathing the money. 

Besides potentially diminishing their retirement savings, participants 
who do not directly roll over all of their lump sum payment into a tax-
preferred account may be subject to certain additional taxes or 
withholding. For example, when a participant cashes out their lump sum 
payment, there is an additional tax of 10 percent, in addition to 
ordinary income tax, if the participant is younger than age 59½. In 
addition, the sponsor must withhold 20 percent of the value of the 
lump sum to cover federal and, if applicable, state taxes. The 
ultimate tax liability will depend on the participant's individual 
circumstances, but he or she is likely to witness some erosion in the 
value of the initial lump sum. 

Side bar: 

Participant Quote: "After I received the lump sum offer there were 
sharks everywhere trying to convince me to let them manage the money. 
They really came out of the woodwork." - 60-69 year old woman. 
Source: GAO's interviews with participants. GAO-15-74. 

[End of side bar] 

Side bar: 

Participant Quote; "I needed the money now. I have three boys that are 
leaving home and [I] have medical conditions that made me think I may 
not live long enough to break even with the annuity." - 50-59 year old 
man who accepted lump sum and used part of it to pay down mortgage and 
medical expenses. 
Source: GAO's interviews with participants. GAO-15-74. 

[End of side bar] 

Studies have found that younger workers, lower earners, and persons 
with smaller distributions are most likely to take lump sums and not 
keep them as retirement savings.[Footnote 77] On the other hand, 
individuals may have important immediate spending needs that must be 
addressed prior to retirement. Our interviews of participants 
presented with lump sum window offers found that only 2 of the 15 
participants who accepted the lump sum cashed it out to pay for 
immediate expenditures. In both cases, the participants had important 
immediate needs associated with their expenditures. In one case the 
former participant used most of the lump sum to pay for living 
expenses; in the other the former participant used most of the monies 
to pay down mortgage debt.[Footnote 78] 

Lump Sum Window Materials We Reviewed Often Lacked Key Information 
Participants Need to Make an Informed Decision: 

Participants need information in certain key areas to make an informed 
decision about their options when provided a lump sum offer. While our 
analysis of materials provided by plan sponsors showed that they 
appeared to include certain required information, they often lacked 
other key information. Most participants we interviewed cited fear 
that their sponsor would not deliver on their pension promise as a 
primary reason for accepting the lump sum offer, but many of these 
participants were not aware of the protections afforded by PBGC. 

Participants Need Information in Eight Key Areas to Make an Informed 
Decision: 

Based on a review of publications by federal agencies, the ERISA 
Advisory Council, financial advisors, investment firms, financial 
services firms, and participant advocacy groups, as well as relevant 
federal laws and regulations, we identified eight key areas of 
information that participants need to weigh their options and 
determine what is in their best interest when faced with a lump sum 
window offer (see table 1). Under existing federal law and 
regulations, plan sponsors who offer a lump sum in place of a 
retirement annuity are required to provide certain disclosures to 
participants related to some of the eight key areas we identified. 
[Footnote 79] For example, the sponsors' disclosures to participants 
are required to include information on the need for spousal consent, 
the tax implications of taking a lump sum, and the relative value of 
the lump sum compared with the plan's benefits. However, this 
information, even when provided as required, may not be sufficient to 
enable participants to make an informed decision. During the ERISA 
Advisory Council hearings in 2013, several experts testified about 
their concerns for participants being offered lump sums. In their 
testimony, some experts noted that participants may not fully 
understand their retirement benefits or the risks involved in taking 
their benefits in the form of a lump sum payment. For example, 
participants electing a lump sum assume responsibility for investing 
their retirement assets and thus bear the risk of both market losses 
and of outliving their retirement assets. The council recommended that 
the disclosure materials include additional information to clarify, 
among other things, the tax implications of a lump sum payment, the 
treatment of early retirement subsidies in the lump sum calculation, 
and how participants' benefit options compare against each other. 

Table 1: Eight Questions that Address Key Factors Participants Need to 
Know In Order to Make an Informed Benefit Choice: 

Question addressing key factor: 
1. What benefit options are available? 
Examples of sub-questions for key factor: 
* What is the monthly benefit amount at normal retirement age (the "do 
nothing now" or "deferred annuity" option)? 
* Is there a subsidized early retirement option? 
* What is the monthly benefit amount if payments begin now under the 
plan (the "immediate annuity" option)? 
What is the lump sum amount (the "lump sum" option)? 

Question addressing key factor: 
2. How was the lump sum calculated? 
Examples of sub-questions for key factor: 
* What interest rates were used? 
* What mortality assumptions were used? 
Were any additional plan benefits included in the lump sum? 

Question addressing key factor: 
3. What is the relative value of the lump sum versus the monthly 
annuity?[A]; 
Examples of sub-questions for key factor: 
* How does the lump sum payment compare to the value of the plan's 
lifetime annuity? 
Would it be possible to replicate the plan's stream of payments by 
purchasing a retail annuity using the lump sum? 

Question addressing key factor: 
4. What are the potential positive and negative ramifications of 
accepting the lump sum? 
Examples of sub-questions for key factor: 
* How could taking the lump sum affect beneficiaries? 
* How could inflation affect the lump sum and plan's monthly benefits? 
* What are the investment risks? 
* What are the longevity risks? 
How could spending some of the lump sum affect its value over time? 

Question addressing key factor: 
5. What are the tax implications of accepting a lump sum?[A]; 
Examples of sub-questions for key factor: 
* How would the lump sum payment be taxed? 
* What rollover options are available and what are the tax 
implications for each? 
Are there early distribution penalties? 

Question addressing key factor: 
6. What is the role of PBGC and what level of protection does PBGC 
provide on each benefit option? 
Examples of sub-questions for key factor: 
* What is PBGC? 
How much of the plan's monthly benefit would be protected by PBGC if 
the plan is terminated with insufficient assets to pay benefits? 

Question addressing key factor: 
7. What are the instructions for either accepting or rejecting the 
lump sum?[A]; 
Examples of sub-questions for key factor: 
* What needs to be done to make either election? 
* What is the deadline for the decision? 
Does a spouse need to grant consent for either election? 

Question addressing key factor: 
8. Who can be contacted for more information or assistance? 
Examples of sub-questions for key factor: 
* What is the contact method for questions? 
* Is federal assistance available? 

Source: GAO analysis of 18 publications by federal agencies, the ERISA 
Advisory Council, financial advisors, investment firms, financial 
services firms, and participant advocacy groups, as well as federal law 
and regulation. GAO-15-74. 

[A] There are some federal requirements related to the provision of 
this type of key information to participants who receive a lump sum 
window offer. 

[End of table] 

Materials Provided by Sponsors Lacked Key Information That Could Have 
Helped Participants: 

In our review and analysis of 11 packets of information that sponsors-
-representing about 248,000 participant offers--provided to 
participants regarding a lump sum window offer, we found that all of 
the packets lacked important information that could have helped 
participants. However, all packets appeared to include information 
that is required by current federal law and regulations governing 
benefit distributions.[Footnote 80] For example, all packets included 
a spousal waiver for electing a lump sum and information about the tax 
implications associated with the participant's decision. In addition, 
all of the packets included the required relative value statement. 
Further, one packet GAO reviewed was commendable in that it provided 7 
of the 8 key pieces of information GAO identified, and provided 
several resources beyond this threshold information. Most packets (8 
of 11) provided at least 5 of the 8 key pieces of information GAO 
identified as necessary to make an informed decision. However, our 
review also revealed that all 11 packets lacked at least one key piece 
of information a participant would need to make a more fully informed 
decision about his or her benefit choices, as described below. Our 
interviews with 33 plan participants revealed they may have lacked key 
information, as many (13 of 33) told us that more information would 
have helped them assess whether or not to accept the lump sum. 

Key Factor #1: Benefit Options: 

Side bar: 

Participant Quote: "I felt the way the information was presented was 
very misleading. The packets made it look like you would have to wait 
to age 65 to receive unreduced benefits, but actually it could be 60. 
Some people close to age 60 would be much better off waiting a year or 
two to get full benefits than accepting a lump sum." - 40-49 year old 
man; 
Source: GAO's interviews with participants. GAO-15-74. 

[End of side bar] 

We found that all the sponsors' packets initially presented at least 
two benefit options: the lump sum payment and the monthly benefit 
amount for an immediate annuity.[Footnote 81] Most packets (9 of 11) 
also presented a deferred annuity option: the estimated monthly 
benefit amount promised under the plan once the participant reached 
the plan's normal retirement age. Only one packet provided the amount 
of the monthly annuity at the plan's early retirement age.[Footnote 
82] In the cases involving the two packets that did not provide 
information about a deferred annuity option at normal retirement age, 
the participants were separated participants who had not begun to 
receive monthly pension benefits. While some participants might have 
on file the estimated monthly benefit amount at normal retirement age, 
others may not.[Footnote 83] Without that information, it would be 
challenging for participants to determine if deferring receipt of 
benefits until reaching normal retirement age should be an option 
worth considering. One participant we interviewed whose sponsor did 
not provide this information said that she was glad she had retained 
records showing her estimated pension amount because otherwise it 
would have been difficult to assess her lump sum offer effectively. 

Side bar: 

Participant Quote: "I felt the way the information was presented was 
very misleading. The packets made it look like you would have to wait 
to age 65 to receive unreduced benefits, but actually it could be 60. 
Some people close to age 60 would be much better off waiting a year or 
two to get full benefits than accepting a lump sum." - 40-49 year old 
man; 
Source: GAO's interviews with participants. GAO-15-74. 

[End of side bar] 

Three participants we interviewed (affiliated with one plan sponsor) 
were very concerned that their sponsor did not provide information on 
the estimated monthly benefits that participants could receive once 
they qualified for an early retirement. According to that plan's 
provisions, participants who had enough years of employment could 
receive unreduced monthly benefits as early as age 60 rather than at 
the normal retirement age of 65. If participants are not informed of 
this option, they may not realize that they could be eligible to 
receive the same monthly benefit 5 years sooner.[Footnote 84] 

Key Factor #2: Lump Sum Calculation: 

With respect to the lump sum calculation, we found that the 
information in only 2 of the 11 packets fully explained how the lump 
sum had been generated, providing sufficient information to facilitate 
an understanding of the interest rate, mortality table, and benefit 
used by the sponsor. The remaining 9 packets lacked some key 
information used in calculating the lump sum amount, such as the 
interest rates or mortality assumptions. For example, 8 of the 11 
packets did not disclose the interest rates used for the calculation. 
[Footnote 85] In addition, 7 of the 11 packets lacked information 
about the specific mortality assumptions used in the calculation. 
Lastly, 4 packets did not explain whether certain additional plan 
benefits, such as early retirement subsidies, were included in the 
calculation. Although not all participants would necessarily use 
information about interest rates, mortality assumptions, or treatment 
of additional plan benefits to help them arrive at a decision, our 
discussions with participants informed us that some (7) likely would. 

Many participants we questioned either reported that they were not 
provided the exact interest rates or mortality assumptions (15 of 37), 
or they found the information that they were provided about interest 
rate or mortality assumptions confusing (8 of 37). Many participants 
who were not provided this information (12 of 15) said they wished 
their plan sponsor had provided it as part of the lump sum offer 
materials. Specifically, some participants (6 of 15) told us they 
wanted to know what interest rates or mortality assumptions had been 
used so they could assess whether the assumptions were fair. Some 
participants (7 of 15) said they wanted the underlying assumptions and 
a clearer explanation as to how the lump sum was calculated to confirm 
it had been calculated correctly.[Footnote 86] A few of these 
participants (4 of 15) said they had been able to obtain information 
on mortality assumptions or interest rates through a call center, and 
all of these participants said they should not have had to track down 
this information themselves. For example, one participant said that 
she had to contact the call center several times before learning she 
would have to write a formal request to receive the information. This 
individual believed the information should have been provided clearly 
in the information materials. 

Participant Quote: "As an engineer with considerable expertise in 
finance, I found it very frustrating that I could not figure out how my 
lump sum had been calculated from the information provided. It took me 
many phone calls to the call center and hours working with a 
spreadsheet to understand what assumptions were used in calculating my 
lump sum. I am still not 100 percent sure the calculation was done 
correctly, but I figure it was close enough." - 60-69 year old man; 
Source: GAO's interviews with participants. GAO-15-74. 

[End of side bar] 

Key Factor #3: Relative Value of a Lump Sum Versus an Annuity: 

In all the packets we reviewed, we found the relative value notice 
required by IRS to inform participants how the overall value of the 
lump sum compares to that of the plan's annuity. These statements 
typically took the form of a table.[Footnote 87] We found little 
additional explanation in any of the packets to help participants 
understand what the numbers meant. Some participants (7 of 33) said 
the relative value statements were not user friendly or particularly 
helpful for them in assessing whether to accept the lump sum. 

Most (7 of 11) of the packets we reviewed contained relative value 
statements that showed the lump sum offered had "approximately the 
same value" as the lifetime annuity provided by the plan when 
calculated as permitted under current law.[Footnote 88] In two 
packets, the relative value statement showed that the lump sum payment 
was less valuable than the annuity. In two other cases, the relative 
value statement showed that the lump sum payment was actually worth 
significantly more than the annuity (114 and 120 percent). Plan 
participants may not understand the importance and effect of 
assumptions used to calculate the relative values, and the materials 
we reviewed did not explain why the lump sum values may be more or 
less valuable than an annuity. In the absence of any further 
explanation, it is unclear how participants could have interpreted the 
results or to what extent the notice could help them reach an informed 
decision. 

