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entitled 'Private Pensions: Participants Need Information on Risks they
Face in Managing Pension Assets at and during Retirement' which was
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Report to Congressional Requesters:
United States General Accounting Office:
GAO:
July 2003:
Private Pensions:
Participants Need Information on Risks They Face in Managing Pension
Assets at and during Retirement:
GAO-03-810:
GAO Highlights:
Highlights of GAO-03-810, a report to Congressional Requesters
Why GAO Did This Study:
The decisions that retiring workers make about how and when to draw
down their pension plan assets determine in part whether they will
have pension income that lasts throughout retirement. Individuals will
need pension and other retirement income to sustain them over a longer
period of time than in the past. Moreover, the continuing trend
towards pension plans with individual accounts has increased
participants’ responsibility for managing their pension assets during
retirement. As such, our objectives were to determine:
(1) what benefit payout options and accompanying information pension
plans make available to participants at retirement, (2) what benefit
payouts plan participants receive at retirement, and (3) the actions
available to help retiring participants preserve their pension and
retirement savings plan assets.
What GAO Found:
Defined benefit (DB) plans make annuities available to all
participants at retirement, while defined contribution (DC) plans make
lump sums available to almost all participants. Recent data also show
that about half of private sector workers who participated in DB plans
had a lump sum option at retirement, and over a third of their
counterparts in DC plans had an annuity option. Plan sponsors GAO
spoke with provide retiring participants with applicable notices about
their benefit payout options available under the plan. Additional
information provided by plan sponsors GAO spoke with primarily focused
on saving for retirement. Risks that can affect retirement income, or
other considerations relevant to managing pension assets at and during
retirement were generally not discussed.
According to GAO’s analysis, while 60 percent of recent retirees
received annuities, an increasing percentage from 1992 to 2000
directly rolled over lump sum benefits into an individual retirement
account or deferred their receipt by leaving these assets in the
plan, a trend in part explained by the shift toward retirees with DC
plan benefits. Additionally, GAO found that a growing percentage of
those retirees who reported having a choice of benefit payouts chose
to directly roll over their lump sum benefits or leave benefits in the
plan rather than receive annuities.
Actions available to help retiring participants preserve their pension
and retirement savings plan assets range from options that would
encourage the receipt of annuities to providing information to help
participants make better decisions about managing their pension assets
at and during retirement. According to an expert panel GAO used as
part of this study, retirees need to be aware of the risk of outliving
one’s assets in retirement and the financial risks individuals face in
retirement. Over 90 percent of GAO’s panelists rated providing
information on such risks as very or extremely effective in helping
retiring participants make decisions about managing their pension
assets.
What GAO Recommends:
GAO is not recommending executive action. However, to improve public
awareness and understanding of important considerations related to
managing pension and retirement assets in retirement, the Congress may
wish to consider amending the Employee Retirement Income Security Act
to require plan sponsors to provide participants with a notice on
risks that individuals face in managing their income and expenditures
at and during retirement. The Congress could consider stipulating that
this notice must be provided at certain key milestones.
www.gao.gov/cgi-bin/getrpt?GAO-03-810.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Barbara Bovbjerg at
(202) 512-7215 or bovbjergb@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
DB Plans More Likely to Offer Annuities and DC Plans to Offer Lump
Sums, and Plans Provide Only Applicable Notices on Benefit Payout
Options:
Most Retirees Receive Annuities, but an Increasing Percentage Receive
Other Types of Benefit Payouts:
Range of Actions Available to Help Retiring Participants Preserve Their
Pension Assets:
Conclusions:
Matter for Congressional Consideration:
Agency Comments:
Appendix I: Data, Scope, and Methods:
Data Sources:
Methodology:
Appendix II: Descriptive Statistics and Regression Analyses:
Pension Payout Categories and Retiree Choice:
Appendix III: Delphi Panel on Options to Encourage the Preservation of
Pension and Retirement Plan Savings:
Phase I:
Phase II:
Factors Affecting Payout Options:
Options That Could Encourage More Annuitization of Pension and
Retirement Plan Savings:
The Role of Information and Education in Managing Pension and
Retirement Plan Savings during Retirement:
Phase III:
Appendix IV: GAO's Delphi Panel of Experts:
Appendix V: Comments from the Department of The Treasury:
Tables:
Table 1: Types of Pension Payouts Received by Retirees:
Table 2: Types of Pension Payouts Received by Retirees Reporting a
Choice of Payout Options:
Table 3: Sample Averages for Characteristics of Retirees, by Pension
Payout Choice:
Table 4: Logistic Regression of Annuity Payouts for All Retirees
Reporting a Choice of Payout Options:
Table 5: Logistic Regression of DB Annuity Payouts for DB Retirees
Reporting a Choice of Payout Options:
Table 6: Logistic Regression of DC Annuity Payouts for DC Retirees
Reporting a Choice of Payout Options:
Table 7: Top Five Answers That Were Identified as Either a Major or
Moderate Factor Affecting the Pension Options Offered and/or Elected by
Retiring Participants:
Table 8: Top Five Answers That Were Most Frequently Included in the Top
Five Factors Affecting the Pension Options Offered and/or Elected by
Retiring Participants:
Table 9: Top Five Answers That Were Identified as Either Extremely
Effective or Very Effective Options in Encouraging More Annuitization
of Pension and Retirement Plan Savings:
Table 10: Top Five Answers That Were Identified as Either Greatly
Helping or Generally Helping Pension and Retirement Plan Coverage:
Table 11: Top Five Answers That Were Identified as Either Very Easy or
Easy for Plan Sponsors to Comply with and/or Act on:
Table 12: Top Five Answers That Were Identified as Either Extremely
Effective or Very Effective Types of Information and Education in
Helping Retiring Participants Make More Optimal Decisions:
Table 13: Top Five Answers That Were Most Frequently Included in the
Top Five Types of Information and Education to Help Retirees Make More
Optimal Decisions:
Figures:
Figure 1: Shares of Aggregate Income for Persons 65 and Over, by
Source, 2001:
Figure 2: Percent of Employees Participating in Types of Plans, by
Choice of Payment Options Provided (2000):
Figure 3: Types of Pension Payouts Received by Retirees:
Figure 4: Types of Pension Payouts Received by Retirees with DB
Payouts:
Figure 5: Types of Pension Payouts Received by Retirees with DC
Payouts:
Abbreviations:
BLS: Bureau of Labor Statistics:
DB: defined benefit:
DC: defined contribution:
DOL: Department of Labor:
EBSA: Employee Benefits Security Administration:
ERISA: Employee Retirement Income Security Act of 1974:
HRS: Health and Retirement Study:
IRA: Individual Retirement Account:
IRC: Internal Revenue Code:
NCS: National Compensation Survey:
NIA: National Institute on Aging:
QJSA: qualified joint and survivor annuities:
RSEC: Retirement Savings Education Campaign:
SAVER: Savings Are Vital to Everyone's Retirement Act:
SSA: Social Security Administration:
United States General Accounting Office:
Washington, DC 20548:
July 29, 2003:
The Honorable Earl Pomeroy
The Honorable Rob Portman
The Honorable Ben Cardin
The Honorable Phil English
House of Representatives:
The decisions that retiring workers make about how and when to draw
down their pension and retirement savings plan assets determine in part
whether they will have pension income that lasts throughout retirement.
Individuals are living longer on average once they retire and will need
pension and other retirement income to sustain them over a longer
period of time than in the past. Moreover, the continuing trend away
from traditional defined benefit (DB) pension plans that can guarantee
a stated level of income for life towards defined contribution (DC)
plans with individual accounts has made participants more responsible
for managing their pension assets during retirement.[Footnote 1]
Increasingly, retirees have access to their pension and retirement
savings plan assets and the flexibility to choose how and when to
invest and draw down these assets.
The type of pension or retirement savings plan workers participate in
could influence the benefit payment options they have available.
Private employers may sponsor DB and/or DC pension plans for their
employees. DB plans must make available a joint and survivor life
annuity to retiring participants--a series of periodic payments that
begin at retirement and continue through the life of the participant
(or other specified period) and at the death of the participant, to the
surviving spouse. These plans may also offer a lump sum--a cash amount-
-as an alternative payout option to the annuity. While some DC plans
are required to make available a joint and survivor annuity,[Footnote
2] DC plans typically make benefits available as a lump sum[Footnote 3]
(i.e., the participant's account balance) or installment payments--
periodic withdrawals paid until account balances are exhausted. DC
plans may offer to purchase an annuity.[Footnote 4]
Pension plan sponsors must provide certain disclosures and notices to
retiring participants about their pension benefit payment options.
These requirements vary based on type of plan and benefit options
available under the plan. For all DB plans as well as those DC plans
subject to the joint and survivor annuity requirement, plans must
provide, among other information, a written explanation of the terms
and conditions of the joint and survivor annuity, including information
about other payout options made available under the plan and the rights
of the participant's spouse.
Annuities and lump sums present different advantages and risks to
retirees. A life annuity, whether received from a plan or purchased,
generally provides insurance that a retiree will not run out of income
no matter how long he or she lives. However, if a retiree dies soon
after choosing or purchasing an annuity, he or she would likely receive
considerably less than if he or she had taken a lump sum and will be
unable to leave that asset as a bequest. Also, income from fixed
annuities may not be adequate to pay for unexpected large expenses or
provide protection against inflation.[Footnote 5]
Retiring participants who receive lump sums have the flexibility to
preserve or draw down these assets as they wish, but could risk running
out of pension assets if they live longer than expected, draw down
assets too rapidly, or suffer poor investment returns on their assets.
A retiree may choose to receive a lump sum directly from the plan as a
cash settlement and then invest or spend some of or the entire amount.
Alternatively, retirees who receive lump sums may preserve these assets
by purchasing an annuity with some or all of the proceeds to provide a
stream of income throughout retirement.
Because of concerns about whether retirees will preserve their pension
assets you asked us to determine: (1) what benefit payout options and
accompanying information pension plans make available to participants
at retirement; (2) what benefit payouts plan participants receive at
retirement; and (3) the actions available to help retiring participants
preserve their pension and retirement savings plan assets.
To determine what benefit payout options and accompanying information
DB and DC plans make available to participants at retirement, we
reviewed applicable laws and regulations to identify benefit payout
options plan sponsors must and may provide at retirement and the types
of accompanying information they must furnish to participants. We
obtained data on the types of payout options available to participants
from the Bureau of Labor Statistics' (BLS) National Compensation Survey
for 2000. We interviewed pension experts and convened a Web-based
expert panel to identify factors that may affect the benefit payout
options plans make available. To examine how retiring plan participants
receive their pension benefits, we used publicly available data from
the University of Michigan's Health and Retirement Study (HRS),
covering the period from 1992 to 2000. In addition, we interviewed plan
sponsors and practitioners to obtain information and views on the
benefit payouts retirees choose when they have payout options and
reasons why retirees prefer (or do not prefer) different benefit
payouts. To identify actions that could help retiring participants
preserve their pension and retirement savings plan assets and obtain
expert opinions and views, we interviewed pension experts and surveyed
our Web-based expert panel. A range of experts, including academics,
plan practitioners, and representatives of insurance providers,
employers, and public interest groups, participated on our expert
panel.
We conducted our work between August 2002 and July 2003 in accordance
with the generally accepted government auditing standards. (See app. I
for more details on our data, scope, and methodology.):
Results in Brief:
In general, DB plans are more likely than DC plans to make annuities
available at retirement, while DC plans are more likely than DB plans
to make lump sums available. The most recent BLS data show, not
unexpectedly, that of those private sector workers who participated in
DB plans, all had an annuity option available. Moreover, slightly less
than half of these DB participants had a lump sum option. In
comparison, almost all private sector workers who participated in DC
plans had a lump sum option available, just over a third had an annuity
option, and over half had an installment payment option. Plan sponsors
we spoke with provide retiring participants with applicable notices
about benefit payout options available under the plan. While some plan
sponsors we spoke with provide more than these notices, this additional
information primarily focuses on saving for retirement. These plan
sponsors generally did not provide information on considerations
relevant to managing pension assets at and during retirement, such as
on the potential risks that retirees face in managing their assets or
on how to assess needs in retirement.
