401(K) PLANS: DOL Could Take Steps to Improve Retirement Income Options for Plan Participants
Highlights
What GAO Found
Workers relying in large part on their 401(k) plan in retirement may not always have a feasible way to make their savings last throughout retirement. Responses to GAO’s non-generalizable questionnaire from 11 401(k) plan record keepers—entities that manage participant account data and transactions for plans—showed that most plans covered by the questionnaire had not adopted products and services that could help participants turn their savings into a retirement income stream (referred to as lifetime income options in this report). Responses to the questionnaire represented more than 40 percent of all 401(k) assets and about a quarter of plans at the end of 2014. GAO found that of the plans covered by the questionnaire, about two-thirds did not offer a withdrawal option —payments from accounts, sometimes designed to last a lifetime—and about three-quarters did not offer an annuity—arrangements that can guarantee set payments for life.
Concerns about legal risks and record keeper constraints may deter many plan sponsors—typically employers that provide 401(k) plans and establish investment and distribution options—from offering lifetime income options. The Department of Labor (DOL) issues regulations and guidance for plan sponsors and is responsible for educating and assisting them to help ensure the retirement security of workers. For example, DOL has prescribed steps plan sponsors can take to satisfy their fiduciary duties (i.e. act prudently and in the best interest of participants) when selecting an annuity provider for a 401(k) plan. However, according to industry stakeholders GAO interviewed, those steps are not often used because they include assessing “sufficient” information to “appropriately” conclude that the annuity provider will be financially able to pay future claims without definitions for those terms. Without clearer criteria to select an annuity provider, fear of liability may deter plan sponsors from offering annuities. Further, GAO found that a mix of lifetime income options to choose from is not usually available. DOL provides an incentive in the form of limited liability relief to plan sponsors who, among other things, provide participants at least three diversified investment options. However, no such incentive exists for plan sponsors offering a mix of lifetime income options. Without some degree of liability relief, plan sponsors may be reluctant to offer a diverse mix of lifetime income options to their participants. Lastly, stakeholders told GAO that record keepers may make only their own annuities available to the plans they service. DOL provides guidance on selecting service providers, but it does not encourage plan sponsors to seek choices from their service providers, which may prevent plans from having appropriate annuity options available to offer participants.
Required minimum distributions (RMD) can offer a default for those who do not choose a lifetime income option by setting a minimum amount of taxable 401(k) income for those age 70 ½ or older, based on life expectancy. Some plan sponsors know how to administer RMDs, and some already choose to provide RMD payments calculated to last a lifetime. However, DOL’s guidance on default lifetime income is focused on a particular annuity type used only by a few plans. By issuing guidance encouraging plans to consider letting RMDs be the default distribution process for retiring participants, DOL may help create lifetime income for participants who do not choose an option.
Why GAO Did This Study
As 401(k) plan participants reach retirement they face the challenge of making their savings last for an unknown lifespan, and many 401(k) plan sponsors do not offer options to help participants with this complex task. GAO was asked to review any related challenges and potential changes to help plan sponsors and participants.
This report examines, among other things, what is known about the adoption of lifetime income options in 401(k) plans, barriers that deter plan sponsors from offering such options, and the defaults that exist for participants who do not choose a lifetime income option. GAO administered a non-generalizable questionnaire to record keepers, conducted a non-generalizable survey of 54 plan sponsors, and interviewed a range of stakeholders.
Recommendations
GAO makes seven recommendations to DOL, including that it clarify the criteria to be used by plan sponsors to select an annuity provider, consider providing limited liability relief for offering an appropriate mix of lifetime income options, issue guidance to encourage plan sponsors to select a record keeper that offers annuities from other providers, and consider providing RMD-based default lifetime income to retirees. DOL generally agreed, and described actions it would take to address the intent of the recommendations.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of Labor | The Secretary of the Department of Labor (DOL) should help encourage plan sponsors to offer lifetime income options by clarifying the safe harbor from liability for selecting an annuity provider by providing sufficiently detailed criteria to better enable plan sponsors to comply with the safe harbor requirements related to assessing a provider's long-term solvency. |
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 clarifies the steps to assess insurer solvency by explicitly listing them. The bill became a part of Further Consolidated Appropriations Act, 2020 (H.R. 1865, as amended) and was passed into law. A fiduciary must obtain a number of written representations from insurers of content that could be useful in considering the long term financial solvency of the insurer, and have no cause to question the accuracy of the information. This legislation provides the clarification sought by this recommendation and implements it.
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| Department of Labor |
Priority Rec.
The Secretary of the DOL should help encourage plan sponsors to offer lifetime income options by considering providing legal relief for plan fiduciaries offering an appropriate mix of annuity and withdrawal options, upon adequately informing participants about the options, before participants choose to direct their investments into them. |
DOL officials told us that it was at EBSA's suggestion that the 2018 ERISA Advisory Council (EAC) study lifetime income in DC plans. Witnesses invited to the EAC provided comments to DOL that support creating a mix of options in plans. The final 2018 EAC report included consideration of fiduciary relief for a mix of distinct options, as currently exists for investment selection in the accumulation phases for plans under Section 404(c) of the Employee Retirement Income Security Act (ERISA). DOL considered how a prudent mix of options might be incentivized while maintaining sufficient participant protections in the process of developing this report.