In addition, in many (5 of 11) of the packets, the relative value 
statements compared the lump sum payment amount to the value of an 
immediate annuity starting at the same time as the lump sum payment 
would occur, but not the value of the deferred annuity available when 
the participant reached full retirement age, often at age 65.[Footnote 
89] It also was not clear if any of these packets included the value 
of a deferred annuity beginning at early retirement age with any 
additional plan benefits.[Footnote 90] A number of the packets did not 
disclose whether the participant would be eligible for any additional 
plan benefits, such as early retirement subsidies, if they waited to 
claim their annuity (4 of 11). IRS guidance allows sponsors to show a 
relative value notice for an immediate annuity, which may exclude 
consideration of certain additional plan benefits that have not yet 
been earned. However, this may limit the usefulness of the relative 
value statement for participants, who may be eligible for early 
retirement benefits at some point in the future or who could qualify 
for other types of additional plan benefits.[Footnote 91] 

Side bar: 

Participant Quote: "I also researched what I could buy in the way of a 
market annuity to generate a similar benefit and found that the amount 
of my lump sum offer wasn't nearly enough to replicate the monthly 
payments I was guaranteed under the pension plan." - 60-69 year old 
man; 
Source: GAO's interviews with participants. GAO-15-74. 

[End of side bar] 

Further, none of the relative value statements included information 
about how much it would cost on the open market to replicate the same 
stream of payments from the plan's lifetime annuity. While there is no 
obligation for sponsors to do so, and it might not be reasonable to 
expect sponsors to research the open market to provide such an 
estimate, many participants trying to assess the relative value of a 
lump sum could benefit from researching and considering this cost. 
Several participants (4 of 33) said they had either researched or 
asked their financial advisor to estimate how much it would cost to 
buy a market annuity equal to their promised lifetime annuity. Two 
others had tried to determine the monthly benefit they would be able 
to secure if they used their lump sum to purchase a market annuity. 
After reviewing the figures provided, all 6 participants who analyzed 
the cost of a market annuity relative to either their plan's monthly 
annuity benefit or the lump sum amount rejected the lump sum offer. 

Key Factor #4: Positive and Negative Ramifications of Accepting a Lump 
Sum: 

To make an informed decision about accepting a lump sum, individuals 
also need to understand potential positive and negative ramifications 
of their decisions. All 11 of the packets we reviewed discussed at 
least one of the potential negative ramifications of accepting a lump 
sum payment, and about half (6) also discussed at least one of the 
positive ramifications of accepting an offer (see table 2). A few 
participants (4 of 33) said that more information related to the 
positive and negative ramifications would have helped them decide 
whether or not to accept the lump sum. 

Side bar: 

Participant Quote; "The materials did not provide much detail about the 
pros and cons of a lump sum versus an annuity and such information 
would have been very helpful. The materials I received were very 
process oriented and did not help me decide whether or not to accept 
the lump sum." - 50-59 year old man; 
Source: GAO's interviews with participants. GAO-15-74. 

[End of side bar] 

Table 2: Examples of Positive and Negative Ramifications of Accepting 
a Lump Sum: 

Potential positive ramifications of accepting a lump sum: 
* Potential inflation protection (depending on investment choices and 
actual returns): 
* Potential to leave a bequest to a beneficiary other than a spouse.
* Ability to consolidate retirement assets.
* Control over investment decisions.
* Possibility of earning investment returns. 

Potential negative ramifications of accepting a lump sum: 
* Loss of spousal benefits after participant's death.
* Participant bears investment risk.
* Participant bears responsibility for managing the money.
* Participant bears the risk of outliving the lump sum funds 
(longevity risk).
* Participant bears the risk of overspending (in the 
absence of the budgeting signal provided by a monthly pension). 

Source: GAO analysis of 18 publications by federal agencies, the ERISA 
Advisory Council, financial advisors, investment firms, financial 
services firms, and participant advocacy groups, as well as federal law 
and regulation. GAO-15-74. 

[End of table] 

Side bar: 

Participant Quote: "I used a projection that I would live to be 85. 
Based on that, the lump sum payout fell short. As long as I collected 
for 20 years or more I would be better off sticking with the annuity." 
- 60-69 year old man; 
Source: GAO's interviews with participants. GAO-15-74. 

[End of side bar] 

The risk of outliving their assets, or "longevity risk," was of key 
concern to many participants we interviewed and a primary reason cited 
for rejecting a lump sum offer. Specifically, of the 22 participants 
who completed our questionnaire and who had chosen to reject the lump 
sum, the most common reason cited for this decision (17) was concern 
about the possibility that they would run out of money before they 
died if they took the lump sum. Most participants (24 of 33) told us 
they had tried to estimate how long they would have to live to break 
even with the lump sum offer,[Footnote 92] and many of those who 
rejected the lump sum (10 of 22) pointed to their own good health or 
long-lived relatives as reasons to keep their plan's lifetime annuity. 

Side bar: 

Participant Quote: I feel better [taking the lump sum] knowing my 
investment is in a 401(k) plan rather than the company sponsored 
[defined benefit] pension. - 40-49 year old woman; 
Source: GAO's interviews with participants. GAO-15-74. 

[End of side bar] 

A number of participants we interviewed expressed their desire to gain 
control of how their retirement savings were invested or bequeathed. 
For example, a few participants (3 of 15) expressed their appreciation 
of the lump sum because it gave them the ability to control and manage 
the monies themselves. Likewise, a few participants (3 of 15) elected 
the lump sum because they wanted to be able to leave money to a 
beneficiary other than a spouse when they die. For instance, one woman 
wanted to ensure that her daughter would benefit from the pension 
funds, and one man we interviewed lived in a state that did not 
recognize same-sex marriages at the time the lump sum offer was made 
and wanted to ensure his partner would be able to access the funds. 
[Footnote 93] 

Side bar: 

Participant Quote: "I am divorced with a grown daughter. I accepted the 
lump sum because I wanted to be sure she would at least get something 
if I was hit by a bus tomorrow." - 50-59 year old woman; 
Source: GAO's interviews with participants. GAO-15-74. 

[End of side bar] 

Participants' understanding of the positive and negative ramifications 
of accepting a lump sum offer would be enhanced to the extent the 
participants have adequate levels of financial literacy (combined with 
adequate disclosure of information as discussed above). For example, 
understanding the risk of outliving one's assets could help 
participants make a more informed decision. In addition, for 
participants who do elect a lump sum, financial literacy could help 
with the challenges of managing that lump sum. Participants' elections 
are also influenced by factors other than rational analysis of 
benefits and risks.[Footnote 94] Adequate disclosure, combined with 
financial literacy, could potentially help counteract behavioral 
tendencies that sometimes might not result in the best outcomes for 
participants. 

Key Factor #5: Tax Implications: 

Individuals must also understand the tax implications of accepting a 
lump sum in order to make an informed decision. All 11 of the election 
packets we reviewed outlined the tax implications of accepting a lump 
sum. Specifically, each packet presented information about rollover 
options and their tax implications. In addition, each election packet 
disclosed that participants under the age of 59½ could be subject to 
early distribution penalties if they elected a lump sum payment and 
did not roll the funds into a qualified retirement account. About half 
the individuals who filled out our questionnaire (20 of 37) said they 
felt that the information provided to them about the tax implications 
of their decision was understandable, and almost all the individuals 
who accepted a lump sum rolled it into an IRA.[Footnote 95] 

Side bar: 

Participant Quote: "The materials on the tax implications were clear, 
but I wish it had been possible to roll the funds directly into an IRA 
rather than have the added headache of receiving a check and having to 
transfer the funds myself. It was a bit nerve wracking because I didn't 
want to take a hit if I did something wrong with such a big amount of 
money." - 50-59 year old man; 
Source: GAO's interviews with participants. GAO-15-74. 

[End of side bar] 

Key Factor #6: PBGC Protection: 

To make an informed decision regarding lump sums, individuals also 
need to assess the risk that a plan might not have sufficient funds to 
fully make promised payments, and understand the extent to which their 
promised pension would be guaranteed by PBGC if that were to happen. 
Indeed, most participants we interviewed (10 of 15) who accepted lump 
sums said that one of the main reasons they chose to accept the lump 
sum was because they were worried the sponsor would default on its 
pension promise.[Footnote 96] Further, only 2 of the 11 election 
packets we reviewed explained the role of PBGC or provided information 
on the level of PBGC protections to an individual's lifetime annuity. 

Our discussions with individuals offered lump sum payments suggest 
that many of them could have benefited from knowing more about PBGC 
and the level of pension protection it offers.[Footnote 97] Of the 15 
participants who completed our questionnaire and had chosen the lump 
sum, most (10) said that one of the primary reasons they elected the 
lump sum was they were worried the plan would default on its pension 
promise and they could lose some or all of their benefits. Many of 
these individuals (6 of 10) were not aware of the protections offered 
by PBGC. 

Text box: 

Pension Benefit Guaranty Corporation (PBGC) Protections: 

PBGC is a government corporation created by the Employee Retirement 
Income Security Act of 1974 (ERISA) to protect pension benefits in 
private defined benefit plans. When plans insured by PBGC end--known 
as a plan termination--without enough money to pay all benefits, 
PBGC's single-employer insurance program pays participants the benefit 
they would have received from their pension plan up to certain limits 
set by law. PBGC's maximum benefit guarantee is set each year under 
ERISA. The maximum guarantee applicable to a plan is generally fixed 
as of that plan's termination date. For 2014, the maximum guaranteed 
amount for singe-employer plans is about $59,320 per year for workers 
who begin receiving payments from PBGC at age 65. The maximum 
guarantee is lower for participants who begin receiving payments from 
PBGC before age 65, or if the pension includes benefits for a 
surviving spouse or other beneficiary. The maximum benefit is higher 
for participants who are over age 65 when they begin receiving 
benefits. In addition, PBGC's guaranteed benefit amounts are subject 
to the "phase-in" limit (related to benefit increases made in the 
previous 5 years) and the "accrued-at-normal" limit (which excludes 
supplemental benefits). 

Participants can find out whether their pension plan is insured by 
PBGC by obtaining a copy of the plan's "Summary Plan Description," or 
SPD, from the employer or plan administrator. A table showing PBGC's 
maximum guarantee at various ages can be found at [hyperlink, 
http://www.pbgc.gov/wr/benefits/guaranteed-benefits/maximum-
guarantee.html]. 

Source: PBGC, "Your Guaranteed Pension," [hyperlink, 
http://www.pbgc.gov/wr/benefits/guaranteed-benefits/your-guaranteed-
pension.html]. 

[End of text box] 

The other participants (4 of 10) were aware of PBGC's protections, but 
said they were worried they would not receive their full benefit or 
any benefit at all from PBGC if their pension plan defaulted. 
Specifically, a few individuals we interviewed (3 of 15) told us that 
they had accepted the lump sum--even though they believed it to be a 
bad deal--because they were afraid they might ultimately be left with 
nothing if their plan sponsor went out of business or mishandled the 
pension funds. For example, one participant said he was afraid he 
would "walk away with nothing," and another said he was concerned he 
would "only get pennies on the dollar." Yet another participant said 
he had decided to "get out while the going is good." 

Side bar: 

Participant Quote: "I was very concerned about what I saw as the 
mismanagement of the company, so I decided I had better take the money 
and run." - 50-59 year old woman; 
Source: GAO's interviews with participants. GAO-15-74. 

[End of side bar] 

Key Factors #7 and #8: Instructions and Assistance: 

Understanding how to complete the administrative process of making a 
benefit election and who to contact for help are two other important 
pieces of information plan participants need in order to make an 
informed decision. All 11 of the election material packets we reviewed 
provided clear administrative instructions on how to elect a lump sum, 
immediate annuity, or deferred annuity. Similarly, all packets 
provided a contact, such as a call center, for asking general 
questions about the lump sum offer. In addition, almost all the plan 
sponsors provided contact information for at least one source of 
federal assistance, typically the IRS. 

Participants responding to our questionnaire generally did not raise 
concerns related to the administrative steps needed to elect a lump 
sum or retain their annuity, or the length of time they had to make 
their decision. Specifically, most said the data included in the 
election materials (such as years of service and age) were accurate 
(29 of 37) and that they found the process of completing the paperwork 
fairly straightforward (23 of 37). Few (2 of 37) reported experiencing 
significant administrative burdens in gathering the required 
information (identification, notarized consents, etc). 

Side bar: 

Participant Quote; "Overall I think my sponsor did a good job of 
putting together very professional and helpful materials. I found the 
spreadsheet where I could adjust assumptions particularly helpful. I'm 
grateful they did such a good job providing information to help me make 
my decision, and I hope other employers do as well by their former 
employees." - 70-plus year old man; 
Source: GAO's interviews with participants. GAO-15-74. 

[End of side bar] 

Fear of Plan Default and of Outliving Assets Were Cited as Main 
Reasons for Accepting or Rejecting a Lump Sum Offer: 

A few themes emerged regarding the primary reasons participants who 
completed our questionnaire either accepted or rejected their lump sum 
offer, and how they went about making their decisions (see figure 3). 
Specifically, most participants accepting the lump sum offer were 
motivated by fear that retaining their annuity would hurt their 
prospects for a secure retirement (10 of 15), either because the 
pension plan would default on its promise (10 of 15) or because the 
plan sponsor would not manage the pension benefits responsibly (6 of 
15).[Footnote 98] In contrast, many participants who chose to reject 
the lump sum offer indicated that their retirement might be more 
secure if they retained their annuity. Specifically, most of these 
participants (17 of 22) did not think the lump sum amount would last 
as long as they expected to live and a majority (14 of 22) believed 
that the calculation was unfair or not to their benefit. 

Figure 3: Top Three Reasons Cited by Participants for Accepting or 
Rejecting a Lump Sum: 

[Refer to PDF for image: illustrated table] 

Top 3 reasons for accepting a lump sum: 

* I was worried the plan would default on its pension promise: 11 of 
15; 
* I believed I could achieve a better rate of return on the money 
myself: 7 of 15; 
* I didn't trust my plan sponsor to manage my pension benefits 
responsibly: 6 of 15. 

Top 3 reasons for rejecting a lump sum: 

* I did not think the lump sum amount would last as long as I expect 
to live: 17 of 22; 
* I believed the calculation was unfair or not to my benefit: 14 of 22; 
* I wanted the security of guaranteed payments for myself: 10 of 22. 

Source: Analysis of GAO participant-questionnaire data. GAO-15-74. 