When we analyzed the types of payout employees actually received at
retirement, we found retirees increasingly selected benefit payouts
other than annuities. About 60 percent of retirees received annuities
from 1992 to 2000,[Footnote 6] but during that period an increasing
proportion of more recent retirees chose to directly roll over lump sum
benefits into an Individual Retirement Account (IRA) or to defer their
receipt by leaving them in the plan. Specifically, retirees choosing
these payouts represented about 32 percent of the group that retired
between 1992-94 and grew to 47 percent by 1998-2000. Only about 14
percent of retirees took their pension benefits as cash settlements, a
figure that changed little over the period. Retirees who received
benefits from DB plans were most likely to receive annuities, while
those who received benefits from DC plans were most likely to roll over
benefits into an IRA or to defer receipt. The shift toward retirees
with DC plan benefits in part explains why we observe a trend away from
annuities and toward other payouts. Additionally, we found that a
growing percentage of those retirees who reported having a choice among
benefit payout options chose payouts other than annuities.
Pension experts identified a range of actions available to help
retiring participants preserve their pension and retirement savings
plan assets. Some policy options would increase or encourage
annuitization of pension assets at retirement. Such options include
imposing new requirements on plan sponsors to offer annuities to
retiring participants. Other options include modifying certain rules to
make it easier for plan sponsors to offer annuities or providing an
incentive to retiring participants to choose annuities. Besides options
that focus exclusively on annuities, information and education could be
provided to participants to help them make decisions about how to
manage pension assets during retirement. For example, our expert panel
indicated that participants could make more informed decisions if they
were aware of various risks that affect the level of income they need
during retirement, such as the risk of outliving their assets and the
risk of declining purchasing power. Participants also need help
understanding how to assess needs in retirement, strategies for drawing
down pension assets during retirement, and how annuities provide
retirement income.
This report includes a matter for congressional consideration to
require plan sponsors to provide a notice on risks that individuals
face when managing their income and expenditures at and during
retirement.
We provided a draft of this report to the Department of Labor (DOL) and
the Department of the Treasury. Both agencies provided us with
technical comments, and we incorporated each agency's comments as
appropriate. Additionally, DOL officials stated that the Secretary of
Labor does not currently have the legal authority under ERISA to
require plan sponsors to provide such information. Consequently, we
changed our recommendation to a matter for consideration for the
Congress to amend ERISA to require plan sponsors to provide a notice to
participants on risks they face when managing their pension and
retirement savings plan assets in retirement.
Background:
The standard of living of the elderly depends on total retirement
income, which includes Social Security, pensions, income from assets,
and earnings from employment. While Social Security provides a
foundation for retirement income, savings through pension and
retirement savings plans, as well as by individuals on their own
behalf, can contribute substantially to ensuring a secure retirement.
For example, the Social Security Administration reports that while 39
percent of income for persons 65 and over came from Social Security
income in 2001, 18 percent of their income came from pensions (see fig.
1).
Figure 1: Shares of Aggregate Income for Persons 65 and Over, by
Source, 2001:
[See PDF for image]
[End of figure]
To encourage employers to establish and maintain pension plans for
their employees, the federal government provides preferential tax
treatment under the Internal Revenue Code (IRC) for plans that meet
certain requirements. A purpose of tax preferences for employer-
sponsored pensions is to encourage savings for workers' retirement.
Pension tax preferences are structured to strike a balance between
providing incentives for employers to start and maintain voluntary,
tax-qualified pension plans and ensuring participants receive an
equitable share of the tax-favored benefits.
A qualified pension plan is a retirement plan that satisfies certain
requirements set forth in the Internal Revenue Code. In order to be
tax-qualified, private pension plans must satisfy a number of
requirements, including minimum requirements on coverage and benefits.
Private pension plans must also generally meet the requirements of the
Employee Retirement Income Security Act of 1974 (ERISA). Title I of
ERISA, among other requirements, contains requirements regarding
information that plan sponsors must provide to participants and defines
the obligations of the individuals who administer employer-sponsored
plans.
There has been a continuing trend from DB to DC plans over the last 2
decades. DOL reports that private sector employers sponsored over
56,000 tax-qualified DB plans in 1998 down from over 139,000 in 1979,
while the number of tax-qualified DC plans sponsored by private
employers more than doubled from over 331,000 to approximately 674,000
during this same period. Along with this continuing trend to sponsoring
DC plans, there has also been a shift in the type of plans that private
sector workers participate in. DOL reports that the percentage of
private sector workers who participated in a primary DB plan has
decreased from 37 percent in 1979 to 21 percent by 1998, while the
percentage of such workers who participated in a primary DC plan has
increased from 7 to 27 percent during this same period. Moreover, these
same data show that, by 1998, the majority of active participants
(workers participating in their employer's plan) were in DC plans,
whereas nearly 20 years earlier most of them were in DB plans.
Employers who sponsor DB plans are responsible for making contributions
that are sufficient for funding the promised benefit, investing and
managing the plan assets, and bearing the investment risk because the
employer, as plan sponsor, agrees to make future payments during
retirement. However, under DC plans, workers bear the investment risk
because there is no promise made by the employer that money will be
available during retirement. Thus, as a result of this shift from DB to
DC plans, an increasing share of the responsibility for providing for
one's retirement income has shifted from the employer to the employee.
DB plans sponsored by private employers are required to offer joint and
survivor annuities[Footnote 7] to married participants beginning at the
plan's normal retirement age. These annuity payouts, called qualified
joint and survivor annuities (QJSA), guarantee a benefit for the life
of the participant and the participant's surviving spouse. DB plans may
also offer a single-life annuity to unmarried participants. With
respect to DC plans, there is no uniform requirement regarding benefit
payouts they must offer. Rather, certain DC plans must adhere to the
QJSA requirements because, similar to DB plans, they are subject to
minimum funding standards.[Footnote 8] Other DC plans are not subject
to the QJSA requirements if the plan provides for payment in full of
the participant's accrued benefit under the plan to the spouse on the
death of the participant and the participant has not elected to receive
a life annuity.[Footnote 9]
Plans subject to the QJSA requirements must provide participants with a
written explanation of the terms and conditions of the QJSA. As part of
this notice, participants must be furnished with a description of other
benefit payouts that the plan offers as options to the QJSA--including
information on their features and value of a participant's benefits
under such options. In addition, the plan must provide participants
with an explanation of the participant's right to make, and the effect
of, an election to waive the QJSA form of benefit, the rights of the
participant's spouse, and the right to revoke an election to waive the
QJSA form of benefit.
Because of concerns that participants who are offered QJSA benefits do
not have adequate information to compare these benefits with other
optional payouts, IRS has proposed regulations to strengthen the
requirements regarding the written explanation of a QJSA that plans
must provide. Specifically, the proposed regulations provide additional
guidance regarding information that plans furnish to describe the value
of a participant's benefits under optional payouts compared with the
value of a participant's QJSA benefits. The comparison must show what
the participant would receive under each optional payout relative to
the QJSA (including for those benefit payouts that are subsidized) in a
way that is meaningful. Additionally, this comparison must include
information that is more readily understandable to
participants.[Footnote 10]
There is also required information that plans must provide retiring
participants about lump sum payouts. Plans that offer a lump sum payout
must provide a rollover notice to retiring participants. The rollover
notice must discuss the participant's ability to have such payouts
directly transferred by the plan to another eligible retirement plan.
Rollover notices must also include information about the tax
consequences of choosing various payout options, such as rolling the
assets to another account or taking a lump sum directly as a cash
settlement.
Retiring participants who have the option to receive benefits as a lump
sum amount (i.e., cash settlement) may also choose to directly "roll
over" their assets to another qualified retirement plan, such as an
IRA.[Footnote 11] DB plans that permit lump sums must adhere to certain
rules regarding the calculation of lump sum amounts. Lump sums must be
at least as large as the actuarial equivalent (i.e., present value) of
a participant's accrued benefit (i.e., the value of the deferred
annuity that the participant is entitled to receive or at the plan's
normal retirement age).[Footnote 12]
DC plan participants also have the option to defer receipt of benefits
by leaving assets in their individual accounts.[Footnote 13] Both
directly rolling over assets into another qualified retirement plan and
leaving benefits in the plan preserve pension assets at the point of
retirement. Also, DC plan participants may have the option to receive
their benefits as a series of installment payments at retirement that
he or she may spend or save as desired. However, unlike a DB plan, a DC
plan cannot itself provide a life annuity, but can offer to purchase an
annuity from an insurance company. Retirees that do not choose or
purchase annuities at the point of retirement assume personal
responsibility for managing their pension and retirement savings plan
assets to provide retirement income. In particular, these retirees must
decide how pension assets are saved or invested and determine the
timing and amount of withdrawals.
Increasingly, retirees will--on average--need to balance income and
expenditures over a longer period of time than in the past. This is in
part due to the long-term trend towards earlier retirement throughout
most of the twentieth century. Nearly half of all men now leave the
labor force by age 62 and almost half of all women are out of the
workforce by age 60. Moreover, the decline in the average retirement
age has occurred in an environment of rising longevity for the elderly.
Falling mortality rates have added almost 4 years to the expected life
span of a 65-year-old man and more than 5 years to the life expectancy
of a 65-year-old woman since 1940.
Individuals face a variety of risks in managing their assets, income,
and expenditures at and during retirement. For example, retirees may
outlive their pension or retirement savings plan assets. In addition,
inflation may erode the purchasing power of their income, investments
may yield returns that are less than expected or decline in value, and
large unplanned expenses, such as those to cover long-term care, may
occur at some point during retirement.
Annuities offer a means to mitigate much of the financial uncertainty
that accompanies living to very old ages, but may not necessarily be
the best approach for all retirees. For example, an individual with a
life shortening illness might not be concerned about the financial
needs that accompany living to a very old age. Also, some individuals
may want to continue to accumulate assets during retirement and could
invest their pension assets in IRAs or financial products, in which
such assets could be more heavily invested in equities. Strategies to
manage risk during retirement, when most are decumulating rather than
accumulating assets will necessarily be highly individualized.
The Internal Revenue Service, DOL's Employee Benefits Security
Administration (EBSA), and the Pension Benefit Guaranty Corporation are
primarily responsible for enforcing laws that govern private pension
plans. The Internal Revenue Service enforces provisions of the IRC that
apply to tax-qualified pension plans. EBSA enforces ERISA's reporting
and disclosure provisions and fiduciary responsibility standards, which
among other things concern the type and extent of information provided
to plan participants. The Pension Benefit Guaranty Corporation insures
the benefits of participants in certain tax-qualified private sector
defined benefit plans.
Recognizing the importance of retirement savings, the Congress enacted
the Savings Are Vital to Everyone's Retirement (SAVER) Act of 1997 to
advance the public's knowledge and understanding of the importance of
retirement savings. The act requires DOL to, among other things,
maintain an ongoing outreach program to the public to effectively
promote retirement savings and to disseminate specific educational
materials related to retirement savings and the principles of saving
and investment. DOL's Retirement Savings Education Campaign (RSEC),
which began 2 years prior to passage of the SAVER Act, is an outreach
program that targets owners of small businesses, women, minorities, and
youth to change the way they think about, and act on, their retirement
saving needs. As part of its campaign, DOL is partnering with outside
organizations to develop informational materials and tools to help
individuals understand their retirement benefit options and make
informed decisions about retirement, including managing assets during
retirement.
DB Plans More Likely to Offer Annuities and DC Plans to Offer Lump
Sums, and Plans Provide Only Applicable Notices on Benefit Payout
Options:
DB plans are more likely to make annuities available to retiring
participants because they are required to do so, while DC plans are
more likely to make lump sums available. Additionally, nearly half of
private sector workers who participated in a DB plan have a lump sum
available at retirement, while over a third of DC plan participants
have annuities available. Pension plan sponsors we spoke with provide
participants with applicable notices about their benefit payout options
available under the plan. Some plan sponsors we spoke with provide
information beyond these notices, but this information primarily
focuses on saving for retirement and not on issues related to managing
pension assets at and during retirement.
