401(k) Plans:

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

GAO-14-9: Published: Nov 20, 2013. Publicly Released: Dec 16, 2013.

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  • GAO Interactive Graphic
    GAO-14-9 Interactive Graphic: Retirement Spend-Down Options Pose Tradeoffs for Defined Contribution (DC) Plan Participants

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Contact:

Charles A. Jeszeck
(202) 512-7215
jeszeckc@gao.gov

 

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What GAO Found

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

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

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

Why GAO Did This Study

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

What GAO Recommends

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

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

Recommendations for Executive Action

  1. Status: Open

    Comments: DOL generally agreed with this recommendation. The agency noted that expanding access to additional options involves plan design features, which historically have not been subject to DOL's regulatory authority under Title I of ERISA. However, the agency will evaluate whether there are available regulatory approaches to address this recommendation. GAO supports this effort and encourages the agency to fully consider the steps it could take within the scope of its current authority.

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

    Agency Affected: Department of Labor

  2. Status: Open

    Comments: Treasury did not provide comments on this recommendation.

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

    Agency Affected: Department of the Treasury

  3. Status: Open

    Comments: DOL agreed that participants should have timely information at or before retirement about available spend-down options and projections of future retirement income and stated that they will explore their options for actions. We encourage DOL to fully consider what steps it could take within the scope of its current authority.

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

    Agency Affected: Department of Labor

  4. Status: Open

    Comments: DOL stated that it will evaluate the available regulatory approaches to address this recommendation. DOL commented that it began working with a National Association of Insurance Commissioners (NAIC) Working Group to consider possible options for easing plan sponsor concerns with the financial soundness of annuity providers in connection with DOL's safe harbor for the selection of annuity providers and fiduciary responsibilities. The NAIC Working Group plans to provide DOL's Employee Benefits Security Administration (EBSA) a list of "best practices" for fiduciaries when asking states for information about insurers, and will continue to work with NAIC, Treasury, the Federal Insurance Office (FIO), and others as it evaluates regulatory approaches to address this recommendation. We commend DOL's efforts regarding a more workable safe harbor, but continue to encourage DOL to review alternative approaches taken by other countries, such as their reliance on existing solvency requirements and insurance standards, which can ease the burden on plan sponsors.

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

    Agency Affected: Department of Labor

 

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