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CCH® PENSION — 02/09/10

IRS, EBSA Request Comments On Lifetime Income Options Under Retirement Plans

from Spencer’s Benefits Reports: The Internal Revenue Service and the Department of Labor’s Employee Benefits Security Administration (EBSA) have published a request for comments regarding lifetime income options for participants in retirement plans. The request was published in the February 2 Federal Register.

In the request, the IRS and the EBSA explain that they are currently reviewing the ERISA and Internal Revenue Code rules to determine whether and how the agencies could or should enhance the retirement security of participants in employer-sponsored retirement plans and in individual retirement accounts by facilitating access to, and use of, lifetime income or other arrangements designed to provide a lifetime stream of income after retirement (such as annuities). The purpose of the request for information is to solicit views, suggestions, and comments from plan participants, employers, and other plan sponsors, plan service providers, and members of the financial community, as well as the general public.

Specifically, the agencies request comments on the following issues:

(1) From the standpoint of plan participants, what are the advantages and disadvantages for participants of receiving some or all of their benefits in the form of lifetime payments?

(2) Currently, the vast majority of individuals who have the option of receiving a lump sum distribution or ad hoc periodic payments from their retirement plan or IRA choose to do so and do not select a lifetime income option. What explains the low usage rate of lifetime income arrangements? Are there steps that the agencies could or should take to overcome at least some of the concerns that keep plan participants from requesting or electing lifetime income?

(3) What types of lifetime income are currently available to participants directly from plans, such as payments from trust assets held under a defined benefit plan and annuity payments from insurance contracts held under a defined contribution or defined benefit plan?

(4) To what extent are 401(k) and other defined contribution plan sponsors using employer matching contributions or employer nonelective contributions to fund lifetime income? To what extent are participants offered a choice regarding such use of employer contributions, including by default or otherwise?

(5) What types of lifetime income or other arrangements designed to provide a stream of income after retirement are available to individuals who have already received distributions from their plans, such as IRA products, and how are such arrangements being structured (fixed, inflation-adjusted, or other variable, immediate, or deferred, etc.)?

(6) What product features have a significant impact on the cost of providing lifetime income or other arrangements designed to provide a stream of income after retirement, such as features that provide participants with the option of lifetime payments, while retaining the flexibility to accelerate distributions if needed?

(7) What are the advantages and disadvantages for participants of selecting lifetime income payments through a plan as opposed to outside a plan (e.g., after a distribution or rollover)?

(8) What are the advantages and disadvantages from the standpoint of the plan sponsor of providing an in-plan option for lifetime income as opposed to leaving to participants the task of securing a lifetime income vehicle after receiving a plan distribution?

(9) How commonly do plan sponsors offer participants the explicit choice of using a portion of their account balances to purchase a lifetime annuity, while leaving the rest in the plan or taking it as a lump sum distribution or a series of ad hoc distributions? Would expanded offering of such partial annuity options—or particular ways of presenting or framing such choices to participants—be desirable and would this likely make a difference in whether participants select a lifetime annuity option?

(10) How should participants determine what portion (if any) of their account balance to annuitize? Should that portion be based on basic or necessary expenses in retirement?

(11) Should some form of lifetime income distribution option be required for defined contribution plans (in addition to money purchase pension plans)? If so, should that option be the default distribution option, and should it apply to the entire account balance? To what extent would such a requirement encourage or discourage plan sponsorship?

(12) What are the impediments to plan sponsors’ including lifetime income options in their plans, e.g., 401(k) or other qualification rules, other federal or state laws, cost, potential liability, concern about counterparty risk, complexity of products, lack of participant demand?

(13) What are the advantages and disadvantages of approaches that combine annuities with other products (reverse mortgages, long term care insurance), and how prevalent are these combined products in the marketplace?

Comments must be submitted by May 3 to the Office of Regulations and Interpretations, EBSA, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue, N.W., Washington, DC 20210, Attention: Lifetime Income RFI; via e-mail to e-ORI@dol.gov. (include RIN 1210-AB33 in the subject line of the message); or via the Internet to http://www.regulations.gov. For further information, contact Stephanie L. Ward or Luisa Grillo-Chope of the EBSA at (202) 693-8500; or Peter J. Marks of the IRS at (202) 622-6090.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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