Nearly Half of DB Plans Make Lump Sums Available and Just Over a Third
of DC Plans Make Annuities Available:
DB plans are more likely than DC plans to make annuities available at
retirement, while DC plans are more likely than DB plans to make lump
sums available. The most recent BLS data (2000)[Footnote 14] show that,
not unexpectedly, all private sector workers who participated in DB
plans had an annuity option[Footnote 15] available at retirement, while
only 38 percent of their DC counterparts had this option. Almost all
private sector workers who participated in DC plans (94 percent) had a
lump sum option available and just under half (46 percent) of their DB
counterparts had this option available. Additionally, over half of
these workers in DC plans had an installment payment option (55
percent) available.
Some private sector workers in each type of plan also had more than one
benefit payment option available at retirement (see fig. 2). BLS data
show that 46 percent of private sector workers in DB plans had both an
annuity and lump sum option available. Also, 32 percent of all private
sector workers who participated in DC plans had a lump sum, an annuity
and an installment payout option available at retirement.
Figure 2: Percent of Employees Participating in Types of Plans, by
Choice of Payment Options Provided (2000):
[See PDF for image]
[A] Percentages of employees calculated based on the number
determinable responses for each type of plan.
[B] Other options such as rollover into an Individual Retirement
Account were not tabulated separately.
[End of figure]
Two surveys conducted on the incidence of payout options plans make
available found similar results. These surveys indicated that almost
all DC plans offer a lump sum to retiring participants, and all DB
plans offer an annuity. In 2001, a study by Hewitt Associates on
certain DB plans found that 40 percent of these plans offered all
participants a lump sum option.[Footnote 16] A survey of certain DC
plans by the Profit Sharing Council of America[Footnote 17] shows that,
in 2001, about 99 percent of the DC plans surveyed offered a lump sum
at retirement, 56 percent offered an installment option, and 28 percent
offered an annuity. Plan sponsors we spoke with also confirmed our
findings from the BLS data.
Several factors may affect the benefit payout options plans made
available to retiring participants. Our expert panel suggested that DC
plans do not offer an annuity because of certain challenges associated
with providing this payout option.[Footnote 18] For example, members of
the expert panel suggested that current QJSA regulations--which require
plans that offer an annuity to offer a QJSA annuity and adhere to
spousal consent rules--may be administratively burdensome to plan
sponsors. Also, some plans do not offer an annuity in part because of
the concern about being held liable for any losses to participants in
the event the annuity provider cannot meet its financial obligations.
Our expert panel also identified worker preferences as an important
factor affecting the pension benefit payout options plans offer to
retiring participants. In part, plan sponsors offer lump sums in
response to employee demand for this option and choose not to offer
annuities absent employee demand for them. Also, pension experts and
plan sponsors we spoke with agreed that plans offer lump sums because
workers generally prefer them to annuities. A funding provider for
defined contribution plans, which used to only offer annuity payouts at
retirement, expanded the payout options it makes available to retiring
participants in response to participants' desire for more options and
control in managing their pension and retirement savings plan assets.
Plans Provide Participants with Notices about Benefit Payout Options,
but Information on Managing Assets during Retirement Is Not Widely
Available:
Plan sponsors we spoke with indicated that they provide retiring
participants with applicable notices about benefit payout options
available under the plan. For example, those sponsors that offer an
annuity payout told us that they provide the required QJSA and spousal
consent notices to participants. Also, those plan sponsors that offer a
lump sum told us that they provide participants with the required
rollover notice that reviews the tax consequences of choosing various
payout options. Additionally, these sponsors provide retiring
participants with various accompanying materials to the notices that
further describe all the benefit payout options available under their
plans.
While plan sponsors we spoke with provided some additional information
on saving for retirement, they generally did not provide information on
considerations relevant to managing pension and retirement savings plan
assets at and during retirement. For example, some of these sponsors
provide information on investment alternatives and the potential
impacts of various investment strategies on accumulating assets for
retirement. Some provide calculators or annual reports that, based on a
participant's current account balance, estimate retirement income using
various saving strategies and age scenarios.
However, the information provided by the plan sponsors we spoke with
generally does not discuss considerations relevant to managing pension
and retirement savings plan assets at and during retirement. These plan
sponsors generally do not discuss the potential pros and cons of
available payout options as related to managing pension assets during
retirement. For example, these sponsors do not provide information that
shows income payments a retiring participant could receive from an
annuity compared with income payments the participant might receive
from personally investing and drawing down a cash settlement.
Additionally, they typically do not discuss risks retirees may face in
managing their assets during retirement, or provide information on how
to assess needs at or during retirement.
Plan sponsors are hesitant to provide information and education on
managing assets during retirement because of liability concerns.
Although plan sponsors are permitted to provide information and
education to participants, there is no specific guidance that plan
sponsors may follow to provide retiring participants with information
on issues related to managing their pension assets during retirement.
If a plan sponsor provides what is considered to be advice, the sponsor
may be held liable for any monetary losses a participant experiences
for making an unfavorable decision--with respect to choosing a benefit
payout at retirement or managing pension assets--based on information
they provide. Plan sponsors are, therefore, careful not to provide
information that may be perceived as advice and could result in
litigation if participants choose benefit payout options or assets
management strategies that ultimately reduce their retirement income.
A funding provider for defined contribution plans we spoke with does,
however, provide information and education on potential risks retirees
face and other considerations for managing assets during retirement.
This organization provides information on three risks to retirement
income, including eroding purchasing power due to inflation, outliving
one's pension and retirement assets, and the possibility of getting
lower than anticipated investment returns due to market conditions.
Participants near and at retirement also receive information to better
understand how each of the various payout options they may choose from
could be most useful in meeting their individual retirement income
needs and preferences. Information and education is provided at key
stages of an employee's participation in the plan using multiple
communication approaches, including seminars, Web-based planning
tools, written materials, worksheets, and one-on-one counseling.
Representatives from this organization cited several reasons for
providing this type of information, including an increase in payout
options available and participant demand for more information and
education.
Most Retirees Receive Annuities, but an Increasing Percentage Receive
Other Types of Benefit Payouts:
When we analyzed the types of payout employees received at retirement,
we found retirees increasingly selecting benefit payouts other than
annuities. Although we found that about 60 percent of retirees received
annuities, over time an increasing percentage of more recent retirees
chose to directly roll over their lump sum benefits into an IRA or to
defer their receipt by leaving them in the plan. On the basis of our
statistical analysis, we found that retirees who received benefits from
DB plans were most likely to receive annuities, while those who
received benefits from DC plans were most likely to directly roll over
these assets into an IRA or defer the receipt of benefits. We found
that participation in a DB plan was the primary factor in choosing to
receive an annuity.
Our analysis of recently retired workers with pensions indicates that
while most received annuities, many received other types of payouts. As
shown in figure 3, from 1992 to 2000 about 60 percent of new retirees
with pensions received an annuity.[Footnote 19] However, about 40
percent reported directly rolling over benefits into an IRA or
deferring receipt by leaving benefits in their plan, and approximately
14 percent of retirees took pension assets as a cash settlement.
Figure 3: Types of Pension Payouts Received by Retirees:
[See PDF for image]
Note: For our analysis, "retirees with pensions" are survey respondents
who reported leaving a preceding-wave job to retire and reported
receiving a pension payout from that job. Figures in subcategories
should not be added because some respondents report receiving multiple
pension payouts.
[A] Includes respondents who received pension benefit payouts from both
DB and DC plans.
[B] For retirees with DB plans, includes respondents who expect to
receive benefits in the future. For those with DC plans, includes
respondents who reported leaving their assets in a plan account.
[End of figure]
While three-fifths of all retirees took annuities, over time an
increasing percentage of more recent retirees received other types of
payouts. Specifically, the percentage of all retirees who either
directly rolled over benefits into an IRA or deferred their receipt
increased from about 32 to 47 percent, while the percentage who
received cash settlements directly from their plan changed little. In
contrast, the percentage of retirees receiving annuities ranged from a
peak of about 65 percent to about 57 percent.
Most retirees participated in DB plans between 1992 and 2000, and
payouts received by retirees with DB benefits tended to be markedly
different from payouts received by retirees with DC benefits, which
helps to explain why most retirees received annuities. About 77 percent
of retirees with DB plan benefits received an annuity from those plans
(see fig. 4), while only 8 percent of retirees with DC plan benefits
received or purchased annuities with their benefits (see fig. 5).
Conversely, over three-quarters of retirees with DC plan benefits
directly rolled over assets into an IRA or deferred receipt of benefits
by leaving assets in their plan.
Figure 4: Types of Pension Payouts Received by Retirees with DB
Payouts:
[See PDF for image]
Note: For our analysis, "retirees with pensions" are survey respondents
who reported leaving a preceding-wave job to retire and reported
receiving a pension payout from that job. Figures in subcategories
should not be added because some respondents report receiving multiple
pension payouts.
[A] For retirees with DB plans, includes respondents who expect to
receive benefits in the future. For those with DC plans, includes
respondents who reported leaving their assets in a plan account.
[End of figure]
Figure 5: Types of Pension Payouts Received by Retirees with DC
Payouts:
[See PDF for image]
Note: For our analysis, "retirees with pensions" are survey respondents
who reported leaving a preceding-wave job to retire and reported
receiving a pension payout from that job. Figures in subcategories
should not be added because some respondents report receiving multiple
pension payouts.
[A] For retirees with DB plans, includes respondents who expect to
receive benefits in the future. For those with DC plans, includes
respondents who reported leaving their assets in a plan account.
[End of figure]
The growing trend towards payouts other than annuities may reflect, at
least in part, the continuing trend in coverage towards DC plans. Among
all retiring participants who received pension benefits, the percentage
who had participated in DC plans increased considerably over time,
while the percentage who had participated in DB plans decreased
somewhat after peaking in 1994. Also, little change occurred in the
types of payouts received by those with benefits from either DB or DC
plans. For example, about 90 percent of retirees with DC plan benefits
received payouts other than annuities over the entire period we
examined. Similarly, during this same period, retirees with DB plan
benefits received their payouts largely through annuities, with little
change.
One likely reason why many retirees with DB plans receive annuities is
that many DB retirees do not have other payout options available. About
38 percent of the DB retirees we analyzed reported having a choice of
receiving a payout other than an annuity. We narrowed our analysis to
examine the payout choices made by retirees, eliminating from our
analysis DB retirees with no payout choice other than an annuity. Thus,
in addition to examining how all retirees receive their pensions, we
also analyzed only retirees who report having a choice of receiving
benefits as an annuity or as a lump sum amount.[Footnote 20] Over the
period, the percentage of retirees who chose to directly roll over
their lump sum benefits to an IRA or to defer receipt of benefits rose
substantially, from around 44 percent of retirees to about 66 percent
(see table 2 in app. II). The percentage choosing annuities and cash
settlements, however, remained flat, indicating that more retirees
chose multiple payouts. Additionally, we found that 64 percent of DB
retirees with a choice still choose annuities over other options. As
with the full sample of retirees, the changes over time among those
with a choice of payout appears to be attributable largely to the trend
toward participation in DC plans, as we do not observe many changes in
payout choices within either plan type.
Currently, pension experts and plan sponsors we spoke with told us that
most retirees do not choose annuities when they have a choice of payout
options. For example, one plan administrator we spoke with indicated
that about two-thirds of retirees in the DB plans they administer
choose payouts other than an annuity when a choice of payout options is
offered. Additionally, a funding provider for DC plans reports that the
percentage of their participants who chose an annuity (single or joint
life) as their initial income selection fell from 78 percent to 45
percent from 1995 to 2001. Nevertheless, our analysis is not
necessarily inconsistent with this information. Although we found that
most retirees with pension benefits received an annuity, we also found
that a growing percentage of all retirees with a choice of payout
options received benefit payouts other than an annuity. Moreover, the
majority of those retirees who received DC plan benefits and who had a
choice of payout options choose to receive payouts other than an
annuity (see table 2 in app. II).