[End of figure] 

Most participants (27 of 37) reported taking at least three steps to 
assess whether or not to accept the lump sum. Specifically, most 
participants reported conducting research using the Internet and 
reading articles about lump sum offers. Many participants (20) also 
reported trying to estimate the lump sum's value based on anticipated 
life expectancy and using various interest rates. About a third of 
participants (11 of 37) reported receiving a tool from their sponsor--
such as a spreadsheet or calculator--they could use to assess the lump 
sum offer and of those, many (7 of 11) said it was very helpful. Two 
participants who did not receive such a tool from their sponsor said 
they wished they had. Most (30 of 37) participants also consulted with 
professionals, such as financial advisors or tax professionals, to 
help them assess the lump sum offer. About a quarter of participants 
(9 of 37) reported receiving unsolicited contacts by individuals not 
formally connected with the pension plan while trying to decide 
whether to accept the lump sum. 

Side bar: 

Participant Quote; "I trust my financial advisor who has been managing 
my money for over 15 years. I brought him everything to make sure I 
wasn't missing anything." - 50-59 year old man; 
Source: GAO's interviews with participants. GAO-15-74. 

[End of side bar] 

Conclusions: 

While plan sponsors may be permitted by law to choose to offer their 
participants lump sum windows to reduce the financial risks associated 
with their defined benefit plans, the full extent of their use is 
unknown. It is apparent that lump sum windows affect a significant 
number of plan participants and can involve very large amounts of lump 
sum payments. Some of the recent lump sum window offers may have been 
driven by federal rules that may serve as cost-saving incentives for 
sponsors to take such actions. Through lump sum payments, sponsors 
transfer the risks and responsibility of retirement security away from 
themselves--and the defined benefit system more generally--and onto 
participants. As the proportion of the U.S. population over age 65 
increases, the importance of retirement security for our country's 
well-being increases as well. Yet the federal agencies charged with 
pension oversight have not been able to fully examine how these risk 
transfers impact workers and retirees--and thus cannot take steps to 
ensure any potential adverse effects on participants are minimized. 

Given the likelihood that plan sponsors will continue to use lump sum 
window offers as a means of reducing current pension liabilities, we 
share a number of the 2013 ERISA Advisory Council's concerns about 
these risk transfers. For example, the pension oversight agencies lack 
data about when and where these actions occur, who is affected, and 
how these actions impact participants. This means that the agencies 
may not have sufficient information to determine whether additional 
participant protections are needed when sponsors implement lump sum 
windows. 

For participants being asked to choose between a lifetime benefit 
option and a lump sum, it is important that they understand how the 
two compare. As our analyses show, once a participant cashes out a 
lifetime annuity by taking a lump sum, the participant's retirement 
savings can be diminished in a number of ways or used on other 
expenses. Participants may not be aware of the effect that certain 
allowable assumptions used to determine their lump sum--such as 
outdated mortality tables and favorable "lookback" interest rates--may 
have on their ultimate payment amount. In most cases, the lump sum 
payment received is unlikely to purchase an equivalent annuity on the 
retail annuity market. Furthermore, the lump sum is exposed to 
potential erosion over the years, as the participant assumes all the 
risks inherent in managing both the investment and drawdown of their 
lump sum amount. Regrettably, such challenges may become more acute as 
the participant ages and the effort required for sound financial 
management becomes more burdensome. Ultimately, the greatest risk 
associated with accepting a lump sum is the risk of outliving it, 
which may occur despite the most savvy management. 

Participants presented with a lump sum offer may not have a full 
appreciation of the range of risks involved in forfeiting their 
lifetime annuity under their sponsor's plan. While we found that some 
sponsors did a commendable job in their efforts to inform participants 
about their benefit choices, it is notable that such efforts often 
fell short of fully preparing the participant to make an informed 
decision based on many of the eight key factors we identified. The 
relative value statements were often confusing, explanations of how 
the lump sum was calculated were often lacking, and many participants 
did not understand the PBGC protections they would be giving up by 
taking a lump sum. 

Recommendations for Executive Action: 

To ensure that federal regulators have better information about lump 
sum windows and to better ensure that participants have ready access 
to key information they need to make a decision when presented with a 
lump sum offer, the Department of Labor should: 

1. Require plan sponsors to notify DOL at the time they implement a 
lump sum window offer, including the number and category of 
participants being extended the offer (e.g., separated vested; 
retiree) as well as examples of the materials provided to them. 

2. Coordinate with IRS and PBGC to clarify the guidance regarding the 
information sponsors should provide to participants when extending 
lump sum window offers and place the guidance on the agency's website. 
Guidance should include clear and understandable presentations of 
information, such as the relative value of the lump sum, the role and 
level of protections provided by PBGC, and the positive and negative 
ramifications of accepting the lump sum. Such guidance could also 
include promising practices for information materials from plan 
sponsors which are particularly effective in facilitating informed 
participant decision-making. 

In addition, to provide participants with useful information and to 
provide for lump sums that are based on up-to-date assumptions, 
Treasury should: 

1. Review its regulations governing the information contained in 
relative value statements to ensure these statements provide a 
meaningful comparison of all benefit options, especially in instances 
where the loss of certain additional plan benefits may not be 
disclosed. 

2. Review the applicability and appropriateness of allowing sponsors 
to select a "lookback" interest rate for use in calculating lump sums 
associated with a lump sum window that can serve to advantage the 
interests of the sponsor. 

3. Establish a process and a timeline for periodically updating the 
mortality tables used to determine minimum required lump sums--
including a means for monitoring when experts' views may indicate that 
mortality tables may have become outdated, and for taking expedited 
action if warranted. 

Agency Comments: 

We provided a draft of this report to DOL, Treasury (including IRS), 
and PBGC for their review and comment. Treasury and PBGC did not 
provide written comments. DOL provided written comments, which are 
reproduced in appendix III. DOL, Treasury (on behalf of IRS) and PBGC 
provided technical comments, which we incorporated where appropriate. 
In oral comments, Treasury officials generally agreed with our 
recommendations. 

In its written comments, DOL generally agreed with the findings and 
conclusions of the report. They noted the challenges participants may 
face when they take on the risks of pension management themselves. 
Specifically, DOL noted that EBSA is especially committed to 
increasing awareness of lifetime income options because participants 
are increasingly taking on many retirement management 
responsibilities. GAO agrees that increasing awareness of lifetime 
income options in retirement is a worthy goal. Additionally, 
understanding the scope of lump sum window offers and the 
informational needs participants have under such offers could help 
focus efforts to educate participants on the importance of lifetime 
income options at the point of decision. 

DOL generally agreed with the recommendations of the report. 
Specifically, they agreed that the type of information that would be 
collected pursuant to our first recommendation would be helpful in 
determining the extent to which lump sum window offers are made and 
the types of disclosures participants receive. However, DOL noted that 
ERISA does not clearly grant the department the authority to impose 
such a requirement on plan sponsors and said that it will be necessary 
for EBSA to determine whether DOL has such authority. We agree that 
DOL should determine whether there is any action it could take within 
the scope of its existing authority to implement this recommendation. 
Should DOL conclude as a result of its analysis that the department 
lacks authority to require plan sponsors to notify the department at 
the time they implement a lump sum window, we would encourage DOL to 
pursue appropriate legislative changes. 

DOL agreed with the second recommendation on coordinating with 
Treasury (including IRS) and PBGC to clarify guidance regarding 
information sponsors should provide to participants when extending a 
lump sum window offer. They noted the manner of publishing such 
guidance would depend on the coordination process with IRS and PBGC. 

As agreed with your office, unless you publicly announce the contents 
of this report earlier, we plan no further distribution of this report 
until 30 days from the report date. We are sending copies of this 
report to the Secretary of Labor, the Secretary of the Treasury, 
Commissioner of Internal Revenue, the Acting Director of PBGC, and 
other interested parties. This report is also available at no charge 
on the GAO website at [hyperlink, http://www.gao.gov]. 

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

Sincerely yours, 

Signed by: 

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

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

Our objectives were to examine 1) the extent to which sponsors of 
defined benefit plans are transferring risk through the use of lump 
sum windows, and the incentives for sponsors to take such actions, 2) 
the implications for participants who accept a lump sum payment, and 
3) the extent to which sponsors' lump sum window informational 
materials enable participants to make an informed decision. To address 
these objectives we collected and analyzed available information about 
pension risk transfers. We also interviewed managers from three plan 
sponsors and other stakeholders, such as consultants, insurance 
company representatives, independent fiduciaries, and subject matter 
experts. In addition, we administered a questionnaire to plan 
participants, interviewed selected participants, and collected and 
analyzed disclosure materials given to participants. We developed a 
lump sum calculator to analyze lump sum calculations. Lastly, we 
reviewed literature, as well as federal laws and regulations relevant 
to pension risk transfers. We conducted this performance audit from 
March 2013 to January 2015 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. 

Literature Review and Legal Analysis: 

We reviewed literature, laws, and regulations relevant to risk 
transfer activities. Most literature was obtained from ERISA Advisory 
Council testimonies, pension expert and consultant presentations, and 
other materials obtained during pension-related conferences, as well 
as publications and whitepapers issued by subject matter experts, 
pension-related organizations, business associations, consulting 
firms, and insurance companies. Legal research primarily focused on 
the Employee Retirement Income Security Act of 1974 (ERISA), Pension 
Protection Act of 2006 (PPA), Moving Ahead for Progress in the 21st 
Century Act (MAP-21), and the Internal Revenue Code, but also included 
additional research on laws and regulations governing retirement 
income, benefit distributions, and participant disclosures. 

Data Collection for Pension Risk Transfer Actions: 

We used a variety of sources to collect information about recent 
pension risk transfer actions that U.S. plan sponsors have taken. 
Prior to identifying these actions, we asked relevant federal agency 
officials and pension experts what sources of information were 
available and we were told such sources were limited. To identify 
sponsors who had implemented a lump sum window during 2012, we first 
used lists provided to us by the Pension Benefit Guaranty Corporation 
(PBGC) officials and the Pension Rights Center. We verified the lists 
to the extent possible, primarily with information contained in 
sponsors' SEC filings and corporate reports. We removed sponsors from 
the lists if we could not find sufficient evidence that they had 
performed a lump sum window during 2012. 

We made efforts to contact managers associated with 18 risk transfer 
actions in order to collect additional information and schedule 
interviews. For all but three sponsors, we either were not able to 
establish contact with the appropriate manager, the sponsor was 
unresponsive to our efforts, or we were told that the sponsor did not 
wish to participate in our study. During the interviews with the three 
sponsors who agreed to speak with us, we asked questions regarding the 
lump sum window implementation process they followed, the reasons 
behind their decision to transfer pension risk, and to the extent 
possible, the outcomes of the action. In some cases, we also collected 
informational materials that had been provided to participants offered 
lump sums. 

To supplement the sponsor interviews, we interviewed other 
stakeholders, such as pension consultants, insurance company 
representatives, an independent fiduciary, and subject matter experts. 
We asked them about several aspects related to lump sum offers, such 
as recent trends, what is driving the practice, and their potential 
effect on plan participants. We also reviewed written reports, papers, 
and studies conducted by consulting firms and other pension experts to 
gain a better understanding about the prevalence of pension risk 
transfers, in general, and why sponsors may be conducting or 
considering them. 

Data Collection for Participant Disclosure Materials and Participant 
Experiences: 

To collect information to provide the participant perspective of lump 
sum windows, we first used social media to identify corporate alumni 
groups associated with the sponsors we had identified as having 
offered lump sums during 2012. From those groups we solicited 
participants who had been offered lump sums and received over 65 
responses from participants who were interested in participating in 
our study. From those, we selected 37 participants across as many 
sponsors as possible. To those individuals we administered a 
questionnaire that asked them to provide information on their overall 
experience when offered a lump sum, what they considered when making 
their decision, their opinion on the understandability and usefulness 
of the information packet they had received from the sponsor, and why 
they ultimately made the choice they did. We also conducted phone 
interviews with 33 of the 37 participants in order to gain additional 
insight into their questionnaire responses, and to supplement the 
information captured by the instrument. We did not independently 
verify information presented by participants in these interviews. 
Consequently, no legal conclusions can be drawn from our work as to 
whether plan sponsors complied with any applicable legal requirements. 

Our selection of participants to survey was also designed to yield a 
group of participants that represented a relatively broad variety of 
attributes, such as gender, age, and whether they had accepted the 
lump sum offer or not. The selected participants represented 11 
different sponsors. Most of these individuals were ages 50 to 59, with 
the remaining individuals fairly evenly split between the 40 to 49 and 
60 to 69 year old age groups. Almost all the participants had been 
salaried employees. Most individuals in the survey group were 
currently working full time. Most, including those who were working 
and those who were fully retired, had other sources of retirement 
income in addition to the defined benefit plan for which they were 
offered a lump sum, including Individual Retirement Accounts, 401(k) 
or 403(b) plans, and Social Security benefits. Of these 37 
participants, 15 accepted the lump sum offer and 22 rejected the lump 
sum offer. While not generalizable, we used the participants' 
responses from the questionnaires and phone interviews to inform our 
discussion about the factors participants weighed when making their 
benefit choices. 

In addition, we developed a lump sum calculator to generate lump sum 
amounts based on participant information obtained during our 
interviews, such as age, gender, and deferred annuity amount. Using 
the calculator, we mimicked sponsor lump sum calculations to gain a 
better understanding of how mandated assumptions affect lump sum 
amounts, and how changes in those assumptions affected amounts for 
participants across differing ages and gender. For details of those 
analyses, see appendix II. 

Factors for Analyzing Packets: 

During participant interviews we asked participants if they could 
provide us the written materials that sponsors gave them when offering 
the lump sum. We asked participants to redact any personally 
identifiable information such as names or offer amounts, and asked for 
as many materials as they could provide. Because these materials were 
participant-provided, we cannot be certain whether the materials we 
reviewed were accurate and complete representations of the materials 
provided by each sponsor to its affected participants. Similarly, 
participants provided us materials in hardcopy, so, for example, 
materials that sponsors provided electronically might not have been 
transmitted to GAO unless the participant had printed and retained 
this information. Electronic information likely would have been 
password protected and not available for GAO's review. We collected at 
least one packet for each of the 11 sponsors executing lump sum offers 
to the participants we interviewed. These 11 sponsors represent, 
according to our review of SEC filings, about 248,000 participant 
offers. 

