Compliance

GAO Makes Recommendations for Lifetime Income Options in 401(k)s

GAO gave the DOL seven recommendations to address 401(k) plan sponsors’ fear of offering lifetime income options in their plans.

By Rebecca Moore editors@plansponsor.com | September 09, 2016

A Government Accountability Office (GAO) questionnaire from 11 401(k) plan recordkeepers 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. 

GAO noted that responses to the questionnaire represented more than 40% of all 401(k) assets and about one-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 systematic withdrawal option—payments from accounts, sometimes designed to last a lifetime—and about three-quarters did not offer an annuity.

Concerns about legal risks and recordkeeper constraints may deter many plan sponsors from offering lifetime income options. The GAO pointed out that the Department of Labor (DOL) has prescribed steps plan sponsors can take to satisfy their fiduciary duties 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 providing clear definitions for those terms.

Further, GAO found that a mix of lifetime income options to choose from is not usually available. The 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.

Stakeholders also told GAO that recordkeepers may make only their own annuities available to the plans they service. The 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.

The 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 required minimum distributions (RMDs) be the default distribution process for retiring participants, the DOL may help create lifetime income for participants who do not choose an option, the GAO said.

GAO made seven recommendations to the 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 recordkeeper that offers annuities from other providers; and consider providing RMD-based default lifetime income to retirees. The DOL generally agreed to the recommendations and told the GAO it would take actions to address them.

The GAO report may be downloaded from here.

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