It is also possible that the receipt of lump sums from DB plans,
whether as cash settlements or through directly rolling over lump sum
benefits to an IRA, has increased since 2000. Recently, 30-year
Treasury bond rates, which DB plan sponsors must use to determine lump-
sum amounts, have fallen from their overall 1990's levels. As a result,
lump sums from DB plans have increased in value relative to
participants' annuity benefits, and retiring participants may find lump
sums more attractive when they are available under their plan.
We further analyzed retirees with a choice of payouts to determine
statistically which factors may influence retirees to choose annuities.
Not unexpectedly, participation in a DB plan was the strongest
predictor of annuity choice. Also, retirees with lower total household
assets (excluding pensions and other retirement assets) and retirees
with more years in the workforce were more likely to choose an annuity,
all else being equal. In addition, different factors seemed to
influence payout choices for retirees with DC benefits as compared with
those with DB benefits. For example, retirees with DC plan benefits
were more likely to be influenced by the price[Footnote 21] of an
annuity and by their perceived health status (with those reporting they
were in better health more likely to choose an annuity), while these
factors did not appear to affect retirees with DB plan
benefits.[Footnote 22]
Pension experts we spoke with suggested that annuities may appeal to
individuals with certain characteristics or preferences, while others
prefer to have control of their assets. Annuities may appeal to
individuals who expect to live long, are concerned about outliving
their resources in retirement, value a predictable, guaranteed income
stream, or do not wish or expect to leave a bequest.[Footnote 23]
However, some retirees may decline to consider annuities because such
payouts are generally irrevocable, instead preferring the flexibility
that other payouts offer. Such retirees may believe they can receive
more income and better protect themselves against inflation by
investing assets on their own. Also, some retirees may want to manage
their pension assets because they have difficulty comparing the value
of a lump sum amount to its equivalent annuity income stream. As such,
retirees may believe lump sum amounts are worth more than income
payments from annuities.
Although not all retirees have the option to receive their pension as
an annuity, they may purchase individual annuities[Footnote 24] to pay
income during retirement directly from insurance companies. However,
few retirees use their pension benefits or other assets to purchase
individual life annuities. Some retirees may choose not to purchase an
individual life annuity because the availability of these annuities is
limited, individual life annuities have associated administrative and
other expenses, and such annuities generally do not provide protection
against inflation. Additionally, one individual annuity provider told
us that the average premium, or one-time payment an individual makes,
to purchase an individual life annuity is approximately $130,000.
The demand for individual annuities may grow as the market continues to
develop innovative annuity products that appeal to consumer
preferences. For example, demand for individual variable annuities,
which offer the potential for higher income payouts based on investment
returns[Footnote 25] is growing. Additionally, as more individuals will
be approaching retirement with responsibility for managing a larger
share of their pension assets, the demand for individual life annuities
may increase.
Range of Actions Available to Help Retiring Participants Preserve Their
Pension Assets:
Pension experts identified a range of actions that could help retiring
participants preserve their pension and retirement savings plan assets.
Some policy options would require plans to payout or offer annuities to
retiring participants, while others would make it easier for plans to
offer annuities at retirement, or encourage retiring participants to
choose annuities. Additionally, pension experts generally agreed that
information and education could be provided to participants to help
them make better decisions regarding how they manage their pension
assets during retirement. For example, they noted that participants
need to be aware of various risks that may affect how participants
manage and draw down their pension assets to provide income during
retirement. At present, public education focuses primarily on saving
for retirement.
Actions Available to Increase or Encourage Receipt of Annuities:
Some actions that could help retiring participants preserve their
pension and retirement savings plan assets include options intended to
increase or encourage the receipt of annuities.[Footnote 26] While
annuities are not the only way plan participants can preserve their
pension assets at retirement, they can provide guaranteed income
throughout retirement. Thus, we asked an expert panel to identify
options that could encourage more annuitization of pension and
retirement savings plan assets at retirement.
Some options are intended to increase the number of retiring
participants who receive annuities by imposing new requirements on plan
sponsors. One option is to require that all pension and retirement
savings plans pay life annuities to retiring participants.[Footnote 27]
Such a mandate would ensure all retiring participants have pension
income for their remaining lifetimes. A variation on mandatory
annuitization would make life annuities the default payout option in
all DC plans. This could be achieved by requiring all tax-qualified DC
plans to offer a life annuity at retirement and retiring participants
to actively choose to receive some other payout (e.g., a cash
settlement) instead of an annuity. While annuities would not be
compulsory, it is likely that more retiring participants would choose
annuities because choosing to receive some other payout would require
an affirmative choice. This is because some retiring participants may
not take the necessary steps to choose another type of payout available
under their plan.
Another somewhat less stringent option than mandatory annuitization is
to require tax-qualified DC plans to offer annuities to retiring
participants like DB plans are required to do. This option would
provide more retirees with the opportunity to preserve retirement
savings by choosing an annuity from their plan without requiring that
they do so. Also, concerns that some participants might have about the
expense of purchasing an individual annuity and potential difficulty in
searching for an annuity product could be mitigated if annuities were
available under their plan.
Although these actions would increase the number of retirees who
receive annuities thus ensuring retirement income throughout their
lives, they also have drawbacks. For example, requiring that pension
plans provide life annuities to retiring participants would reduce
people's ability to tailor the receipt of benefits to their particular
circumstances. Depending on one's individual circumstances and
preferences, an annuity may not be the best payout option for managing
pension assets during retirement. A retiring participant who is in poor
health or needs cash to cover certain expenses may not want to receive
an annuity. Also, some retirees might increase their income by rolling
over benefits directly to an IRA, thus enabling them to invest and draw
down their pension assets during retirement.
Requiring all tax-qualified DC plans to offer annuities to retiring
participants--as the default payout option or not--might not
substantially increase the number of retirees who choose annuities. Our
analysis shows that recent experience with retiring participants who
have a choice of payout options indicates that these retirees
increasingly choose to directly roll over their lump sum benefits into
an IRA or defer the receipt of benefits. Also, some plan sponsors and
pension experts we spoke with indicated that retiring participants
generally do not choose annuities when they have other payout options
available.
A common drawback of such requirements on plans to offer annuities at
retirement is that they could increase the administrative and
regulatory burdens plan sponsors face. DC plans would have to comply
with applicable laws and regulations that must be satisfied when
annuities are provided, such as offering annuities that provide income
for the life of the participant and spouse or beneficiary. And those
plans that do not currently offer an annuity payout option at
retirement would have to contract with an annuity provider. Imposing
new requirements on plans to pay or offer annuities at retirement
represent prescriptive approaches that do not necessarily help retiring
participants understand their pension payout options or make decisions
suited to their individual needs or preferences.
While requiring plan sponsors to pay or offer annuities represents one
set of options for increasing annuitization, other options involve
modifying certain requirements to make it easier for qualified plans to
offer annuities. One such modification could be providing regulatory
relief to plan sponsors from potential fiduciary liability they assume
in selecting an annuity provider. Because plan sponsors must generally
select the safest available annuity for participants, those that do not
offer annuities may be concerned about being held liable for any losses
to participants in the event the annuity provider cannot meet its
financial obligations. Another modification could be exempting DC plans
that are not required to offer an annuity but choose to do so from
having to make a joint and survivor annuity the default payout or from
satisfying associated spousal consent requirements. These
modifications could encourage more DC plans to offer annuities to the
extent they reduce administrative or regulatory burdens that plans
would incur otherwise. However, these modifications could lessen
certain protections available to plan participants that receive or
choose annuities.
In addition to options that focus on plan sponsors, our expert panel
identified other policy options that focus on encouraging more retiring
participants to choose annuities or purchase them with their pension
assets. For example, lowering taxes on annuity income from qualified
plans[Footnote 28] could encourage some retiring participants, who
would not otherwise do so, to choose or purchase an annuity. Such an
incentive would not involve any new requirements on plan sponsors to
payout or offer annuities at retirement. Nor does it constrain an
individual's choice because retiring participants who receive lump sum
benefits could partially annuitize their pension assets and maintain
some assets they could more easily access to cover immediate and/or
large expenses. Also, a tax incentive for qualified plan annuities
could potentially help to reduce the long-term burden on government
assistance programs, such as the Supplemental Security Income and
Medicaid programs, to the extent that fewer retirees deplete their
assets during retirement.
However, a tax incentive for income provided by qualified plan
annuities could also have drawbacks. For example, such an incentive
might be limited to only those assets held in qualified retirement
plans. Also, annuities could be made more attractive to some retiring
participants for whom another payout option might be more advantageous,
such as those in ill health who need large sums of cash to cover
medical expenses. Moreover, some participants, who would elect an
annuity from their plan even in the absence of such an incentive, would
benefit. To the extent this option encourages more retirees to choose
or purchase annuities, it would result in the federal government
forgoing some amount of revenue.
Another option that could encourage more retiring participants to
choose annuities would involve modifying the mandatory interest rate
that DB plan sponsors must use to calculate lump sums. By law, DB plans
must use the interest rate on 30-year Treasury bonds, which some
pension experts and plan sponsors consider to be low and thus inflate
the value of lump sums relative to annuities.[Footnote 29] A higher
mandatory interest rate would generally decrease and potentially
equalize the value of lump sums from DB plans relative to participants'
annuity benefits. As a result, smaller lump sums may not be as
economically attractive to some retirees. However, the extent to which
more retiring participants with DB benefits would choose annuities
instead of lump sums when they are both offered is uncertain.
Alternatively, the taxes that apply to lump sums (i.e., cash
settlements) received directly by individuals prior to retirement could
also be applied to cash settlements received by retiring participants.
Currently, lump sums that are received directly by participants as cash
settlements (prior to attaining age 59-½) are subject to certain
taxes.[Footnote 30] Less favorable tax treatment of cash settlements,
while not requiring retiring participants to take an annuity or any
other type of payout, could encourage retirees to preserve their
pension benefits. However, this option could be disadvantageous for
some retiring participants. For example, those participants who are in
poor health and need cash to pay for medical expenses may want the
access to large sums of cash and flexibility that a cash settlement
provides. Moreover, to the extent retiring participants have difficulty
comparing the value of annuity income payments with lump sum amounts,
options that seek to influence the payouts chosen by retiring
participants might have limited impact.
Increased Information and Education Could Help Participants Make More
Informed Decisions:
Beyond options focusing exclusively on annuities, pension experts we
spoke with generally agreed that retiring participants need information
and education to help them make decisions about how to manage their
pension assets during retirement. While annuities reduce the risk of
outliving one's assets, they may not always be the best choice for
addressing individual retirement needs and preferences. Moreover,
retiring participants may have a choice of benefit payout options, and
the payouts they choose may or may not address their individual
retirement income needs and preferences.
According to our expert panel, retiring participants need information
and education on various risks that affect the level of income needed
during retirement.[Footnote 31] These risks include outliving one's
assets during retirement (i.e., longevity risk) and financial risks,
such as declining purchasing power of retirement income (i.e.,
inflation risk) that affect how retirees balance income and expenses.
Almost all of the respondents from our expert panel rated information
on the financial risks individuals face in retirement (96 percent) and
the risk of outliving one's assets in retirement (91 percent) as very
or extremely effective in helping retiring participants make decisions
about how to manage pension assets.[Footnote 32] Furthermore, a recent
study by the Society of Actuaries on retirement risks indicates that
both retirees and individuals approaching retirement age tend to
underestimate the average life expectancy of individuals at age 65.