To analyze participant packets, we identified eight key areas of 
information participants would need to understand in order to make an 
informed decision about a lump sum offer.[Footnote 99] To identify 
these areas, we gathered information from federal agencies, the ERISA 
Advisory Council, financial advisors, investment firms, financial 
services firms, participant advocacy groups, and federal laws and 
regulations. Since these key factors were gathered from diverse 
sources, they were also vetted and reviewed by GAO's Chief Actuary and 
a research methodologist to ensure they could be applied when we 
analyzed the materials for informational content. 

To apply the eight key factors to the informational materials, we 
identified specific pieces of information, or sub-factors, that the 
packet would need to contain in order to fully satisfy the main 
factor. GAO developed decision rules for each main factor regarding 
how many of these sub-factors were needed in order to fully satisfy 
the main factor. Under these decision rules, for seven of the eight 
key factors, all sub-factors needed to be present to fully satisfy the 
main factor. However, for one of the eight factors, our decision rule 
only required that one of the elements be present. Specifically, for 
our factor on "What are the potential positive and negative 
ramifications of accepting the lump sum?," we identified many 
potential positive or negative ramifications that could be highlighted 
in the materials, but specified that a packet only need to list at 
least one negative ramification of accepting the lump sum to satisfy 
this factor. Table 3 has more detail on the extent to which the 
packets, in aggregate, met our main factors and sub-factors. 

Table 3: Overview of GAO's Informational Review of 11 Lump Sum Offer 
Packets: 

Key questions participants need answered in order to make an informed 
decision: 
1. What benefit options are available? 
Number of packets fully answering these key questions[A]: 9; 
The specific details GAO looked for to assess if the packets included 
the information necessary to answer the key questions [and the number 
of packets containing those details][A]: 
* Amount of the lump sum offer [all 11]; 
* Amount of the deferred annuity, starting at normal retirement age 
for terminated vested participants; or the current annuity payment, 
for participants already in pay status [9 of 11]; 
* Amount of the immediate annuity, for terminated vested participants; 
or alternate annuity form, for participants already in pay status [all 
11]. 

Key questions participants need answered in order to make an informed 
decision: 
2. How was the lump sum calculated? 
Number of packets fully answering these key questions[A]: 2; 
The specific details GAO looked for to assess if the packets included 
the information necessary to answer the key questions [and the number 
of packets containing those details][A]: 
* Mortality assumptions used in calculating the lump-sum clearly shown 
[4 of 11]; 
* Interest rates used and their effect on the lump sum amount [3 of 
11]; 
* Whether any additional plan benefits were included in the 
calculation or not [5 of 11]. 

Key questions participants need answered in order to make an informed 
decision: 
3. What is the relative value of the lump sum versus the monthly 
annuity (both immediate and deferred)? 
Number of packets fully answering these key questions[A]: 0; 
The specific details GAO looked for to assess if the packets included 
the information necessary to answer the key questions [and the number 
of packets containing those details][A]: 
* Relative value notice [all 11]; 
* Difference between an annuity, or stream of payments, and a lump-sum 
is explained clearly [all 11]; 
* Concept of present value clearly explained [3 of 11]; 
* Discussed fact that it might cost more than the lump-sum amount to 
buy the current annuity benefits on the open market [0 of 11]. 

Key questions participants need answered in order to make an informed 
decision: 
4. What are the potential positive and negative ramifications of 
accepting the lump sum? 
Number of packets fully answering these key questions[A]: 11; 
The specific details GAO looked for to assess if the packets included 
the information necessary to answer the key questions [and the number 
of packets containing those details][A]: 
* Potential positive ramifications discussed [6 of 11]; 
* Potential negative ramifications discussed [all 11]. 

Key questions participants need answered in order to make an informed 
decision: 
5. What are the tax implications of accepting a lump sum? 
Number of packets fully answering these key questions[A]: 11; 
The specific details GAO looked for to assess if the packets included 
the information necessary to answer the key questions [and the number 
of packets containing those details][A]: 
* Rollover options and their tax implications presented [all 11]; 
* Potential early distribution penalties discussed [all 11]. 

Key questions participants need answered in order to make an informed 
decision: 
6. What is the role of the Pension Benefit Guaranty Corporation and 
what level of protection does PBGC provide for each benefit option? 
Number of packets fully answering these key questions[A]: 2; 
The specific details GAO looked for to assess if the packets included 
the information necessary to answer the key questions [and the number 
of packets containing those details][A]: 
* PBGC protections discussed [2 of 11]; 
* Maximum level of PBGC protections discussed [2 of 11]. 

Key questions participants need answered in order to make an informed 
decision: 
7. How do I accept or reject the lump sum offer? 
Number of packets fully answering these key questions[A]: 11; 
The specific details GAO looked for to assess if the packets included 
the information necessary to answer the key questions [and the number 
of packets containing those details][A]: 
* Instructions for making a lump sum election presented clearly [all 
11]; 
* Instructions for electing an immediate annuity or a new form of 
annuity presented clearly [all 11]; 
* Instructions for electing to keep the deferred annuity or current 
annuity payments presented clearly [all 11]; 
* Deadlines for making an election presented clearly [all 11]; 
* Instructions make it clear that a spouse must grant consent in order 
to elect to receive a lump sum [all 11]. 

Key questions participants need answered in order to make an informed 
decision: 
8. Where can I get more information or assistance? 
Number of packets fully answering these key questions[A]: 9; 
The specific details GAO looked for to assess if the packets included 
the information necessary to answer the key questions [and the number 
of packets containing those details][A]: 
* Contact method provided for general questions [all 11]; 
* Source for federal assistance provided [9 of 11]. 

Source: GAO analysis of 11 lump sum offer packets using eight GAO 
factors developed from a GAO analysis of 18 publications by federal 
agencies, the ERISA Advisory Council, financial advisors, investment 
firms, financial services firms, and participant advocacy groups, as 
well as federal law and regulation. GAO-15-74. 

[A] Our limited review of these materials did not constitute a 
compliance review, so we did not reach any determinations as to 
whether individual sponsors complied with any applicable legal 
requirements in providing materials to their participants. 
Accordingly, the numbers presented in these columns cannot be read as 
indicating that any plan sponsors either complied with or failed to 
comply with any applicable legal requirements. 

[End of table] 

As noted earlier, this review was an information review and did not 
constitute a compliance or legal review. Our only purpose in 
conducting this review was to determine whether the information 
packets provided to participants in connection with lump sum offers 
contained sufficient information to enable them to make informed 
decisions. Consequently, no legal conclusions can be drawn from our 
work as to whether plan sponsors complied with any applicable legal 
requirements. As with the development of these factors for analyzing 
the information packets, the process for implementing the factors was 
vetted and reviewed by GAO's Chief Actuary and a research 
methodologist. An analyst reviewed the materials for informational 
content based on the implementation sub-factors and a second, 
independent analyst verified the process and validated determinations 
of the review. 

[End of section] 

Appendix II: Lump Sum Calculations and Additional Figures: 

Basic Components of the Lump Sum Calculation: 

At the most basic level, determining a lump sum is converting a stream 
of projected future monthly benefits into a present value. A present 
value is the current worth of a future sum of money or stream of cash 
flows given a specified rate of return, also known as an interest rate 
or discount rate. The future cash flows are discounted at the discount 
rate, and the higher the discount rate, the lower the present value. 
[Footnote 100] In the context of a monthly benefit provided by a 
defined benefit pension plan, the stream of payments generally 
commences at an age specified by the plan, known as the normal 
retirement age, or at an optional early retirement age for eligible 
participants, and ends when the participant dies (or when the later of 
the participant and beneficiary dies, for a joint annuity).[Footnote 
101] How long the stream of benefits will last depends on how long the 
participant lives, and lump sums take into account the probability 
that the participant will be alive at each future date. A mortality 
table is a common actuarial convention which shows, for each age, the 
probability that a person will die before his or her next birthday. 
[Footnote 102] 

Section 417(e)(3) of the Internal Revenue Code (26 U.S.C. § 
417(e)(3)),[Footnote 103] together with regulatory guidance, specifies 
the interest rates and mortality tables for determining the minimum 
present value of an annuity, and thus the minimum value of a lump sum. 
Specifically, the interest rates are published by the Internal Revenue 
Service (IRS), with the Pension Protection Act of 2006 (PPA) requiring 
that minimum lump sums be calculated using three different corporate 
interest rates based on segments of a corporate bond yield curve. 
[Footnote 104] The first segment is a short-term corporate bond 
interest rate applied to projected pension payments payable within 5 
years; the second segment is a medium-term corporate bond interest 
rate applied to payments payable 5 years or more, but less than 20 
years, into the future; and the third segment is a long-term corporate 
bond interest rate applied to payments payable in 20 years or more. 

Description of Our Lump Sum Calculations: 

We constructed a calculator of minimum lump sums to show some of the 
effect certain methods and assumptions can have on the calculation. We 
constructed a number of illustrative individuals to show how the 
minimum lump sums may vary according to key participant 
characteristics, namely age, gender, and retirement age, and key input 
calculation parameters, namely interest rates, mortality tables, and 
the inclusion or exclusion of certain additional plan benefits. While 
we performed lump sum calculations across a number of illustrative 
individuals, throughout this appendix we present the results for 
single individuals in 10-year age increments, from age 35 to age 95. 
We assumed all individuals are full integer ages--that is, the 
participant has his or her birthday on the measurement date of the 
lump sum offer. For terminated vested participants, we assumed a 
normal retirement age of 65. For retired participants, the present 
value of their lump sum is calculated and commences at their current 
age and is based on the remaining payments that are expected to be due 
from that point forward. Technically, our calculator projects an 
annual lump sum factor, which produced a lump sum based on an annual 
benefit. We used a common actuarial adjustment factor to account for 
monthly payments. 

We verified our lump sum calculations in two ways. First, when we 
started our study we asked Pension Benefit Guaranty Corporation (PBGC) 
officials with actuarial expertise to furnish us with lump sum amounts 
based on varying age and benefit commencement assumptions using 
various mortality and interest rate assumptions consistent with § 
417(e)(3).[Footnote 105] We were able to replicate their calculations, 
as we planned to base our calculations on annual benefit amounts, and 
asked the officials to perform the calculation using such a method. 
Additionally, to determine if we could come reasonably close to actual 
offers, we reviewed lump sum offers in two participant packets for 
which we had enough information to calculate or approximate the lump 
sum in that packet. Our calculations differed by 1.5 percent and 
nearly zero percent for the two offers we reviewed. The 1.5 percent 
difference is very modest and may be due to the fact that the birth 
date or the date of normal retirement age of the participant we used 
differed from the date of the offer by a few calendar months. Based on 
these small differences, and since our purpose was to then estimate 
changes to lump sums based on changes in certain assumptions, we 
deemed our calculator to be adequate for such purposes. 

Figures and Results: 

We discuss our lump sum results below and show how values can change 
depending on certain key factors. Generally, we are comparing 
alternative assumptions to our baseline assumptions. We found, of the 
materials we reviewed, that many of the lump sum election windows 
occurred between September and December 2012. Based on our review of 
election materials, we found that many of these sponsors elected to 
use August 2011 interest rates for the 2012 plan year. Thus, our 
"baseline" assumption is an offer made in October 2012, using a 
methodology under § 417(e)(3) for August 2011 interest rates for the 
2012 plan year, along with the IRS published unisex mortality table 
for the 2012 plan year, and without including any additional plan 
benefits. Comparisons and deviations from this baseline are noted with 
the figures. 

Figure 4 compares, for our range of ages, the PPA interest rate basis 
(our baseline) against the pre-PPA interest rate basis for minimum 
lump sums, for a lump sum payment offer made in October 2012. As 
noted, our baseline uses August 2011 corporate bond segment rates (for 
the 2012 plan year), which under PPA uses corporate bond rates 
published by IRS as the interest rate used to determine minimum 
required lump sums. The comparison uses the August 2011 30-year 
Treasury Securities Rate (TSR), as the 30-year TSR was used to 
determine minimum required lump sums prior to PPA. Figure 4 shows that 
lump sum payments are most disparate for younger individuals. This 
occurs because these individuals have their payments discounted at the 
second or third segment rates, which are much higher than the 30-year 
TSR in this instance, and because lump sum amounts for younger 
participants are more sensitive to changes in interest rates because 
of the greater length of the discounting period. As shown, minimum 
lump sums for 35-year-old participants would have increased by 142 
percent if an August 2011 30-year TSR was used instead of the baseline. 

Figure 4: PPA Interest Rates Compared to Pre-PPA Interest Rates at 
Selected Ages, with Lump Sum Payment Based on a $10,000 Annual Benefit 
Due at Age 65: 

[Refer to PDF for image: vertical bar graph] 

Amount of lump sum: 

Age of recipient: 35; 
August 2011 segment rates (2012 plan year): $17,967; 
3.65 percent 30-year Treasury Securities Rate (for August 2011): 
$43,479; 
Percentage change in lump sum: 142%. 

Age of recipient: 45; 
August 2011 segment rates (2012 plan year): $32,453; 
3.65 percent 30-year Treasury Securities Rate (for August 2011): 
$62,643; 
Percentage change in lump sum: 93%. 

Age of recipient: 55; 
August 2011 segment rates (2012 plan year): $67,019; 
3.65 percent 30-year Treasury Securities Rate (for August 2011): 
$90,805; 
Percentage change in lump sum: 35%. 

Age of recipient: 65; 
August 2011 segment rates (2012 plan year): $124,523; 
3.65 percent 30-year Treasury Securities Rate (for August 2011): 
$136,287; 
Percentage change in lump sum: 9%. 