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| Department of Labor | To guide fiduciaries as they consider how the account balances of their participants will translate into financial security in retirement, DOL should modify its Meeting Your Fiduciary Responsibilities publication or issue new guidance to encourage plan sponsors to use a record keeper that includes annuities from multiple providers on their record keeping platform. |
As of September 2023, DOL reviewed its publications to explore ways to encourage use of products and arrangements designed to provide participants and beneficiaries a lifetime income stream after retirement, and it is working on ways to build on them to better educate participants and plan sponsors about the need to think of making retirement savings last throughout retirement. The agency noted its regulatory work to help ensure plan participants receive their account balance expressed in annuity terms. DOL stated that it plans to update its "Meeting Your Fiduciary Responsibilities" publication, which will provide it an opportunity to encourage plan sponsors to use a record keeper that includes annuities from multiple providers on their record keeping platform. We will consider closing this recommendation when this publication - or other guidance - is updated to reflect these changes.
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| Department of Labor | To guide fiduciaries as they consider how the account balances of their participants will translate into financial security in retirement, DOL should modify its Meeting Your Fiduciary Responsibilities publication or issue new guidance to encourage plan sponsors to offer participants the option to partially annuitize their account balance by allowing them the ability to purchase the amount of guaranteed lifetime income most appropriate for them. |
As of September 2023, DOL reviewed its publications to explore ways to encourage use of products and arrangements designed to provide participants and beneficiaries a lifetime income stream after retirement, and it is working on ways to build on them to better educate participants and plan sponsors about the need to think of making retirement savings last throughout retirement. The agency noted its regulatory work to help ensure plan participants receive their account balance expressed in annuity terms. DOL stated that it plans to update its "Meeting Your Fiduciary Responsibilities" publication, which will provide it an opportunity to encourage plan sponsors to offer participants the option to partially annuitize their account balance. We will consider closing this recommendation when this publication - or other guidance - is updated to reflect these changes.
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| Department of Labor | To guide fiduciaries as they consider how the account balances of their participants will translate into financial security in retirement, DOL should modify its Meeting Your Fiduciary Responsibilities publication or issue new guidance to encourage plan sponsors to consider whether a contract with a service provider ensures future service provider changes do not cause participants to lose the value of their lifetime income guarantees. |
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, enacted in 2020, includes several lifetime income provisions, including a provision to create a mechanism to preserve the value of 401(k) plan participant lifetime income guarantees that may be discontinued when a plan sponsor changes its service provider. This increases the portability of annuity investments for employees who switch jobs or retire. Plan sponsors will be able to ensure that future service provider changes do not cause participants to lose the value of their lifetime income guarantees. To implement lifetime income provisions in the SECURE Act provisions, DOL issued an interim final rule on September 18, 2020. In addition, DOL reviewed the "Meeting Your Fiduciary Responsibilities" publication and is updating it to address the SECURE Act provisions and related guidance. We believe the intent of this recommendation has been met by Congressional action.
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| Department of Labor | To guide fiduciaries as they consider how the account balances of their participants will translate into financial security in retirement, DOL should modify its Meeting Your Fiduciary Responsibilities publication or issue new guidance to encourage plan sponsors to include participant access to advice on the plan's lifetime income options from an expert in retirement income strategies. |
As of September 2023, DOL reviewed its publications to explore ways to encourage use of products and arrangements designed to provide participants and beneficiaries a lifetime income stream after retirement, and it is working on ways to build on them to better educate participants and plan sponsors about the need to think of making retirement savings last throughout retirement. The agency noted its regulatory work to help ensure plan participants receive their account balance expressed in annuity terms. DOL stated that it plans to update its "Meeting Your Fiduciary Responsibilities" publication, which will provide it an opportunity to encourage plan sponsors to include participant access to advice on the plan's lifetime income options from an expert in retirement income strategies. We will consider closing this recommendation when this publication - or other guidance - is updated to reflect these changes.
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| Department of Labor | To guide fiduciaries as they consider how the account balances of their participants will translate into financial security in retirement, DOL should modify its Meeting Your Fiduciary Responsibilities publication or issue new guidance to encourage plan sponsors to consider providing RMD-based default income-plan distributions as a default stream of lifetime income based on the RMD methodology-beginning, unless they opt-out, when retirement-age participants separate from employment, rather than after age 70½. |
As of September 2023, DOL reviewed its publications to explore ways to encourage use of products and arrangements designed to provide participants and beneficiaries a lifetime income stream after retirement, and it is working on ways to build on them to better educate participants and plan sponsors about the need to think of making retirement savings last throughout retirement. The agency noted its regulatory work to help ensure plan participants receive their account balance expressed in annuity terms. DOL stated that it plans to update its "Meeting Your Fiduciary Responsibilities" publication, which will provide it an opportunity to encourage plan sponsors to consider providing RMD-based default income-plan distributions as a default stream of lifetime income based on the RMD methodology-beginning, unless they opt-out, when retirement-age participants separate from employment, rather than when RMDs are required. We will consider closing this recommendation when this publication - or other guidance - is updated to reflect these changes.
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