This study also reports that 63 percent of pre-retirees and 55 percent
of retirees surveyed are somewhat or very concerned about not being
able to keep the value of their savings and investments growing faster
than inflation.[Footnote 33]
Our expert panel also noted the importance of information and education
on other considerations relevant to managing pension and retirement
savings plan assets during retirement. Such considerations include how
to assess needs in retirement, how to compare annuity and lump sum
amounts, the value of expected benefit from DB and DC plans, how
annuities provide retirement income, and strategies for drawing down
pension assets during retirement. At least 60 percent of our expert
panel participants rated such considerations as very or extremely
effective in helping retiring participants make decisions about
managing their pensions during retirement.
Overall, federal efforts to provide information and education on
retirement planning have focused on accumulating pension assets and not
on how to manage these assets to provide income throughout retirement.
Under its authority to implement the SAVER Act, current DOL outreach
efforts are primarily aimed at advancing public awareness and
understanding about the importance of saving for retirement. For
example, DOL convened two national summits focusing on challenges to
saving for retirement. Also, as we previously reported, DOL conducts a
range of outreach activities, including developing and distributing
publications and using public service announcements.[Footnote 34]
DOL has begun to broaden the focus of its education initiatives to
include managing assets during retirement. For example, DOL is
developing a tool kit for those near retirement that will include some
information on considerations relevant to managing retirement assets
during retirement. However, some pension experts told us that there is
a need for more focus on managing pension and retirement savings plan
assets during retirement. These experts generally agreed that the
federal government could improve public awareness and understanding
about issues related to managing pension assets during retirement.
Also, pension experts we spoke with generally agreed that participants
need information and education in several areas to help them make
decisions about how to manage their pension assets during retirement.
Some of these experts told us that many participants do not accurately
assess the risk that they could live to very old age and have little
income to meet their needs. Others indicated that retiring participants
do not understand how annuities provide retirement income or how to
assess retirement income needs.
At present, federal pension law does not generally address managing
pension and retirement savings plan assets during retirement.
Disclosures plan sponsors must provide to participants about their
pension benefits are intended to give them information about rights and
obligations under the plan. There are no additional requirements on
plan sponsors to provide information and education to participants
regarding managing pensions during retirement. Also, while DOL issued
regulatory guidance for plan sponsors who want to provide investment
information and education to their participants, it has not issued
similar guidance regarding the provision of education on retirement
planning. Recognizing the need for more information on retirement
planning, DOL's Employee Retirement Income Security Act Advisory
Council Working Group on Planning for Retirement issued a report that
recommended DOL explore regulatory measures to encourage employers to
provide retirement planning advice to their employees.[Footnote 35]
Conclusions:
The decreasing number of employer-sponsored pension plans that offer
only life annuities at retirement and the increasing percentage of
retiring participants who choose benefit payouts other than annuities
suggest that, in the future, fewer retirees may receive pension income
guaranteed to last throughout retirement. The growth in the number of
DC plans, along with the increasing availability of lump sums from DB
plans, means that retirees will face greater responsibility and choices
for managing their pension and other assets at and throughout
retirement. Depending on their choices, retirees could be at greater
risk of outliving their pension and retirement savings plan assets or
ultimately having insufficient income to maintain their standard of
living through their retirement years.
Such risks underscore the need for providing enhanced information and
education to participants about their available payout options, the
issues they may face in managing retirement assets, and how different
options may mitigate, or increase, these risks. As part of their
responsibility, retirees will have to weigh certain pros and cons of
different ways to manage and preserve pension assets. Currently, the
notices that plan sponsors must furnish to retiring participants are
not sufficient to help them choose payout options that suit their
individual circumstances, while assuring adequate levels of such income
to the extent possible. Our expert panel suggested that providing
several types of information, such as on risks that could affect
retirement income security, could help retiring participants make more
informed decisions regarding how they balance income and expenditures
during retirement.
Matter for Congressional Consideration:
To improve public awareness and understanding of important
considerations related to managing pension and retirement savings plan
assets at and during retirement, the Congress should consider amending
ERISA so that it specifically requires plan sponsors to provide
participants with a notice on risks that individuals face when managing
their income and expenditures at and during retirement. Also, the
Congress could consider stipulating that this notice must be provided
to participants at certain key milestones, such as at enrollment in the
plan, when participants receive or when changes are made to certain
plan documents, when participants reach various years of service, when
a participant separates from service, and/or at retirement among other
instances.
Agency Comments:
We provided a draft of this report to the Department of Labor and the
Department of the Treasury. We received technical comments from both
agencies that we incorporated as appropriate.
In the draft of this report we sent to agency for review, we
recommended that the Secretary of Labor direct the Assistant Secretary,
Employee Benefits Security Administration, to require plan sponsors to
provide participants with information on risks that individuals face
when managing their income and expenditures during retirement. DOL
officials said that the Secretary does not currently have the legal
authority under ERISA to require plan sponsors to provide such
information. Consequently, we changed our recommendation to a matter
for consideration for the Congress to amend ERISA so that it requires
plan sponsors to provide a notice to participants on risks that may
affect an individual's ability to manage income and expenditures at and
during retirement.
In addition, we received a letter from the Department of the Treasury
that neither agrees nor disagrees with our findings and conclusions.
Instead, the letter highlights the Administration's proposal to replace
the 30-year Treasury rate as the mandated discount rate used in many
pension calculations. Of relevance to this report, the letter notes
that the Administration's proposal would affect the calculation of lump
sum payments (see app. V).
We are sending copies of this report to the Secretary of Labor,
the Secretary of the Treasury, and interested congressional committees.
We will also make copies available to others on request. In addition,
the report will be available at no charge on GAO's Web site at http://
www.gao.gov.
If you have any questions concerning this report, please contact me at
(202) 512-7215 or George A. Scott at (202) 512-5932. Other major
contributors to this report include Jeremy Citro, Mark M. Glickman,
Gene Kuehneman, Luann Moy, Nyree M. Ryder, Patrick DiBattista, Joseph
Applebaum, and Roger Thomas.
Barbara D. Bovbjerg
Director, Education, Workforce, and Income Security Issues:
Signed by Barbara D. Bovbjerg:
[End of section]
Appendix I: Data, Scope, and Methodology:
We used a variety of data sources to examine the pension payouts plans
make available to retiring participants and the benefit payouts they
receive, as well as to identify what available actions could help
retiring participants preserve their pension and retirement savings
plan assets. We used National Compensation Survey (NCS) data from the
Bureau of Labor Statistics (BLS) to determine the availability of
various pension payout options. Further, we analyzed Health and
Retirement Study (HRS) data covering individual respondents that
retired between 1992 and 2000 to determine the pension payouts retirees
receive and what factors influenced their choice of payout.
Generally, the estimates in this report of the availability and the
receipt of pension payouts are derived from a sample of usable
responses (i.e., NCS and HRS) and therefore are subject to sampling and
nonsampling errors. Sampling errors are the differences that can arise
between results derived from a sample and those computed from
observations of all units in the population being studied. When
probability techniques are used to select a sample, statistical
measures called "standard errors" can be calculated to measure possible
sampling errors.
Nonsampling errors also affect survey results. They can be attributed
to many sources: inability to obtain information about all
establishments in the sample; definitional difficulties; differences in
the interpretation of questions; inability or unwillingness of
respondents to provide correct information; mistakes in recording or
coding the data; and other errors of collection, response, processing,
coverage, and estimation for missing data. Computer edits of the data
and professional review of both individual and summarized data reduce
the nonsampling errors in recording, coding, and processing the data.
These nonsampling errors can influence the accuracy of information
presented in the report, although the magnitude of their effect is not
known.
Finally, we convened a virtual expert panel--using a Delphi method--to
identify and evaluate the actions available to help retiring
participants preserve their pension and retirement savings plan assets
at and during retirement. We performed our work between August 2002 and
July 2003 in accordance with generally accepted government auditing
standards.
Data:
BLS Employee Benefits Data:
BLS collects information covering incidence and detailed provisions of
selected employee benefit plans as part of the NCS. The portion of the
NCS from which reported estimates on employee benefits were made covers
all private-sector establishments in the United States, with the
exception of farms and private households. The most recent (2000) NCS
obtained data from 1,436 private industry establishments, representing
over 107 million workers; of this number, nearly 86 million were full-
time workers and the remainder--nearly 22 million--were part-time
workers. NCS collects incidence and provisions data for both defined
benefit and defined contribution retirement plans. Excluded from the
survey are self-employed persons, proprietors, major stockholders,
members of a corporate board who are not otherwise officers of the
corporation, volunteers, unpaid workers, family members who are paid
token wages, the permanently disabled, partners in unincorporated
firms, and U.S. citizens working overseas. BLS statistics based on NCS
data are estimates derived from a sample of usable occupation quotes
selected from the responding establishments. They are not tabulations
based on data from all employees in private establishments within the
scope of the survey. BLS did not calculate estimates of sample error
for these statistics. Summary, data collection, and survey methodology
information for the NCS is publicly available through the Bureau of
Labor Statistics' World Wide Web site at http://www.bls.gov/ncs/
home.htm.
HRS Retirement Data:
HRS is a national panel study intended to provide data related to
retirement, health insurance, saving and economic well-being. The HRS
began with an initial (1992) sample of over 12,600 persons in 7,600
households.[Footnote 36] The HRS baseline is drawn from in-home, face-
to-face survey interviews conducted in 1992 for the 1931-1941 birth
cohort (and their spouses, if married, regardless of age); and in 1998
for newly added 1924-1930 and 1942-1947 birth cohorts. Follow-ups are
administered by telephone every second year, with proxy interviews
after death. Future data collections will largely replicate the 1998
HRS in design, format, coverage, structure, and measurement. Data is
collected by the Institute for Social Research, University of Michigan,
and is supported by funding from the National Institute on Aging (NIA),
the Social Security Administration (SSA), the Department of Labor, the
state of Florida Department of Elder Affairs, and the Assistant
Secretary for Planning and Evaluation at the Department of Health and
Human Services. HRS is an ongoing survey that plans to be continually
representative of the complete U.S. population over the age of 50 by
adding additional cohorts every 6 years while continuing to follow up
with existing cohorts. Further information on the design, history,
content, and use of HRS study components is available at http://
hrsonline.isr.umich.edu/intro/sho_intro.php?hfyle=uinfo.
RAND HRS Data:
The RAND HRS data file is a cleaned and streamlined version of the
Health and Retirement Study with derived variables covering a broad,
though not complete range of measures and which are named consistently
across waves. NIA and SSA support the development and continued
maintenance of the RAND HRS data. As of late 2001, RAND HRS data
included the HRS cohort (1931-1941 birth cohort, plus spouses) and is
based on 1992, 1994, and 1996 public releases and the 1998 and 2000
preliminary releases.
Methodology:
Determining Defined Benefit and Defined Contribution Payout Options and
Accompanying Information Available at Retirement:
We reviewed applicable laws and regulations to identify benefit payout
options plan sponsors must and may provide at retirement and the types
of accompanying information they must furnish to participants. We
obtained data from NCS on the types of payout options available to
participants. Specifically, we tabulated supplementary NCS data
published by BLS in the Monthly Labor Review (April 2003). We
recalculated the percent of participants with each payout option to
include only those for which benefit options were determinable. Also,
we interviewed plan sponsors and practitioners to supplement BLS data
and to determine what benefit payout options DB and DC plan sponsors
typically make available to participants at retirement. Further, we
asked our Delphi panel to identify factors that affect the benefit
payout options offered to retiring participants, as well as conducted
interviews with plan sponsors and practitioners to determine some of
the factors that affect the options offered.
We determined what information DB and DC plan sponsors must provide to
retiring participants about their benefit payout options by reviewing
relevant provisions of pension laws and regulations. We also
interviewed plan sponsors to determine the information plan sponsors do
and do not provide to retiring participants and some factors that
influence the types of information they provide. While we did not have
a specific selection criteria for interviewing pension plan sponsors,
we sought a range in terms of the type of company (i.e., we interviewed
an insurance, a manufacturing company, a pharmaceutical, a tobacco
company, a funding provider for educational institutions, and a law
firm) and in the types of plans (i.e., we interviewed both DB and/or DC
plan sponsors).