Age of recipient: 75; 
August 2011 segment rates (2012 plan year): $91,866; 
3.65 percent 30-year Treasury Securities Rate (for August 2011): 
$95,390; 
Percentage change in lump sum: 4%. 

Age of recipient: 85; 
August 2011 segment rates (2012 plan year): $56,031; 
3.65 percent 30-year Treasury Securities Rate (for August 2011): 
$56,094; 
Percentage change in lump sum: 0. 

Age of recipient: 95; 
August 2011 segment rates (2012 plan year): $31,766; 
3.65 percent 30-year Treasury Securities Rate (for August 2011): 
$31,257; 
Percentage change in lump sum: -2%. 

Source: GAO analysis of U.S. Department of the Treasury (Internal 
Revenue Service) data. GAO-15-74. 

Note: Analysis assumes a $10,000 annual benefit (or $833 monthly). The 
annuity begins at the normal retirement age of 65, for those below age 
65. For those older than age 65, the participant is assumed to be in 
receipt of benefits and thus participant's lump sum is determined 
using their current age. The August 2011 corporate bond segment rates 
(for the 2012 plan year) for payments due in less than 5 years, 5 to 
20 years, or more than 20 years are 1.85, 4.62, and 6.02 percent, 
respectively. The August 2011 30-year Treasury Securities Rate is 3.65 
percent. Both scenarios use the 2012 mortality table under § 417(e)(3). 

[End of figure] 

Figure 5 compares the effect of using the "lookback" interest rates 
that sponsors are allowed to select (our August 2011 interest rates 
baseline used for the 2012 plan year) against using interest rates as 
of the month immediately preceding the month of the lump sum offer 
(September 2012 rates). As noted previously, sponsors may elect a 
stability period of one year with a maximum lookback of 5 months. This 
means that the rates used at the time of the offer may be nearly 17 
months old compared to rates that are current just before the offer. 
As shown, minimum lump sums would have been higher at all ages, as 
much as 65 percent higher for 35-year-olds, if more current interest 
rates were used instead of the "lookback" rates. 

Figure 5: Effect of "Lookback" Rates on Lump Sum Payments at Selected 
Ages, with Payment Based on a $10,000 Annual Benefit Due at Age 65: 

[Refer to PDF for image: vertical bar graph] 

Amount of lump sum: 

Age of recipient: 35; 
August 2011 segment rates (2012 plan year): $17,967; 
September 2012 segment rates (2012 plan year): $29,558; 
Percentage change in lump sum factor: 65%. 

Age of recipient: 45; 
August 2011 segment rates (2012 plan year): $32,453; 
September 2012 segment rates (2012 plan year): $46,967; 
Percentage change in lump sum factor: 45%. 

Age of recipient: 55; 
August 2011 segment rates (2012 plan year): $67,019; 
September 2012 segment rates (2012 plan year): $81,633; 
Percentage change in lump sum factor: 22%. 

Age of recipient: 65; 
August 2011 segment rates (2012 plan year): $124,523; 
September 2012 segment rates (2012 plan year): $135,548; 
Percentage change in lump sum factor: 9%. 

Age of recipient: 75; 
August 2011 segment rates (2012 plan year): $91,866; 
September 2012 segment rates (2012 plan year): $97,328; 
Percentage change in lump sum factor: 6%. 

Age of recipient: 85; 
August 2011 segment rates (2012 plan year): $56,031; 
September 2012 segment rates (2012 plan year): $58,074; 
Percentage change in lump sum factor: 4%. 

Age of recipient: 95; 
August 2011 segment rates (2012 plan year): $31,766; 
September 2012 segment rates (2012 plan year): $32,476; 
Percentage change in lump sum factor: 2%. 

Source: GAO analysis of U.S. Department of the Treasury (Internal 
Revenue Service) data. GAO-15-74. 

Note: Analysis assumes a $10,000 annual benefit (or $833 monthly). The 
annuity begins at the normal retirement age of 65, for those below age 
65. For those offers made at or after age 65, the participant is 
already receiving the annuity and the lump sum is calculated at the 
participant's current age. The August 2011 corporate bond segment 
rates (assumed lookback rates used for the 2012 plan year) for 
payments due in less than 5 years, 5 to 20 years, or more than 20 
years are 1.85, 4.62, and 6.02 percent respectively (baseline). The 
alternative scenario uses the corporate bond segment rates as of 
September 2012, which is the month preceding the lump sum offer in 
this scenario. The September 2012 interest rates are 1.02, 3.71, and 
4.67 percent. Both scenarios use the 2012 mortality table under § 
417(e)(3). 

[End of figure] 

Figure 6 compares the effect of using current prescribed mortality 
tables (baseline) against using more up-to-date mortality tables on a 
participant's minimum lump sum amount at selected ages. Here we show 
lump sums that are calculated using the new mortality tables and 
projection scales devised by the Retirement Planning Experience 
Committee of the Society of Actuaries and compare that to the current 
mortality tables used for lump sum payments under § 417(e)(3). 
[Footnote 106] The differences in lump sum values, which are also 
sensitive to the assumed interest rate, vary significantly depending 
on the age of the participant. As shown, the more up-to-date mortality 
method improves lump sums by as little as 5 percent for 95-year-olds 
but as much as 13 percent for 35-year-olds. 

Figure 6: Effect of Current versus Future Mortality Tables, with 
Payment Based on a $10,000 Annual Benefit Due at Age 65: 

[Refer to PDF for image: vertical bar graph] 

Amount of lump sum: 

Age of recipient: 35; 
§ 417(e)(3) 2012 mortality: $17,967; 
RP-2014 base mortality using MP-2014 scale (generational projection 
beginning in 2012): $20,390; 
Percentage change in lump sum factor: 13%. 

Age of recipient: 45; 
§ 417(e)(3) 2012 mortality: $32,453; 
RP-2014 base mortality using MP-2014 scale (generational projection 
beginning in 2012): $35,944; 
Percentage change in lump sum factor: 11%. 

Age of recipient: 55; 
§ 417(e)(3) 2012 mortality: $67,019; 
RP-2014 base mortality using MP-2014 scale (generational projection 
beginning in 2012): $72,390; 
Percentage change in lump sum factor: 8%. 

Age of recipient: 65; 
§ 417(e)(3) 2012 mortality: $124,523; 
RP-2014 base mortality using MP-2014 scale (generational projection 
beginning in 2012): $132,977; 
Percentage change in lump sum factor: 7%. 

Age of recipient: 75; 
§ 417(e)(3) 2012 mortality: $91,866; 
RP-2014 base mortality using MP-2014 scale (generational projection 
beginning in 2012): $101,387; 
Percentage change in lump sum factor: 10%. 

Age of recipient: 85; 
§ 417(e)(3) 2012 mortality: $56,031; 
RP-2014 base mortality using MP-2014 scale (generational projection 
beginning in 2012): $62,819; 
Percentage change in lump sum factor: 12%. 

Age of recipient: 95; 
§ 417(e)(3) 2012 mortality: $31,766; 
RP-2014 base mortality using MP-2014 scale (generational projection 
beginning in 2012): $33,202; 
Percentage change in lump sum factor: 5%. 

Source: GAO analysis of U.S. Department of the Treasury (Internal 
Revenue Service) data. GAO-15-74. 

Note: Analysis assumes a $10,000 annual benefit (or $833 monthly). The 
annuity begins at the normal retirement age of 65, for those below age 
65. For those offers made at or after age 65, the participant is 
already receiving the annuity and the lump sum is calculated at the 
participant's current age. Both lump sum payments use the same August 
2011 interest rates (for the 2012 plan year) of 1.85, 4.62, and 6.02 
percent. 

[End of figure] 

Figure 7 compares baseline lump sums against an estimate of what they 
would be if based on group annuity purchase rates. It shows how a lump 
sum payment, calculated in 2012 using sponsor-elected August 2011 
corporate bond interest rates (for the 2012 plan year) and the 
prescribed mortality tables, would compare to lump sum payments 
calculated in the month before the offer was made, or September 2012, 
using the interest rate, mortality assumptions, and loading factors 
used by PBGC. This method uses the survey that PBGC takes of recent 
prices of group annuities to derive the interest factors that are used 
to calculate the present value of future benefit-payment obligations 
under section 4044 of the Employee Retirement Income Security Act of 
1974 (ERISA). These future benefits are obligations that PBGC must pay 
to participants in the plans that they have taken over as trustee. 
[Footnote 107] 

As observed earlier in the report, figure 7 shows that lump sum 
payments under the minimum method prescribed under § 417(e)(3) can be 
significantly smaller than the lump sums that would be necessary to 
repurchase an annuity that matches the benefit forgone under the 
participant's plan. In this case, and because retail annuity data is 
not easily available, we used a group annuity methodology consistent 
with PBGC section 4044 assumptions.[Footnote 108] For example, a 55-
year-old female would receive a lump sum payment of $67,020 under the 
§ 417(e)(3) minimum, while she would need $114,460, or a 71 percent 
larger lump sum, to purchase an annuity that would have been provided 
under her plan (in this case, a $10,000 annual, or $833 monthly, 
benefit starting at age 65). As noted earlier in the report, group 
annuities are generally only available to large pension plans, and 
retail annuities are generally more expensive due to adverse selection 
and administrative charges or other fees, so an individual would 
likely need an even larger lump sum payment to replicate their prior 
benefit on the retail market. 

Figure 7: Lump Sum Payments Based on § 417(e)(3) Methodology and Sex-
specific PBGC Group Annuity Methodology, with Payment Based on a 
$10,000 Annual Benefit Due at Age 65: 

[Refer to PDF for image: vertical bar graph] 

Amount of lump sum: 

Age of recipient: 35; 
PBGC Section 4044 methodology: 
Women: $55,965; 
Men: $50,495; 
§ 417(e)(3) methodology: $17,967; 
Percentage change in lump sum: 
Women: 211%; 
Men: 181%. 

Age of recipient: 45; 
PBGC Section 4044 methodology: 
Women: $80,484; 
Men: $72,921; 
§ 417(e)(3) methodology: $32,453;
Percentage change in lump sum: 
Women: 148%; 
Men: 125%. 

Age of recipient: 55;
PBGC Section 4044 methodology: 
Women: $114,463; 
Men: $104,267; 
§ 417(e)(3) methodology: $67,019; 
Percentage change in lump sum: 
Women: 71%; 
Men: 56%. 

Age of recipient: 65;
PBGC Section 4044 methodology: 
Women: $162,970; 
Men: $150,152; 
§ 417(e)(3) methodology: $124,523
Percentage change in lump sum: 
Women: 31%; 
Men: 21%. 

Age of recipient: 75; 
PBGC Section 4044 methodology: 
Women: $116,887; 
Men: $103,350; 
§ 417(e)(3) methodology: $91,866
Percentage change in lump sum: 
Women: 27%; 
Men: 13%. 

Age of recipient: 85; 
PBGC Section 4044 methodology: 
Women: $69,723; 
Men: $60,098; 
§ 417(e)(3) methodology: $56,030
Percentage change in lump sum: 
Women: 24%; 
Men: 7%. 

Source: GAO analysis of U.S. Department of the Treasury (Internal 
Revenue Service) data. GAO-15-74. 

Note: Analysis assumes a $10,000 annual benefit (or $833 monthly). The 
annuity begins at the normal retirement age of 65, for those below age 
65. For those age 65 or older, the participant receives an immediate 
annuity and the lump sum or annuity price is calculated at the 
participant's current age. This figure compares lump sums determined 
under the minimum required methodology that we found prevalent in 
participant materials against lump sums that were determined using the 
group annuity methodology published by PBGC, applicable to the time of 
the offer. The statutory minimum lump sums use the August 2011 
interest rates (for the 2012 plan year) of 1.85, 4.62, and 6.02 
percent using the unisex mortality table prescribed under § 417(e)(3). 
These lump sums are compared against lump sums using the PBGC section 
4044 interest rate and mortality assumptions--including a loading 
factor consistent with such assumptions--for September 2012. The 
September 2012 interest rate is 2.95 percent for payments due within 
20 years, and 3.66 for payments due beyond 20 years. We assume 
September 2012 rates because this is the rate in the month prior to 
October 2012, when we note a number of offers were made. 

[End of figure] 

Figure 8 illustrates the potential effect of excluding certain 
additional plan benefits from the lump sum calculation by looking at 
one type of additional plan benefit, subsidized early retirement--in 
this case, a plan with a normal retirement age of 65 but that offers 
unreduced early retirement at age 60. It compares the baseline lump 
sum that assumes retirement at age 65, versus a calculation that 
includes the value of the additional plan benefit by assuming the 
participant would have retired at age 60. This analysis assumes that 
the participant is eligible for, or could become eligible for, such 
early retirement under the plan. Figure 8 shows that only those 
participants who have not reached retirement age (or early retirement 
age) are impacted by the early retirement provision. This occurs 
because these participants will receive their benefits in the future. 
Those age 65 or older are already eligible or receiving monthly 
benefits under the plan at the time of their lump sum offer. A few (3) 
participants we interviewed noted that they believed they would 
qualify for early retirement under their plan, but we were unable to 
determine if they were indeed eligible. Formal eligibility aside, 
participants may find it useful to know how much their lump sum would 
be if the early retirement subsidy were included so they can 
understand the impact it might have on their lump sum offer. The 
differences in lump sum payments can be significant. For example, in 
figure 8, a 55-year-old participant would receive a $67,020 lump sum 
payment if the normal retirement age of 65 is assumed. However, if the 
plan benefits are assumed to be payable at the early retirement age of 
60, the same participant would receive $101,780 --or a 52 percent 
larger lump sum. 

Figure 8: Lump Sum Payments Based on § 417(e)(3) Methodology Using 
Plan Normal Retirement Age and Early Retirement Age, by Selected Ages, 
with Payment Based on a $10,000 Annual Benefit Due at Age 65: 

[Refer to PDF for image: vertical bar graph] 

Amount of lump sum: 

Age of recipient: 35; 
Age 65 (normal retirement age): $17,967; 
Age 60 (early full retirement): $27,574; 
Percentage change in lump sum factor: 53%. 