Determining Benefit Payouts Plan Participants Receive at Retirement:
We analyzed HRS data to determine the benefit payouts pension plan
participants receive at retirement. We examined benefit payouts for
1,523 HRS respondents that reported being covered by a pension on a job
they held in the preceding survey wave and left to enter retirement.
This information was collected for HRS in 1994, 1996, 1998, and 2000
(survey waves 2-5) and included respondents that retired between 1992
and 2000. We used information reported by individual respondents on the
type of plan they participated in and on the corresponding pension
payouts received. We only examined pension payouts received at the
earliest time at which a respondent reported leaving a job to retire.
For example, a respondent who reported being retired in 1994, reported
resuming work in 1995, and again reported retiring in 2000 would be
categorized as a 1994 retiree and not as a 2000 retiree.
Our analyses depend upon the accuracy of reported plan type among the
recently retired who received or deferred a pension payout in
connection with their recent retirement. Some experts have expressed
concerns regarding the accuracy of HRS respondents with respect to
pension availability and type of pension. Workers who are years away
from retirement may not have good information about their plan type. To
mitigate this concern, we limit our analyses to respondents who leave a
job they held in the previous wave to retire. We believe that these
respondents are likely to have more accurate information about their
pension plans because they likely will have received recent information
on their plans and payout choices. Accordingly, we confirm a
respondent's reported plan type and choice of payouts by examining the
respondent's actual payout from a DB or DC plan, and where
discrepancies exist between a respondent's plan type description and
actual receipt of benefits from a type of plan we use the information
from the actual receipt. There is a range of sampling errors for the
estimated percentages of retirees that receive each type of pension
payout as reported in tables 2-4. Except as noted in these tables, all
estimated percentages had sampling errors less than plus or minus 6
percentage points at the 90 percent confidence level.
To determine the payouts plan participants receive at retirement, we
tabulated the number and percent of participants for four benefit
payout option categories. These four categories include receiving or
purchasing an immediate annuity, rolling over assets directly into an
Individual Retirement Account (IRA), deferring receipt of benefits by
leaving them in the plan, or receiving benefits directly from their
plan as a cash settlement directly from their plan (i.e., lump sum
amount). We tabulated figures for the receipt of pension payouts, as
well as payouts elected by those retirees with a choice of payout
options, for HRS waves two through five. The numbers and percent
receiving any given pension payout may exceed the totals because
individuals may have more than one pension and because respondents may
receive more than one payout from a pension (e.g., a respondent with a
DB pension may take a partial cash settlement and receive an annuity
for the remainder).
There are payout categories where the effect on receipt of pension
benefits differs between retirees with benefits from DB plans and those
with benefits from DC plans. The payout category "deferring benefit
receipt" for retirees with benefits from DB plans generally means
delaying the receipt of an annuity, while for retirees with benefits
from DC plans this payout category generally means maintaining the DC
account balance with the plan sponsor. Also, while retirees with
annuities from DB plans receive an immediate annuity from their plan
sponsor, retirees with annuity payouts from DC plans may have converted
their account balance into an annuity through their pension plan
sponsor or used their account balance to purchase an annuity privately.
The HRS data on annuity payouts received by retirees with DC plan
benefits do not permit us to determine whether these annuities are from
plans or were purchased privately. A further possibility is that
retirees with DC plan benefits that receive a cash settlement and
privately purchase an annuity might categorize this payout as a cash
withdrawal or as an annuity. We categorize DC participants pension
payouts based on the retiree's survey responses.
We further tabulated pension payouts separately for DB and DC pensions.
We excluded 49 respondents from this tabulation because their survey
responses did not distinguish whether the pension payouts they reported
corresponded to their DB or DC pension. We tabulated DB and DC pension
payouts using the same four categories as for the overall tabulations.
Additionally, we tabulated benefit payouts for retirees with a choice
of benefit payouts. This group includes all retirees participating in a
DC pension[Footnote 37] as well as DB participants that reported having
a choice or demonstrated having such a choice by receiving all or part
of their DB pension in a form other than an annuity.
We also conducted logistic regressions on retiree payout choices to
evaluate factors that might influence retirees to choose an annuity
versus other payouts. We augmented the main HRS information with
accompanying information from the RAND HRS data set. Survey sample
weights were used throughout our analysis because HRS data is collected
from a stratified sample. We used the individual sampling weights from
the first survey wave in our regressions and to calculate associated
standard errors. We used STATA software to estimate logistic regression
parameters and associated standard errors. Results of our regression
analyses are presented in appendix II.
To supplement results from our analysis of HRS data, we interviewed
plan sponsors and practitioners to obtain testimony and data on the
payouts participants receive at retirement, as well as the benefit
payouts retiring participants choose when offered a choice of payout
options. In addition, we obtained plan sponsors and practitioners'
views on why retiring participants choose (or do not choose) certain
payout options, such as annuities or lump sums. We also asked our
Delphi panel to identify the most significant factors that affect the
payout options retiring participants elect.
Identifying Actions Available to Help Retiring Participants Preserve
Their Pension and Retirement Savings Plan Assets:
We convened a virtual panel on the Internet of 27 experts in the area
of pensions and retirement to address the third study objective. The
panelists were asked to identify factors affecting benefit payout
options offered to and/or elected by retirees, policy options that
could encourage more annuitization of pension and retirement plan
savings, and the role that education and information could play in
helping retirees make optimal decisions about retirement income
management. We employed a modified version of the Delphi
method[Footnote 38] to organize and gather opinions from experts in the
area of pensions and retirement using a Web-based forum.[Footnote 39]
The panel was selected from a list of experts, including from
participants in the Comptroller General's Retirement Advisory Panel,
referrals from interviews, experts cited in the literature, and
representatives of other important players in the pension and
retirement field. To ensure we had a range of views, we asked
participants from several different backgrounds including: academic,
practitioners, legal experts, plan sponsors, consumer and public
interest groups, and insurance providers, to participate in our survey.
Of the 30 experts we contacted, 27 agreed to participate. The identity
of respondents, as well as their comments and answers, remained
anonymous to other participants.
Our Delphi process entailed 3 questionnaire phases. Phase I asked the
panel to identify the most significant factors that affect pension and
retirement savings plan benefit payout options offered to and elected
by retiring participants; identify options that could be considered to
encourage more annuitization of pension and retirement plan savings and
the likely effects and tradeoffs of these options; and discuss the role
of information and education. Phase II presented 7 follow-up questions
where respondents were asked to either rank or rate the responses from
phase I (all responses were included in follow-up questions). The Phase
III survey provided panelists with some of the key findings from phase
II and solicited their feedback about these findings. Phase III also
asked the panel to identify options to encourage retiring participants
to preserve their pension assets at retirement by deferring the receipt
of benefits (i.e., leaving assets in an account balance), or rolling
over assets directly to an IRA at retirement. A full discussion of this
expert panel, including the process we employed and methodology, and
highlights of results from phases I and II are presented in appendix
III. A copy of the phase II questionnaire can be viewed at http://
www.gao.gov/cgi-bin/getrpt?gao-03-990sp.
[End of section]
Appendix II: Descriptive Statistics and Regression Analyses:
This appendix presents more detailed descriptive statistics for our
analysis of the relationship between the choices to receive an annuity
versus other pension payouts. It includes further discussion of pension
payout categories and retiree choice, characteristics of retirees by
payout choice, and regression statistics.
Pension Payout Categories and Retiree Choice:
Pension Payout Categorization:
For each respondent in the Health and Retirement Study (HRS) who
reports leaving a job to retire, HRS collects information on how the
respondent received his DB and/or DC pension payouts. Retirees with DB
pensions are asked whether they (1) expect future benefits, (2) are
receiving benefits now, (3) received a cash settlement, (4) rolled
benefits into an IRA, or (5) lost benefits. Retirees with DC pensions
are asked whether they (1) withdrew the money, (2) rolled assets into
an IRA, (3) left plan assets to accumulate, or (4) converted assets to
an annuity. We characterize these pension payouts in four categories:
* Annuities include DB respondents receiving benefits now and DC
respondents who converted assets to an annuity.
* Cash settlement includes DB respondents who received a cash
settlement and DC respondents who withdrew the money from their plan.
* Direct rollover into IRA and/or deferred benefits includes DB and DC
respondents who rolled plan assets into an IRA directly from their
plan,[Footnote 40] includes DB respondents who expect future benefits
and includes DC respondents who left plan assets to accumulate.
We used these categories for all HRS retirees receiving one or more
pension payout. These payouts are reported in table 1.
Table 1: Types of Pension Payouts Received by Retirees:
Percent of retirees with pension plan benefits[A]:
Annuity; Retirement period: 1992-94: 59.7; 1994-96: 65.1; 1996-98:
58.4; 1998-2000: 57.1; 1992-2000: 60.2.
Cash settlement; Retirement period: 1992-94: 15.8; 1994-96: 11.6; 1996-
98: 16.8; 1998-2000: 12.9; 1992-2000: 14.3.
Direct rollover to IRA and/or deferred receipt of benefits[B];
Retirement period: 1992-94: 32.0; 1994-96: 39.5; 1996-98: 40.3;
1998-2000: 47.1; 1992-2000: 39.7.
Number of retirees with pension plan benefits; Retirement period: 1992-
94: 353; 1994-96: 408; 1996-98: 405; 1998-2000: 357; 1992-2000: 1,523.
Percent of retirees with DB plan benefits:
Annuity; Retirement period: 1992-94: 77.3; 1994-96: 77.3; 1996-98:
75.9; 1998-2000: 76.3; 1992-2000: 76.7.
Cash settlement; Retirement period: 1992-94: 10.0; 1994-96: 10.9; 1996-
98: 14.5; 1998-2000: 8.3; 1992-2000: 11.1.
Direct rollover to IRA and/or deferred receipt of benefits[B];
Retirement period: 1992-94: 18.3; 1994-96: 20.2; 1996-98: 18.0;
1998-2000: 19.2; 1992-2000: 19.0.
Number of retirees with DB plan benefits; Retirement period: 1992-94:
236; 1994-96: 324; 1996-98: 302; 1998-2000: 257; 1992-2000: 1,119.
Percent of retirees with DC plan benefits:
Annuity; Retirement period: 1992-94: 7.8; 1994-96: 12.0; 1996-98: 4.9;
1998-2000: 5.9; 1992-2000: 7.5.
Cash settlement; Retirement period: 1992-94: 22.8[C]; 1994-96: 10.3;
1996-98: 15.9; 1998-2000: 15.4; 1992-2000: 15.1.
Direct rollover to IRS and/or deferred receipt of benefits[B];
Retirement period: 1992-94: 71.2[C]; 1994-96: 77.6; 1996-98: 79.2;
1998-2000: 79.9; 1992-2000: 78.0.
Number of retirees with DC plan benefits; Retirement period: 1992-94:
68; 1994-96: 137; 1996-98: 149; 1998-2000: 168; 1992-2000: 522.
Source: GAO analysis of weighted HRS data 1992-2000.
Notes: For our analysis, "retirees with pensions" are survey
respondents who reported leaving a preceding-wave job to retire and
reported receiving a pension payout from that job. Figures in
subcategories may not add up to 100 percent because some respondents
report multiple pension dispositions.
[A] Includes respondents who received multiple pension benefit payouts.
[B] For retirees with DB plans, includes respondents who expect to
receive benefits in the future. For those with DC plans, includes
respondents who reported leaving their assets in a plan account.
[C] The estimated percentage had a sampling error greater than plus or
minus 6 percentage points at the 90-percent confidence level.
[End of table]
Choice:
In addition to tabulating the form in which retirees receive their
pensions, we also analyzed the pension payouts received by retirees who
had a choice among different pension payout options. We identify this
subset of retirees from HRS answers about the available options for
payout of a pension associated with the job from which a respondent
retired. For DB participants, we used information from HRS waves prior
to retirement, since questions about options for pension payouts are
asked only when the respondent has a current job, not retrospectively
about a job from which a respondent has retired. We define "choice" as
having the option to take a pension as either a lump sum amount (i.e.,
as a cash settlement or as a direct rollover to an IRA) or as an
annuity. We include in this definition all DC participants. This is
because all DC participants have the option to take a rollover IRA,
almost all have the option to take a cash settlement, and all have the
option of purchasing an annuity on the private market. We also include
DB participants who annuitize and who report in the prior wave that
they had the option of taking a pension as a lump sum or in
installments. Additionally, we consider DB participants whom we observe
a cash settlement or IRA rollover to have had a choice, because almost
all DB plans must offer an annuitized payout of benefits. Thus, the
only retirees we categorized as not having a disposition choice are DB
participants who elect to receive an annuity and who, in the previous
wave, report that they did not have a lump sum option.[Footnote 41]
Using our definitions of choice, we analyzed pension payouts for those
retirees who choose the form of their pension over other available
forms. These payouts are reported in table 2.
Table 2: Types of Pension Payouts Received by Retirees Reporting a
Choice of Payout Options:
Percent of retirees with pension plan benefits[A]:
Annuity; Retirement period: 1992-94: 42.0; 1994-96: 51.5; 1996-98:
42.6; 1998-2000: 41.0; 1992-2000: 44.4.
Cash settlement; Retirement period: 1992-94: 26.0; 1994-96: 19.4;
1996-98: 25.2; 1998-2000: 17.9; 1992-2000: 22.1.
Direct rollover to IRA and/or deferred receipt of
benefits[B]; Retirement period: 1992-94: 43.9; 1994-96: 55.9; 1996-98:
54.1; 1998-2000: 65.9; 1992-2000: 55.1.
Number of retirees with pension plan benefits; Retirement period:
1992-94: 207; 1994-96: 232; 1996-98: 253; 1998-2000: 229; 1992-2000:
921.
Percent of retirees with DB plan benefits:
Annuity; Retirement period: 1992-94: 63.2[C]; 1994-96: 67.4[C]; 1996-
98: 60.0[C]; 1998-2000: 64.1[C]; 1992-2000: 63.6.
Cash settlement; Retirement period: 1992-94: 25.8[C]; 1994-96: 27.9[C];
1996-98: 31.1[C]; 1998-2000: 17.9[C]; 1992-2000: 26.5.
Direct rollover to IRA and/or deferred receipt of
benefits[B]; Retirement period: 1992-94: 24.1[C]; 1994-96: 23.1[C];
1996-98: 20.4[C]; 1998-2000: 24.5[C]; 1992-2000: 22.8.
Number of retirees with DB plan benefits; Retirement period: 1992-94:
91; 1994-96: 119; 1996-98: 125; 1998-2000: 85; 1992-2000: 420.
Percent of retirees with DC plan benefits:
Annuity; Retirement period: 1992-94: 7.8; 1994-96: 12.0; 1996-98: 4.9;
1998-2000: 5.9; 1992-2000: 7.5.
Cash settlement; Retirement period: 1992-94: 22.8[C]; 1994-96: 10.3;
1996-98: 15.9; 1998-2000: 15.4; 1992-2000: 15.1.
Direct rollover to IRA and/or deferred receipt of
benefits[B]; Retirement period: 1992-94: 71.2[C]; 1994-96: 77.6;
1996-98: 79.2; 1998-2000: 79.9; 1992-2000: 78.0.
Number of retirees with DC plan benefits; Retirement period: 1992-94:
68; 1994-96: 137; 1996-98: 149; 1998-2000: 168; 1992-2000: 522.
Source: GAO analysis of weighted HRS data 1992-2000.
Notes: For our analysis, "retirees with pensions" are survey
respondents who reported leaving a preceding-wave job to retire and
reported receiving a pension payout from that job. Figures in
subcategories may not add up to 100 percent because some respondents
report multiple pension dispositions.
[A] Includes respondents who received multiple pension benefit payouts.
[B] For retirees with DB plans, includes respondents who expect to
receive benefits in the future. For those with DC plans, includes
respondents who reported leaving their assets in a plan account.
[C] The estimated percentage had a sampling error greater than plus or
minus 6 percentage points at the 90-percent confidence level.
[End of table]
Characteristics of Retirees by Payout Choice:
For retirees who made different pension payout choices, we calculated
means for several descriptive variables for each category. We included
only those retirees with a choice of payouts and present the means for
three categories: (1) those who chose an annuity; (2) those who did not
choose an annuity; and (3) all retirees with a choice of payout.
Table 3: Sample Averages for Characteristics of Retirees, by Pension
Payout Choice:
Category: Means:
Category: Age at retirement; Chose an annuity: 61.0; Did not choose an
annuity: 61.5; All retirees with a choice: 61.4.
Category: Age of Spouse at retirement; Chose an annuity: 60.2; Did not
choose an annuity: 60.0; All retirees with a choice: 60.0.
Category: Years of education; Chose an annuity: 13.5; Did not choose an
annuity: 13.2; All retirees with a choice: 13.3.
Category: Self reported health status (1=Excellent, 5=Poor); Chose an
annuity: 2.3; Did not choose an annuity: 2.4; All retirees with a
choice: 2.3.
Category: Mother's age (current or max); Chose an annuity: 75.1; Did
not choose an annuity: 76.0; All retirees with a choice: 75.8.
Category: Father's age (current or max); Chose an annuity: 72.6; Did
not choose an annuity: 72.1; All retirees with a choice: 72.2.
Category: Out of pocket medical expenses; Chose an annuity: $1,633; Did
not choose an annuity: $1,697; All retirees with a choice: $1,679.
Category: Household Social Security disability income; Chose an
annuity: $141; Did not choose an annuity: $369; All retirees with a
choice: $306.
Category: Household Social Security retirement and widow benefits;
Chose an annuity: $4,024; Did not choose an annuity: $4,844; All
retirees with a choice: $4,618.
Category: Total household income; Chose an annuity: $63,955; Did not
choose an annuity: $67,063; All retirees with a choice: $66,193.
Category: Total household wealth; Chose an annuity: $339,065; Did not
choose an annuity: $505,410; All retirees with a choice: $458,570.
Category: Self-reported probability of living to 75; Chose an annuity:
71.0%; Did not choose an annuity: 69.6%; All retirees with a choice:
70.0%.
Category: Self-reported probability of receiving an inheritance; Chose
an annuity: 22.0%; Did not choose an annuity: 22.0%; All retirees with
a choice: 22.0%.
Category: Total years in the workforce; Chose an annuity: 38.8; Did not
choose an annuity: 39.2; All retirees with a choice: 39.1.
Category: Annuity price; Chose an annuity: $10.7; Did not choose an
annuity: $10.7; All retirees with a choice: $10.7.
Category: Time of retirement; Chose an annuity: 1996.1; Did not choose
an annuity: 1996.8; All retirees with a choice: 1996.6.
Category: S&P 500 level; Chose an annuity: 720.9; Did not choose an
annuity: 823.2; All retirees with a choice: 794.5.
Category: Probabilities, conditional on pension choice:
Category: Had DB only; Chose an annuity: 85.5%; Did not choose an
annuity: 27.3%; All retirees with a choice: 43.6%.
Category: Had DC only; Chose an annuity: 11.8%; Did not choose an
annuity: 47.7%; All retirees with a choice: 37.6%.
Category: Had both DB and DC; Chose an annuity: 2.6%; Did not choose an
annuity: 25.0%; All retirees with a choice: 18.8%.
Category: Male; Chose an annuity: 53.1%; Did not choose an annuity:
59.2%; All retirees with a choice: 57.5%.
Category: White; Chose an annuity: 85.8%; Did not choose an annuity:
90.6%; All retirees with a choice: 89.3%.
Category: Married; Chose an annuity: 80.8%; Did not choose an annuity:
82.9%; All retirees with a choice: 82.3%.
Category: Covered by health insurance in retirement; Chose an annuity:
64.8%; Did not choose an annuity: 63.6%; All retirees with a choice:
63.9%.
Category: Spouse covered by health insurance in retirement; Chose an
annuity: 39.7%; Did not choose an annuity: 38.9%; All retirees with a
choice: 39.1%.
Category: Worry about retirement income; Chose an annuity: 41.2%; Did
not choose an annuity: 38.9%; All retirees with a choice: 39.6%.
Category: Most risk averse (top category); Chose an annuity: 64.7%; Did
not choose an annuity: 68.7%; All retirees with a choice: 67.6%.
Category: Financial horizon of 5 years or greater; Chose an annuity:
36.6%; Did not choose an annuity: 40.7%; All retirees with a choice:
39.5%.
Category: At least 90% chance of leaving bequest; Chose an annuity:
56.4%; Did not choose an annuity: 67.0%; All retirees with a choice:
64.0%.
Category: Number of retirees; Chose an annuity: 259; Did not choose an
annuity: 662; All retirees with a choice: 921.
Source: GAO analysis of weighted HRS data 1992-2000.
[End of table]
Regression Analysis:
We performed logistical regressions to ascertain the contributions of
different factors to the probability of choosing an annuity.
Specifically, we calculated logistic regressions of the form:
[See PDF for image]
[End of figure]
Where the beta are coefficients that represent the effect that our
explanatory variables have on the log odds of having an annuity versus
not having an annuity, and X represents a series of retiree
characteristics; and e an error term. Only retirees with information
available on all explanatory variables were included in these
regressions.
We calculated this regression for all retirees, and separately for
those who took a pension from a DB plan and those who took a pension
from a DC plan (see tables 4, 5, and 6).
Table 4: Logistic Regression of Annuity Payouts for All Retirees
Reporting a Choice of Payout Options:
Variable: Annuity price; Coefficient: -0.25087; Standard error:
0.231967; t-Statistic: -1.08.
Variable: Time of retirement; Coefficient: 0.001362; Standard error:
0.002873; t-Statistic: 0.47.
Variable: Had DB pension[A]; Coefficient: 3.4595; Standard error:
0.373268; t-Statistic: 9.27.
Variable: Had DC pension; Coefficient: 0.393633; Standard error:
0.307601; t-Statistic: 1.28.
Variable: S&P 500 index; Coefficient: 0.000164; Standard error:
0.000483; t-Statistic: 0.34.
Variable: Health status; Coefficient: 0.010337; Standard error:
0.133094; t-Statistic: 0.08.
Variable: Age of spouse at respondent's retirement[A]; Coefficient:
0.032597; Standard error: 0.018563; t-Statistic: 1.76.
Variable: Probability of leaving bequest; Coefficient: 0.001824;
Standard error: 0.003764; t-Statistic: 0.48.
Variable: Retirement age; Coefficient: -0.09303; Standard error:
0.06347; t-Statistic: -1.47.
Variable: Total household Social Security income; Coefficient: 3.36E-
05; Standard error: 2.58E-05; t-Statistic: 1.3.
Variable: Total household wealth, net of retirement accounts[A];
Coefficient: -0.00125; Standard error: 0.000419; t-Statistic: -2.99.
Variable: Probability of living to 75; Coefficient: 0.002496; Standard
error: 0.005197; t-Statistic: 0.48.
Variable: Risk aversion measure; Coefficient: -0.12428; Standard error:
0.12742; t-Statistic: -0.98.
Variable: Out-of-pocket medical expenses, previous 2 years;
Coefficient: 5.14E-05; Standard error: 4.71E-05; t-Statistic: 1.09.
Variable: Mother's current or maximum age; Coefficient: -0.01387;
Standard error: 0.010083; t-Statistic: -1.38.
Variable: Father's current or maximum age; Coefficient: -0.00547;
Standard error: 0.008423; t-Statistic: -0.65.
Variable: Retiree has health insurance; Coefficient: -0.0271; Standard
error: 0.238637; t-Statistic: -0.11.
Variable: Spouse covered by health insurance in retirement;
Coefficient: -0.09481; Standard error: 0.254387; t-Statistic: -0.37.
Variable: Total household income, net of pensions; Coefficient: 6.65E-
07; Standard error: 2.30E-06; t-Statistic: 0.29.