Age of recipient: 45; 
Age 65 (normal retirement age): $32,453; 
Age 60 (early full retirement): $54,301; 
Percentage change in lump sum factor: 67%. 

Age of recipient: 55; 
Age 65 (normal retirement age): $67,019; 
Age 60 (early full retirement): $101,781; 
Percentage change in lump sum factor: 52%. 

Age of recipient: 65; 
Age 65 (normal retirement age): $124,523; 
Age 60 (early full retirement): $124,523; 
Percentage change in lump sum factor: 0%. 

Age of recipient: 75; 
Age 65 (normal retirement age): $91,866; 
Age 60 (early full retirement): $91,866; 
Percentage change in lump sum factor: 0%. 

Age of recipient: 85; 
Age 65 (normal retirement age): $56,031; 
Age 60 (early full retirement): $56,031; 
Percentage change in lump sum factor: 0%. 

Age of recipient: 95; 
Age 65 (normal retirement age): $31,766; 
Age 60 (early full retirement): $31,766; 
Percentage change in lump sum factor: 0%. 

Source: GAO analysis of U.S. Department of the Treasury (Internal 
Revenue Service) data. GAO-15-74. 

Note: Analysis assumes a $10,000 annual benefit (or $833 monthly) for 
both scenarios. For those offers made at or after age 65, the 
participant is already receiving the annuity--the annuity is assumed 
to be immediate and the lump sum is calculated at the participant's 
current age. Both scenarios assume a lump sum offer made in October 
2012 using the sponsor-elected August 2011 interest rates (for the 
2012 plan year). The August 2011 interest rates (for the 2012 plan 
year) are 1.85, 4.62, and 6.02 percent. Both scenarios use the 2012 
mortality table under § 417(e)(3). One lump sum offer assumes the 
annuity would have been deferred until the normal retirement age of 
65. The other lump sum offer assumes the annuity would have been 
deferred to the plan's early retirement age, in this case age 60. 

[End of figure] 

[End of section] 

Appendix III: Agency Comments: 

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

December 16, 2014: 

Mr. 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 draft report entitled 
"Private Pensions: Participants Need Better Information When Offered 
Lump Sums That Replace Their Lifetime Benefits." Your draft report 
concerns practices by sponsors of defined benefit plans to mitigate 
the plan sponsors' future pension funding risks and focuses in 
particular on certain new strategies whereby employers seek to reduce 
DB pension plan costs or risks by purchasing annuity certificates for 
individual participants to transfer to an insurance company the plan's 
liability to provide benefits, and the offering of lump-sum buy-outs 
to retirees who are already receiving monthly lifetime pension 
benefits. Some refer to these transactions not as "de-risking" but as
"risk transfers" because they generally increase risk to individuals 
by shifting risk from companies to pm1icipants who may be living on 
fixed incomes and are not able to reenter the job market to earn 
additional income. 

EBSA recognizes that workers today face greater responsibility for 
managing their assets for retirement, whether as a result of plan 
sponsor risk-transfer activities like the "lump sum window" that are 
the focus of your draft report or as a result of the general trend 
away from traditional defined benefit plans and toward defined 
contribution plans. In response to these developments, one of EBSA's 
highest priorities has been to increase the awareness among 
participants and beneficiaries of the importance of lifetime income 
options for retirement. Each year, the Department's Benefits Advisors 
provide direct assistance to hundreds of thousands of participants who 
contact the Department over the phone or online. Questions concerning 
benefit distributions rank second in frequency of all the issue raised 
by inquirers. 

The Labor and Treasury Departments and the Pension Benefit Guaranty 
Corporation (PBGC) have been monitoring this relatively new practice 
in the DB plan area. Although neither Treasury nor Labor Depm1ment 
regulations nor other guidance of general applicability specifically 
address this practice, it is clear, nonetheless, that fiduciary 
standards in Title I of ERISA apply to the manner in which plan 
amendments and other plan provisions are implemented. Under these 
standards, we would expect plan fiduciaries to take steps to ensure
that communications with affected participants are accurate, 
impartial, and provide sufficient information for the participant to 
make an informed decision. 

Your draft report included recommendations that the Secretary of 
Labor: (1) require plan sponsors to notify DOL at the time they 
implement a lump sum window offer, including the number and category 
of participants being extended the offer (e.g., separated vested, 
retiree) as well as examples of the materials provided; and (2) 
coordinate with the IRS and PBGC to clarify the guidance regarding the 
information sponsors should provide to participants when extending
lump sum window offers and place the guidance on the agency's website. 
GAO recommends that the guidance include specific information on such 
matters as the relative value of the lump sum, the role and level of 
protections provided by the PBGC, and the positive and negative
ramifications of accepting the lump sum. Such guidance should also 
incorporate communication practices and strategies that plan sponsors 
have found particularly effective in facilitating informed participant 
decision-making. 

As to the draft report's first recommendation, which is directed 
exclusively to the Department, we have the following comments. We 
agree that this type of information may be helpful in determining the 
extent to which lump sum window offers are made, as well as the types of
disclosures the participants receive. However, ERISA does not clearly 
grant the Department authority to impose such a requirement on plan 
sponsors. It will be necessary for EBSA to consider the extent of 
DOL's legal authority to effectively require that plan sponsors notify 
DOL at the time they implement a lump sum window offer. 

With regard to the second recommendation, we agree that it is 
important for the Department to coordinate with the IRS and PBGC to 
clarify the guidance regarding the information sponsors and other plan 
fiduciaries should provide to participants and beneficiaries when 
extending lump sum window offers. The manner of publishing that 
guidance, of course, would be part of that coordination process. 

In conclusion, we appreciate GAO's interest in helping plan 
participants understand the challenges when faced with distribution 
decisions. EBSA is committed to protecting the retirement benefits of 
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, Kimberly Granger (Assistant 
Director); Frank Todisco (Chief Actuary); Amy Buck; Chuck Ford; David 
Perkins; Walter Vance; Roger Thomas; and Sheila McCoy made key 
contributions to this report. Also contributing to this report were 
Gene Kuehneman; James Bennett; Sue Bernstein; Margie Shields; Amber 
Yancey-Carroll; Angie Jacobs; David Lin; and Marissa Jones. 

[End of section] 

Footnotes: 

[1] Based on 2013 Pension Benefit Guaranty Corporation premium filings 
for single-employer defined benefit plans. 

[2] Note that all the subsequent discussion about plan sponsors is 
referring to private sector single-employer plan sponsors. 

[3] Pub. L. No. 93-406, 88 Stat. 829. 

[4] Funded status is a comparison of plan assets to plan liabilities. 
One measure of funded status is the "funded ratio," which is 
calculated by dividing plan assets by plan liabilities. Another 
measure of funded status is the difference between plan assets and 
plan liabilities, that is, the dollar amount of surplus (if plan 
assets exceed plan liabilities) or unfunded liability (if plan assets 
are less than plan liabilities). 

[5] See Statement of Financial Accounting Standards 158 (subsequently 
codified--see generally Accounting Standards Codification (ASC) Topic 
715). The 2006 accounting standard change by the Financial Accounting 
Standards Board (FASB) requires private sector single-employer plan 
sponsors to recognize the funded status of plans on their balance 
sheet. Under FASB's standards, plan funded status will vary with 
changes in asset values and interest rates. As a result, the funded 
status of a plan can be volatile over time, resulting in fluctuations 
to the plan sponsor's balance sheet. 

[6] In 2011, according to DOL data, private sector employers sponsored 
just under 44,000 single-employer defined benefit plans, down from 
approximately 111,000 in 1990. Meanwhile, growth of single-employer 
defined contribution plans continued during the same period, with the 
number of defined contribution plans totaling nearly 637,000 in 2011, 
up from approximately 598,000 in 1990. 

[7] This delineation was used by the ERISA Advisory Council in their 
2013 report summarizing their examination of pension de-risking, 
presented on DOL's website: [hyperlink, 
http://www.dol.gov/ebsa/publications/2013ACreport2.html]. 

[8] Sponsors are generally permitted by law to elect to make such 
offers to separated participants (also known as terminated vested 
participants). Whether sponsors are generally permitted to engage in 
the new practice of making such offers to retirees who have been 
receiving annuity benefits from the plan, however, is a more 
complicated determination raising additional legal and policy issues 
that have yet to be fully explored, Treasury officials have noted. 

[9] When we refer to participants in this report, we are generally 
referring to either separated (terminated vested) or retired 
participants. 

[10] For example, a retired participant may be able to switch their 
benefit annuity to another type of qualified joint and survivor 
annuity offered under the plan and, specifically for married retired 
participants, a qualified optional survivor annuity. The options 
offered will depend on the retired participant's marital status at the 
time of the offer. 

[11] 29 U.S.C. § 1104(a)(1). ERISA imposes certain obligations on plan 
fiduciaries. Under ERISA, a person generally acts as a plan fiduciary 
when he or she (1) exercises any discretionary control or authority 
over plan management or any authority or control over plan assets, (2) 
renders investment advice for compensation respecting plan assets, or 
has authority or responsibility to do so, or (3) has any discretionary 
authority or responsibility over plan administration. 29 U.S.C. § 
1002(21). 

[12] DOL has the statutory authority to bring legal action against 
plan fiduciaries that do not comply with ERISA requirements. See 29 
U.S.C. § 1132. 

[13] GAO, Private Pensions: Clarity of Required Reports and 
Disclosures Could Be Improved, [hyperlink, 
http://www.gao.gov/products/GAO-14-92] (Washington, D.C.: Nov 21, 
2013). 

[14] By law, the formal name of the council is The Advisory Council of 
Employee Welfare and Pension Benefit Plans. 

[15] Between June 5 and November 4, 2013, the ERISA Advisory Council 
held four hearings. Over 20 expert witnesses provided testimony, 
representing, in part, DOL, PBGC, pension consulting firms, insurers, 
academics, advocacy groups, retiree groups, and plan sponsors. 

[16] 26 U.S.C. § 6110(k)(3). 

[17] 26 U.S.C. § 417(e)(3). 

[18] We identified several Treasury regulations that apply to offers 
of lump sums paid out as part of a lump sum window. See, e.g., 26 
C.F.R. § 1.417(a)(3)-1: Required explanation of qualified joint and 
survivor annuity and qualified preretirement survivor annuity; 26 
C.F.R. § 1.417(e)-1: Restrictions and valuations of distributions from 
plans subject to sections 401(a)(11) and 417; 26 C.F.R. § 1.401(a)-20: 
Requirements of qualified joint and survivor annuity and qualified 
preretirement survivor annuity; 26 C.F.R. § 31.3405(c)-1: Withholding 
on eligible rollover distributions; 26 C.F.R. § 1.402(f)-1: Required 
explanation of eligible rollover distributions. 

[19] Participants who accept the lump sum offer are allowed to roll 
over, or transfer, all or part of the lump sum amount into either an 
Individual Retirement Account (IRA) or another eligible employer plan. 

[20] The regulation offers some flexibility as to how sponsors should 
convey this information. The sponsor can 1) state the lump sum amount 
as a percentage of the actuarial present value of the monthly annuity, 
2) state the amount of the annuity that is the actuarial equivalent of 
the lump sum, or 3) state the actuarial present value of both the lump 
sum and the annuity. 

[21] If the participant is married and the lump sum is greater than 
$5,000, written consent of the spouse is required for any form of 
benefit other than a joint and survivor annuity. 

[22] In September 2014, PBGC announced that it intends to ask the 
Office of Management and Budget to approve a proposal requiring 
certain information about lump sum windows be reported as part of the 
annual premium filing starting with 2015 filings. See 79 Fed. Reg. 
56,831 (Sept. 23, 2014). According to draft forms and instructions 
available to the public at the time the notice was published, the 
questions will relate to the number of persons offered lump sums under 
the window and the number of persons accepting the offer. The 
instructions will require only after-the-fact reporting (i.e., for 
windows that had recently closed), with a reporting lag of between 1 
and 13 months. 

[23] This is done using IRS Form 1099-R. 

[24] Towers Watson, Pension De-Risking Through Lump Sum Offers (New 
York, N.Y.: 2013). 

[25] Towers Watson, U.S. Pension Risk Management--What Comes Next? 
(New York, N.Y.: 2013). 

[26] Aon Hewitt, 2014 Hot Topics in Retirement--Building a Strategic 
Focus (Chicago, Ill.: 2014). 

[27] We based our analysis on publicly available information from a 
variety of sources, including information collected from PBGC, a 
participant advocacy group, SEC filings, corporate reports, and media 
reports. We verified this information to the extent possible. In 
October 2014, PBGC informed us, based on limited sources of 
information, that they were aware of at least 17 additional lump sum 
windows announced by sponsors during 2013 and 2014. However, we were 
not able to verify this information before the publication of this 
report. 

[28] The number of participants offered lump sums by any one sponsor 
varied greatly, ranging from as few as 1,400 participants to as many 
as 90,000. For this selection of sponsors, the median number of 
participants receiving offers was 13,000. 

[29] Aon Hewitt, Pension Settlements Through Vested Terminated Lump 
Sum Windows (Chicago, Ill.: 2013). 

[30] IRS private letter rulings are not publicly associated with a 
specific requestor by name, but pension experts have presumed these 
two rulings were requested and received by Ford and General Motors. In 
one ruling (PLR 201228051), the IRS stated that a 30-to 60-day lump 
sum window period for participants receiving annuity benefits would 
not violate the minimum distribution requirements. In another ruling 
(PLR 201228045), the IRS stated that those requirements would not be 
violated by a 60-to 90-day window period. Both rulings also made clear 
that, except for the particular rulings specified, no opinion was 
expressed as to the federal tax consequences of these practices under 
any other provision of the Internal Revenue Code, including a number 
of specified Code sections, or as to the qualification of the plans at 
issue. 

[31] Specifically, once a participant begins receiving lifetime 
annuity payments, those payments must not increase and the payment 
period may not be modified except in specific circumstances, such as 
due to a plan amendment providing for the payment of increased 
benefits. 26 U.S.C. § 401(a)(9) and 26 C.F.R. § 1.401(a)(9)-6, Q&A-
14(a)(4). 

[32] Experts point out that these rulings were notable to the extent 
they allowed plan sponsors to perform risk transfers in a manner that 
had not previously been explored. During 2014, six additional sponsors 
requested and received similar IRS private letter rulings regarding 
offers of lump sums to retirees in payment status, although these 
private letter rulings contained several caveats to the effect that 
their scope was limited to specified issues and did not address 
compliance with other plan qualification requirements or with ERISA. 
As with other private letter rulings, the identity of the sponsors 
making these additional requests was not publicly disclosed by IRS. 
While IRS private letter rulings interpret and apply tax laws to the 
requestors' represented set of facts specific to their case, the 
rulings may not be relied on as precedent for future cases, regardless 
of similarity. See 26 U.S.C. § 6110(k)(3). Thus, other sponsors 
considering similar actions must request their own rulings in order to 
ensure compliance with the Internal Revenue Code. 

[33] Pub. L. No. 109-280, § 302, 120 Stat. 780, 920. 

[34] Present value calculations reflect the time value of money, based 
on the assumption that a dollar in the future is worth less than a 
dollar today because the dollar today can be invested and earn 
interest. Using a higher interest rate will lower the present value of 
a stream of future payments, in this case, the lump sum amount, 
because it implies that a lower level of assets today would be able to 
fund those future payments. 

[35] The extent to which lump sum amounts are lower because of the 
switch from 30-year Treasury rates to corporate bond rates is 
dependent on the age of the participant. This is because the corporate 
bond rates vary with how many years into the future the projected 
pension payments would be made. Under most economic conditions, lump 
sums for younger participants would be reduced the most, and lump sums 
for older participants may sometimes be increased. 

[36] PPA established a five-year phase-in of the switch from the 30-
year Treasury bond rate to corporate bond rates for calculating lump 
sums. Treasury rates were still to be used for lump sum distributions 
in 2007, followed by weighted averages of Treasury and corporate rates 
for distributions in 2008 to 2011, with corporate rates being given 20 
percent weight in 2008, 40 percent in 2009, 60 percent in 2010, and 80 
percent in 2011, before being fully phased in for 2012 and later years. 

[37] Pub. L. No. 112-141, § 40211, 126 Stat. 405, 846. 

[38] Under Section 103 of PPA, lump sum payments are restricted for 
plans with a reported funded status below 80 percent. MAP-21 has 
temporarily changed the measurement of a plan's funded status for this 
purpose by basing the discount rate used to measure plan liabilities 
on a 25-year historical average of corporate bond rates rather than 
the 2-year average otherwise established under PPA. Specifically, MAP-
21 temporarily applies what is known as an "interest rate corridor" 
based on the 25-year historical average. The use of a 25-year 
historical average has the effect of increasing discount rates, and 
thereby lowering the measure of plan liabilities and improving funded 
status, because interest rates were higher earlier in the 25-year 
historical period. The Highway and Transportation Funding Act of 2014 
generally extended these interest rate "smoothing" provisions. Pub. L. 
No. 113-159, § 2003, 128 Stat. 1839, 1849. 

[39] SOA released its new tables on October 27, 2014. Based on 
historical precedent, experts anticipate that IRS will adopt the final 
SOA tables for use in the calculation of lump sums, in some manner, 
after considering certain technical adjustments. SOA has stated that 
an important motivation for its study was the requirement that 
Treasury review prescribed mortality tables at least every 10 years. 
SOA also recommends that the mortality improvement model be reviewed 
at least every three years, and designed its model to facilitate ease 
of updating. 

[40] In this report, we use the term "mortality tables" to refer to a 
combination of a base mortality table, which measures mortality rates 
as of a base year, and a mortality improvement projections scale, 
which estimates annual improvements in mortality beyond the base year. 
The mortality tables currently required by IRS are the RP-2000 tables 
with Scale AA mortality improvement. These tables form the basis for 
the unisex tables constructed for minimum lump sums under 26 U.S.C. § 
417(e)(3). The new table released by SOA is known as RP-2014 and the 
mortality improvement scale is MP-2014. 

[41] Specifically, the tables reflect a 10.4 percent increase in life 
expectancy for males age 65, with an average life expectancy of 21.6 
years, up from 19.6 years. The tables reflect an 11.3 percent increase 
for females age 65, with an average life expectancy of 23.8 years, up 
from 21.4 years. The percentage increase in any lump sum will 
generally be somewhat less than the percentage increase in life 
expectancy because projected future payments are discounted with 
interest to determine their present value in calculating the lump sum. 
Also, unisex mortality tables are used for the purpose of determining 
optional forms of benefits from qualified pension plans, so the new 
mortality tables ultimately adopted by IRS will reflect some blend of 
male and female life expectancy. 

[42] The Society of Actuaries report presents a range of calculations 
of single-sum annuity values, which are equivalent to lump sum 
calculations, under a variety of interest rate assumptions. Under one 
of these calculations, based on SOA's projection of required segment 
interest rates, SOA estimates indicate that switching to the new 
mortality tables in 2016 would increase hypothetical sex-specific lump 
sums by anywhere from 3.6 percent to 16.9 percent for males and by 5.8 
percent to 11.8 percent for females, depending on current age. These 
calculations assumed a pension starting age of 62 for those younger 
than age 62, and are shown for every tenth age from ages 25 through 
85. The impact is lowest at age 55 for males and age 65 for females, 
and is greater at younger and older ages. Actual lump sums are based 
on unisex tables, so estimated increases would be somewhere in between 
these sex-distinct estimates. Also, as already noted, there are 
technical choices that the IRS would have to make in adopting these 
tables, and one of these is whether projections of future mortality 
improvement should be "static" (where the degree of mortality 
improvement varies only by age) or "generational" (where the 
improvement varies by both age and calendar year). The current IRS 
methodology for determining minimum lump sums uses the static 
approach, but SOA recommends using the generational approach for 
pension measurements, and the estimates of lump sum increases 
presented here assume that the IRS adopts the generational approach. 

[43] PBGC premium rate increases were included in section 40211 of MAP-
21 in 2012, and in the Bipartisan Budget Act of 2013. Pub. L. No. 113-
67, § 703, 127 Stat. 1165, 1190-92. This is also a potential incentive 
to conduct a group annuity buy-out. 

[44] Rates will be indexed for inflation beyond 2016. 

[45] This reduction of premium costs will continue to accrue to the 
sponsor for each additional year that the removed participant would 
have otherwise been in the plan. 

[46] This can be partly due to the fact that this group will generally 
consist of younger participants compared to the group of participants 
already in pay status. As a result, these participants' accrued 
benefits will be discounted for a greater length of time due to their 
younger ages. 

[47] Russell Research, Update: Risk transfer options for defined 
benefit plan sponsors (East Rutherford, N.J., 2013). 

[48] Specifically, a sponsor may elect a stability period of up to one 
year combined with a maximum lookback of up to 5 months. This means 
that the interest rates used at the time of the offer may be nearly 17 
months old relative to rates that are current just before the offer. 

[49] IRS officials said that the ability to selectively choose a 
"lookback" month is constrained in the case of a plan that already has 
a lump sum benefit--even if the lump sum distributions are less than 
$5,000 and are paid without employee consent. This is because a plan 
can have only one provision for "lookback." 

[50] Specifically, IRS officials explained that the "lookback" rule 
was created to help with the administration of plans that offer lump 
sums as an ongoing optional form of benefit. When applied to those 
types of lump sums, sponsors lock in a single "lookback" rate to be 
used for all lump sums calculated during a specified period, such as a 
plan year. Due to interest rate fluctuations over the course of that 
period, the "lookback" rate may favor the plan sponsor at certain 
times and the plan participant at other times. However, in the case of 
a one-time lump sum window, the IRS officials said sponsors, in 
essence, have perfect hindsight and will select "lookback" rates that 
will minimize the overall amount of lump sum payments on the specified 
calculation date. 

[51] In defined benefit plans, early retirement benefits are often 
actuarially reduced to reflect the fact that someone retiring at an 
early retirement age will collect benefits sooner, and for a longer 
period of time, than someone retiring at normal retirement age. A 
subsidized early retirement benefit is one in which the early 
retirement benefit is reduced by less than a full actuarial reduction; 
one example of such a benefit would be an unreduced early retirement 
benefit. Similarly, a subsidized joint-and-survivor annuity is one in 
which the reduction to the plan's single life annuity benefit is less 
than the full actuarial reduction that would account for the fact that 
a joint-and-survivor annuity is paid out, on average, for a longer 
period of time than a single life annuity. Lastly, an example of a 
supplemental early retirement benefit would be a temporary additional 
benefit paid from an early retirement age to normal retirement age. 

[52] It is important to note that this incentive, unlike the other 
incentives we examined, will only apply to plans that have provisions 
for certain additional plan benefits for separated former 
participants. Additional plan benefits, such as subsidized early 
retirement benefits, are more commonly offered to plan participants 
who are still employees of the plan sponsor and retire from the plan 
sponsor, but they are sometimes offered to separated former 
participants as well. 

[53] PLR 201228045. 

[54] Note that reducing the size of the plan relative to the size of 
the plan sponsor, and removing pension liabilities for participants 
who had never worked for the plan sponsor, may also serve as 
incentives to conduct a group annuity buy-out. 

[55] Note that some of these considerations--sizable immediate 
payments, interest rate uncertainty, foregone potential returns, and 
to a lesser extent, administrative costs--may also serve as 
disincentives to conduct a group annuity buy-out. 

[56] The method sponsors must use for determining the minimum lump sum 
value of an annuity benefit is statutorily prescribed in 26 U.S.C. § 
417(e)(3). 

[57] These reductions in retirement income can also be thought of as 
the gap between the amount of lump sum offered and the amount of lump 
sum that would be needed to replicate the pension benefit. 

[58] Note that since figure 1 is based on a group annuity methodology 
and does not correct for the differences in pricing between the group 
annuity and the retail annuity market, it thus understates the 
potential reduction in retirement income from accepting a lump sum 
window offer and using the lump sum to purchase a replacement annuity. 
A group annuity is a type of annuity that is generally available to 
purchasers of annuities for a collection of individuals, such as a 
group of participants in a pension plan, and where there is no option 
to opt out of the annuity. For example, a large pension plan that 
purchases annuities for its participants as part of a plan termination 
may purchase a group annuity contract for the participants under the 
plan. See appendix II for more discussion of the methodology used in 
figure 1. 

[59] See GAO, Pension Plan Valuation: Views on Using Multiple Measures 
to Offer a More Complete Financial Picture, [hyperlink, 
http://www.gao.gov/products/GAO-14-264] (Washington, D.C.: September 
30, 2014). 

[60] As of the date underlying the data in figure 1, the discount 
rates for determining minimum required lump sums were 1.85 percent for 
projected pension payments that would have been due in less than 5 
years, 4.62 percent for payments that would have been due in 5 to 20 
years, and 6.02 percent for payments of more than 20 years. In 
contrast, the discount rates underlying the estimated group annuity 
rates were 2.95 percent for payments that would have been due within 
20 years, and 3.66 for payments that would have been due beyond 20 
years. See appendix II for more detail. 

[61] Assuming that men and women of equivalent ages have a common life 
expectancy is known as unisex, or gender neutral, life expectancy. 
Specifically, for lump sum distributions that are subject to 26 U.S.C. 
§ 417(e), a unisex mortality table is used to determine the minimum 
lump sum, and lump sum rates must be the same for men and women even 
if lump sum rates in excess of the minimum are used. 

[62] A group annuity is a type of annuity that has generally favorable 
pricing and low administrative costs because the insurer is able to 
spread longevity risk across a large population of individuals. These 
types of group annuities are available to large purchasers of 
annuities for a group of individuals, for example, large pension 
plans. Most former participants are unlikely to have an available 
retirement vehicle that will allow them access to a group annuity with 
their lump sum. 

[63] This advice is consistent with other expert observations. For 
example, the American Academy of Actuaries notes that defined benefit 
plans tend to be a more cost effective source of annuities than 
outside a defined benefit plan because of savings in administrative 
costs and the absence of profit margins, among other reasons. 

[64] Some participants may also be allowed to roll over their lump sum 
into a tax-qualified defined contribution plan, such as a 401(k) plan. 
However, we focus on IRA rollovers as they appear to be most prevalent 
and the risks and characteristics of such plans are in many ways 
similar. 

[65] GAO has reviewed a particular type of annuity product that has 
guaranteed lifetime withdrawal features that can help older Americans 
ensure that they do not outlive their assets. Consumers can 
potentially benefit from these products by having a steady stream of 
income regardless of how their investment assets perform or how long 
they live, while at the same time maintaining access to their assets 
for unexpected or other expenses. However, these products are complex 
and present some risks to consumers, and require them to make multiple 
important decisions similar to those participants face during the 
spend-down phase of a lump sum. 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). 

[66] 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.: March 7, 
2013). 

[67] U.S. Library of Congress, CRS,Converting Retirement Savings into Income: Annuitiesand Periodic Withdrawals, byJanemarie Mulvey and Patrick Purcell, CRS R40008 (Washington, DC: Office of Congressional Information and Publishing, Feb.2, 2009). 

[68] Note that figure 2 assumes regular, periodic withdrawals in the 
spend-down of the lump sum. 

[69] See L. Frolik, Rethinking ERISA's Promise of Income Security in a 
World of 401(k) Plans, (University of Pittsburgh School of Law: March 
2013). In addition, diminished capacity that impacts general financial 
decision-making may make older adults particularly susceptible to 
financial exploitation. See GAO, Elder Justice: National Strategy 
Needed to Effectively Combat Elder Financial Exploitation, [hyperlink, 
http://www.gao.gov/products/GAO-13-110] (Washington, D.C.: November 
15, 2012). 

[70] [hyperlink, http://www.gao.gov/products/GAO-13-30]. 

[71] The specific investment products held in 401(k) plans and IRAs, 
as well as the various financial professionals who service them, are 
subject to oversight from applicable securities, banking, or insurance 
regulators, which can include both federal and state regulators. For 
example, mutual funds, offered in both plans and IRAs, are generally 
regulated by the Securities and Exchange Commission (SEC), which 
requires funds to disclose fees and to inform investors of products' 
potential risks. An investment adviser provides a wide range of 
investment advisory services, including management of client 
portfolios. Investment advisers manage the portfolios of individuals 
as well as the portfolios of pension funds and mutual funds. Broker-
dealers provide brokerage services where they act as an agent for 
someone else; a dealer acts as a principal for its own account. SEC 
has primary responsibility for oversight of investment advisers and 
broker-dealers, while those who sell insurance products are also 
subject to state insurance regulation. Investment advisers, broker-
dealers, and insurance agents are subject to different standards of 
practice. 

[72] Witnesses at the 2013 ERISA Advisory Council hearings on Private 
Sector Pension De-risking and Participant Protections noted that the 
elderly may be particularly "vulnerable to pressure from relatives or 
investment advisors, and, in some cases, diminished in their capacity 
to weigh the pros and cons of the options" with respect to a lump sum 
election. 

[73] [hyperlink, http://www.gao.gov/products/GAO-13-30]. 

[74] See Aon Hewitt, Pension Settlements Through Terminated Vested 
Lump Sum Windows: Insights into Plan Sponsor Experience, February 
2013. The observation that just over half of participants elect to 
roll over their lump sum is consistent with our interviews of 
participants. Among the participants we interviewed, 15 out of 37 
accepted the lump sum window offer. Of those that accepted, 13 said 
they rolled over most of their monies into an IRA. 

[75] Ibid. The study also notes that the direct rollover rate 
increased with the size of the lump sum, which suggests that the 
dollar-weighted value of direct rollovers is larger than 51 percent. A 
direct rollover is when a participant specifies the plan or IRA to 
which their distribution should be transferred. The plan can transfer 
the money via a non-transferable check made out to the receiving 
entity or electronically. Indirect rollovers are another option for 
maintaining the lump sum in the qualified retirement system, but the 
study notes that many participants that cash out their lump sum do not 
rollover the monies at a later date, resulting in a leakage of funds 
out of the retirement system. Indirect rollovers are rollovers wherein 
the participant's plan writes a check payable to the participant for 
some or all of the lump sum. The participant then disburses those 
funds within 60 days of receipt of the check to a qualified plan that 
will accept the monies or to an IRA. Our IRA rollover report, 
[hyperlink, http://www.gao.gov/products/GAO-13-30], also discusses the 
different types of rollovers. 

[76] In some cases, leakage might not be a retirement security 
problem. For example, an individual who has adequate other sources of 
retirement income may be able to afford to use a pension lump sum for 
other purposes, such as a bequest. 

[77] U.S. Social Security Administration, Office of Policy, 
Perspectives: Does Retirement Education Teach People to Save Pension 
Distributions? by Leslie A. Muller Social Security Bulletin, Vol. 64 
No. 4 (2001/2002). 

[78] In some cases, taking a lump sum to use for these other purposes 
could be the most appropriate decision given the participant's 
particular circumstances. This assessment involves broader and more 
complex issues of poverty or insufficient overall wealth or income, 
which are beyond the scope of this report. 

[79] As described more fully in the background section of this report, 
sponsors are required to provide participants some of the information 
GAO determined was key to participants' decisions as to whether to 
elect a lump sum. 

[80] Most of the materials we analyzed were provided to us by 
participants who had received them rather than by plan sponsors. As 
such, we cannot be certain that the materials we reviewed were 
accurate and complete representations of the materials provided by 
plan sponsors to participants. Further, our limited review of these 
materials did not constitute a compliance review, so while we observed 
that sponsors appeared to provide certain required materials, we did 
not assess the adequacy of those materials or reach any determinations 
as to whether such materials complied with any applicable legal 
requirements. 

[81] An immediate annuity is an annuity for which the participant is 
eligible at his or her current age. A deferred annuity is one for 
which the participant will be eligible at a later age, such as 65 for 
normal retirement, or, for example, age 60 for early retirement. 

[82] For a detailed explanation of how we assessed for our factors 
when reviewing packets, please see appendix I, table 3. 

[83] Defined benefit plan sponsors are required to provide a pension 
benefit statement to all plan participants at least once every 3 
years. In addition, defined benefit plan participants may annually 
request a benefit statement. 

[84] According to participants we interviewed, the materials the plan 
sponsor provided compared the value of the annuity at age 65 to the 
value of the lump sum and did not make clear that unreduced benefits 
were available at age 60. 

[85] Six packets provided the interest rates used to develop the 
relative value notice, but no mention was made regarding whether these 
rates were also used in calculating the lump sum. GAO did not consider 
the inclusion of these interest rates sufficient for participants' 
purposes in assessing the lump sum offer. 

[86] Some (12 of 33) participants assumed that their lump sum payment 
had been calculated based on a single life expectancy and wished that 
their plan sponsor had told them this figure explicitly. In actuality, 
lump sum calculations are not based upon a single life expectancy 
figure, but upon a set of mortality probabilities for different ages 
provided in a mortality table. However, only one packet we reviewed 
demonstrated how mortality assumptions were incorporated into the lump 
sum calculation. 

[87] 26 C.F.R. § 1.417(a)(3)-1(c)(1)(iv) and (v). In its bulletin 
accompanying the issuance of the final regulations on the Relative 
Value Notice (Internal Revenue Bulletin 2006-16), IRS states that the 
regulations were developed to help plan participants compare different 
forms of their pension benefits "without professional advice." The 
regulation offers some flexibility as to how sponsors should convey 
this information. Specifically, the sponsor can 1) state the lump sum 
amount as a percentage of the actuarial present value of the monthly 
annuity, 2) state the amount of the annuity that is the actuarial 
equivalent of the lump sum, or 3) state the actuarial present value of 
both the lump sum and the annuity. 

[88] As noted earlier, the value of the lump sum payment may be 
substantially lower than what it would cost to purchase a retail 
annuity. 

[89] In addition to the relative value notice, IRS, in a notice of 
proposed rulemaking published in 2008, noted that PPA instructed the 
Secretary of the Treasury ''to provide that the description of a 
participant's right, if any, to defer receipt of a distribution shall 
also describe the consequences of failing to defer such receipt.'' 
Notice to Participants of Consequences of Failing to Defer Receipt of 
Qualified Retirement Plan Distributions; Expansion of Applicable 
Election Period and Period for Notices, 73 Fed. Reg. 59,575 (to be 
codified at 26 C.F.R. pt. 1) (Oct. 9, 2008). To that end, the proposed 
regulations would have required that, in the case of a defined benefit 
plan, the participant be provided a description of the specified 
federal tax implications of failing to defer, as well as a statement 
of the amount payable to the participant under the normal form of 
benefit both upon immediate commencement and as a deferred annuity 
benefit (at the later of age 62 or attainment of normal retirement 
age). The proposed regulation would also have increased the length of 
lump sum election period to 180 days. The proposed rule has not been 
finalized. 

[90] Under the minimum required lump sum calculation under 26 U.S.C. § 
417(e)(3), the present value of benefits is generally calculated at 
the plan-specified normal retirement age. Such calculation might not 
include certain additional plan benefits, such as early retirement 
subsidies. (For more details about how the treatment of certain 
additional plan benefits affects the lump sum payment, see appendix 
II.) 

[91] Specifically, because the participant would not be eligible for 
the additional plan benefits under either the lump sum or immediate 
annuity options, this comparison might show the two options to have 
"approximately the same value" without disclosing that the value of 
the deferred annuity option would be higher than either of those 
options. 

[92] While some (12) participants told us they performed more advanced 
calculations that adjusted for the time value of money, others (12) 
told us they did not. 

[93] On June 26, 2013, the Supreme Court of the United States ruled, 
in United States v. Windsor, that section 3 of the Defense of Marriage 
Act (DOMA) is unconstitutional. 570 U.S. ____,133 S. Ct. 2675 (2013). 
Section 3 provides that, in any federal statute, the term "marriage" 
means a legal union between one man and one woman as husband and wife, 
and that "spouse" refers only to a person of the opposite sex who is a 
husband or wife. Subsequently, on September 18, 2013, the Department 
of Labor released guidance indicating that ERISA and DOL's ERISA 
regulations would be read as recognizing all legal marriages of same-
sex couples regardless of where the couple lived. See: Technical 
Release No. 2013-04: Guidance to Employee Benefit Plans on the 
Definition of "Spouse" and "Marriage" under ERISA and the Supreme 
Court's Decision in United States v. Windsor. 

[94] As demonstrated by research from the field of behavioral finance 
and economics, emotion and intuition can play a role in financial 
decision-making, as people are not always rational as would be assumed 
under conventional financial and economic theory. 

[95] In 2009, IRS issued Internal Revenue Bulletin 200-39, Notice 2009-
68, which contains safe harbor explanations and model notices for 
plans offering rollover distributions, which would occur, for example, 
under a lump sum window. The model notice provides, among other items, 
a discussion of 1) how a rollover may affect a participant's tax 
situation, 2) additional income taxes from early distributions, and 3) 
state income taxes. While we did not assess sponsor compliance, we 
observed in our review of sponsor materials that the included tax 
materials often appeared to be very similar to the model notice. 

[96] Technically, pension payments are paid out of the plan, not by 
the plan sponsor. The sponsor's obligation is to make required, 
actuarially determined contributions to the plan. So a plan sponsor 
cannot "default on its promise to pay pension benefits," but can 
default on its required contributions to the plan. 

[97] While PBGC faces some long-term financial challenges, we found 
that many participants were not well informed about the agency and the 
level of benefit protection it could afford them. According to a 2008 
PBGC report, approximately 84 percent of participants from sampled 
defined benefit plans had vested benefits that would be fully 
guaranteed by PBGC. PBGC trusteed the 125 sampled plans on which the 
analysis was based from 1990 to 2005. See PBGC, PBGC Guarantee Limits--
An Update (Washington, D.C.: September 2008). For information on long-
term PBGC financial challenges identified by GAO, see: GAO, High Risk 
Series: An Update, [hyperlink, http://www.gao.gov/products/GAO-13-283] 
(Washington, D.C.: February 2013), 46-48. 

[98] Many of these participants (6 of 10) cited both of these concerns. 

[99] As noted previously, we did not reach any determinations as to 
whether individual sponsors complied with the applicable federal 
requirements. Instead, we focused on whether the materials provided by 
sponsors to participants satisfied the eight factors we had identified 
as key to informed participant decision-making. 

[100] This inverse relationship occurs because present value 
calculations reflect the time value of money. A dollar in the future 
is worth less than a dollar today, because the dollar today can be 
invested and earn interest. Using a higher interest rate will lower 
the present value of a stream of payments--or, in this case the lump 
sum--because it implies that a lower level of assets will be needed to 
fund those future payments. 

[101] In the case of a retired participant, the participant would 
already be receiving monthly benefits, so the lump sum would be the 
present value of projected remaining benefit payments under the plan. 
In the case of a terminated vested participant, the participant is 
entitled to a deferred annuity, that is, payments are due to commence 
at some date in the future. This contrasts with an immediate annuity 
in which the participant is about to begin receiving benefits with no 
deferral period. 

[102] Mortality tables are often constructed using a snapshot of age-
specific mortality rates based on study of experience from the recent 
past, and are often used in combination with a table to project future 
mortality improvement. 

[103] For ease of reference, we refer to this simply as § 417(e)(3) 
throughout this appendix. 

[104] A yield curve is a graph that shows interest rates of bonds of 
common credit quality at a set point in time plotted on the vertical 
axis, and time, known as the maturity date, plotted on the horizontal 
axis. A common yield curve compares U.S. Treasury securities of 
various maturities. Long-term rates usually are higher than short-term 
rates because the risks posed by inflation and the possible default of 
the borrower rise with the length of time over which credit is 
extended. Therefore, most of the time, the yield curve slopes upward 
from left to right. 

[105] In addition, a PBGC official said, as an additional check, the 
calculations were validated using a separate calculator made by a PBGC 
contractor. 

[106] Figure 6 specifically uses 2012 unisex mortality tables using 
the MP-2014 projection scale--with mortality improvement applied 
generationally--for the alternative calculation. To construct a 2012 
unisex mortality table from the RP-2014 mortality tables and mortality 
improvement scales from the Society of Actuaries' (SOA) RPEC, we 
backcasted the employee and healthy annuitant tables for males and 
females by the mortality improvement recommended by SOA (mortality 
improvement scale MP-2014). We then created a combined table from the 
separate employee and healthy annuitant tables for each gender, using 
the implied ratios in the 2012 § 417(e)(3) table. Technically, these 
are sex-specific tables used for § 430(h), but since the unisex tables 
under § 417(e)(3) are simply an average of the combined, sex-specific 
tables under § 430(h), we created a 2012 unisex table accordingly. To 
incorporate generational mortality improvement, which means that we 
project each age cohort to experience the projected probability of 
mortality in each future year, we adjusted for projected improvement 
within each calendar year that the individual ages. (For example, a 35-
year-old would have the probability of death of a 35-year-old in 2012, 
the probability of death (adjusted for any improvement) of a 36-year-
old in 2013, and so on, until the individual has a certain probability 
of death at age 120 in the year 2097). 

[107] The PBGC methodology uses a mortality table with similarities to 
the § 417(e)(3) table except that gender-specific tables are used. 

[108] Additionally, a loading factor consistent with 4044 assumptions 
is added to the lump sum. In the case of the annuity prices, which are 
all less than $200,000, this is a charge of 5 percent of the 
preliminary annuity price plus $200. For a more detailed description 
of loading assumptions for all annuity prices, see Appendix C to 29 
C.F.R. Part 4044. 

[End of section] 

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