Variable: Worry about retirement income; Coefficient: 0.019336;
Standard error: 0.120549; t-Statistic: 0.16.
Variable: Years of education; Coefficient: 0.071815; Standard error:
0.052977; t-Statistic: 1.36.
Variable: Expect to receive inheritance; Coefficient: 0.004127;
Standard error: 0.003465; t-Statistic: 1.19.
Variable: Years in workforce[A]; Coefficient: 0.030211; Standard error:
0.016801; t-Statistic: 1.8.
Variable: Financial planning horizon of 5+ years; Coefficient:
0.100165; Standard error: 0.109364; t-Statistic: 0.92.
Number of observations: 529.
F statistic: 5.40.
Prob. > F: 0.0000.
Source: GAO analysis of weighted HRS data 1992-2000.
[A] Denotes variable that is significantly different from zero at the
0.10 level.
[End of table]
Table 5: Logistic Regression of DB Annuity Payouts for DB Retirees
Reporting a Choice of Payout Options:
Variable: Coefficient; Variable: Standard error; Variable: t-
Statistic.
Variable: Annuity price; -0.09807; 0.324193; -0.3.
Variable: Time of retirement; 0.002018; 0.004173; 0.48.
Variable: Had DC pension[A]; -0.97222; 0.424141; -2.29.
Variable: S&P 500 index; -0.00019; 0.000707; -0.27.
Variable: Health status; -0.15276; 0.187185; -0.82.
Variable: Age of spouse at respondent's retirement; 0.028123; 0.023523;
1.2.
Variable: Probability of leaving bequest; -0.00156; 0.00529; -0.3.
Variable: Retirement age; -0.07108; 0.097696; -0.73.
Variable: Total household Social Security income[A]; 7.41E-05; 3.93E-
05; 1.88.
Variable: Total household wealth, net of retirement accounts[A]; -
0.00133; 0.000619; -2.15.
Variable: Probability of living to 75; 0.001074; 0.007111; 0.15.
Variable: Risk aversion measure; 0.096408; 0.155251; 0.62.
Variable: Out-of-pocket medical expenses, previous 2 years; 3.72E-06;
2.78E-05; 0.13.
Variable: Mother's current or maximum age; -0.00011; 0.012965; -0.01.
Variable: Father's current or maximum age; -0.00752; 0.010782; -0.7.
Variable: Retiree has health insurance; -0.26401; 0.326731; -0.81.
Variable: Spouse covered by health insurance in retirement; -0.36816;
0.313117; -1.18.
Variable: Total household income, net of pensions; 2.93E-06; 2.80E-06;
1.05.
Variable: Worry about retirement income; -0.00034; 0.152546; 0.
Variable: Years of education; 0.0821; 0.067164; 1.22.
Variable: Expect to receive inheritance; 7.34E-03; 0.005174; 1.42.
Variable: Years in workforce; 0.007865; 0.023182; 0.34.
Variable: Financial planning horizon of 5+ years; 0.005217; 0.148459;
0.04.
Number of observations: 251.
F statistic: 1.26.
Prob. > F: 0.1956.
Source GAO analysis of weighted HRS data 1992-2000.
[A] Denotes variable that is significantly different from zero at the
0.10 level.
[End of table]
Table 6: Logistic Regression of DC Annuity Payouts for DC Retirees
Reporting a Choice of Payout Options:
Variable: Annuity price[A]; Coefficient: -2.31524; Standard error:
0.919319; t-Statistic: -2.52.
Variable: Time of retirement[A]; Coefficient: 0.018948; Standard error:
0.008539; t-Statistic: 2.22.
Variable: Had DB pension; Coefficient: -0.47319; Standard error:
0.729786; t-Statistic: -0.65.
Variable: S&P 500 index; Coefficient: 0.001132; Standard error:
0.001271; t-Statistic: 0.89.
Variable: Health status[A]; Coefficient: 0.506268; Standard error:
0.265987; t-Statistic: 1.9.
Variable: Age of spouse at respondent's retirement; Coefficient:
0.02792; Standard error: 0.043543; t-Statistic: 0.64.
Variable: Probability of leaving bequest; Coefficient: 0.001694;
Standard error: 0.009517; t-Statistic: 0.18.
Variable: Retirement age[A]; Coefficient: -0.3346; Standard error:
0.147274; t-Statistic: -2.27.
Variable: Total household Social Security Income; Coefficient: -5.4E-
05; Standard error: 4.89E-05; t-Statistic: -1.11.
Variable: Total household wealth, net of retirement accounts;
Coefficient: -0.0016; Standard error: 0.001; t-Statistic: -1.6.
Variable: Probability of living to 75; Coefficient: 0.008101; Standard
error: 0.009112; t-Statistic: 0.89.
Variable: Risk aversion measure[A]; Coefficient: -0.74169; Standard
error: 0.242509; t-Statistic: -3.06.
Variable: Out-of-pocket medical expenses, previous 2 years[A];
Coefficient: 0.0001; Standard error: 6.03E-05; t-Statistic: 1.66.
Variable: Mother's current or maximum age; Coefficient: -0.02623;
Standard error: 0.019592; t-Statistic: -1.34.
Variable: Father's current or maximum age[A]; Coefficient: -0.03902;
Standard error: 0.018709; t-Statistic: -2.09.
Variable: Retiree has health insurance; Coefficient: 0.428917; Standard
error: 0.56647; t-Statistic: 0.76.
Variable: Spouse covered by health insurance in retirement[A];
Coefficient: 1.378197; Standard error: 0.595818; t-Statistic: 2.31.
Variable: Total household income, net of pensions; Coefficient: 3.93E-
07; Standard error: 6.21E-06; t-Statistic: 0.06.
Variable: Worry about retirement income; Coefficient: -0.20785;
Standard error: 0.307375; t-Statistic: -0.68.
Variable: Years of education; Coefficient: 0.221811; Standard error:
0.153804; t-Statistic: 1.44.
Variable: Expect to receive inheritance; Coefficient: -0.00022;
Standard error: 0.007027; t-Statistic: -0.03.
Variable: Years in workforce[A]; Coefficient: 0.077752; Standard error:
0.037246; t-Statistic: 2.09.
Variable: Financial planning horizon of 5+ years; Coefficient:
0.409007; Standard error: 0.252653; t-Statistic: 1.62.
Number of observations: 281.
F Statistic: 5.63.
Prob. > F: 0.0000.
Source: GAO analysis of weighted HRS data 1992-2000.
[A] Denotes variable that is significantly different from zero at the
0.10 level.
[End of table]
[End of section]
Appendix III: Delphi Panel on Options to Encourage the Preservation of
Pension and Retirement Plan Savings:
This appendix presents the results from the expert panel on options to
encourage the preservation of pension and retirement savings. Included
here are the questions and some of the results from the three
questionnaires that were completed by members of the panel selected for
this study (referred to as "phase I," "phase II," and "phase III"). We
obtained a pledge of confidentiality from our requesters that they
would not request any of the responses obtained during this Delphi
survey process. A complete set of descriptive statistics from the
survey can be found at http://www.gao.gov/cgi-bin/getrpt?gao-03-990sp.
We administered the questionnaires for phases I and II over the
Internet; we administered phase III via E-mail.
Phase I:
In the first phase of the expert panel, which ran from February 11 to
February 28, 2003, we asked the panelists to respond to three open-
ended questions about the preservation of pension and retirement plan
savings. We developed these questions based on our study objectives. We
pre-tested the questions on the on-line version with two individuals to
ensure that the questionnaire (1) was clear and unambiguous, (2) did
not place undue burden on individuals completing it, and (3) was
independent and unbiased. We made relevant changes before we deployed
the first questionnaire to all participants on the Internet.
Phase I consisted of open-ended questions on themes related to the
preservation of pension and retirement plan savings. The questions
addressed the following themes.
1. Factors that affect pension and retirement savings plan benefit
payout options offered to and elected by retiring participants.
2. Options that could be considered to encourage more annuitization of
pension and retirement plan savings and the likely effects and
tradeoffs of these options.
3. The role of information and education in managing pension and
retirement plan savings during retirement.
After panelists completed the first questionnaire, we performed a
content analysis on the responses to the open-ended questions in order
to compile a list of the most important factors affecting preserving
pension and retirement savings, as well as identify options that may
encourage more annuitization of pension and retirement assets, and the
type of education and information that could assist retirees in making
optimal decisions regarding their retirement income. We coded
panelists' responses, and similar responses were given the same code.
To maintain standards of methodological integrity, two team members
coded each of the participant's responses together and, when necessary,
codes were updated to reflect participants' responses. Any
disagreements in coding decisions were discussed until consensus was
reached. We had a third person review some of the coded responses to
ensure that our coding decisions were valid. We contacted respondents,
if necessary, when a response was unclear. We reviewed and coded
answers to each of the three questions to develop close-ended questions
for phase II of the survey.
Twenty-four of the 27 panelists selected completed phase I of the
survey (about 89 percent response rate). Those that did not complete
this phase were dropped from subsequent phases. Below are lists of the
categories for the responses from the phase I open-ended questions.
Categories are presented in order of frequency from most frequently to
least frequently provided responses for each of the questions.
Factors Affecting Payout Options Offered and/or Elected:
* Worker preferences for the type of plan they want and /or how they
receive benefits [employers include certain benefits in the plan
because workers want them or workers prefer to receive benefits in a
certain way].
* Lack of consumer knowledge/understanding about annuitization and/or
key risks they will face in retirement.
* Challenges to offering an annuity, such as administrative cost/
burden, or compliance with applicable rules (including QJSA, PBGC
premiums, etc.).
* Adequacy of available annuity product types (i.e., variety, pricing,
value of payments, lack of inflation protection, etc.).
* The value of lump sums from DB plans has increased [low 30-year
Treasury rate makes lump sums more valuable].
* Trends in types of employer-sponsored plans.
* Participants' expectations about needs in retirement (e.g., income,
expenses, longevity).
* Preferences of owners/executives who start plans.
* Individuals believe they can do better managing the money than with
an annuity.
* The role of financial advisors [financial planners prefer lump sums
because they receive better commission].
* Changes in plan design/features within plans.
* Impact of laws and regulations on employer decisions (i.e., impact of
ERISA or the tax code).
* Trends in workforce demographics and retirement [greater worker
mobility, people are living longer].
* Changes in the availability and/or election of various payout
options.
* Amount of retirement/saving plan assets of future retirees.
* Concerns and trust issues about annuity providers and/or employers
ability to provide annuity payments (i.e., solvency issues).
* Widespread media, investment community, and employee focus on account
balances [the focus for pensions have been on saving and accumulating].
* Competitive pressures: attract workers, minimize/stabilize costs.
* Workers/retirees already have annuity income (i.e., from social
security, from a DB plan, from a spouse's plan).
* Household decisions about retirement income.
* Bequest motives.
* Retirees/employees don't have adequate information to make benefit
elections.
* Participants' lack of understanding about the value of certain DB
plan benefit features (e.g., early retirement subsidies).
* PBGC guaranties qualified DB annuity payouts.
* Participants do not understand investments and/or how to invest their
retirement savings.
* The taxation of distributions from various types of retirement plan
vehicles.
* Change in employee attitude about employers' role in providing
retirement security.
* Concerns of higher-income DB participants about potential loss of
benefits as a result of PBGC guarantee limits.
* Inertia-the real and/or perceived cost of changing the status quo in
terms of options offered.
Options That Could Encourage More Annuitization of Pension and
Retirement Plan Savings:
* Increase information and education to participants/ retirees.
* Provide tax incentives for employees who receive qualified annuity
income (i.e., favorable tax treatment of annuity income).
* Mandating pension/retirement saving plan benefits be paid as
annuities (partial or full).
* Change related regulations (e.g., interest rate for DB lump sum
calculations, PBGC premium requirements, etc.) that affect pension
obligations or payout options.
* Require qualified DC plans to offer an annuity option.
* Modify rules/regulations that currently apply when plans offer an
annuity (e.g., limit QJSA provisions).
* Mandating qualified DC plans offer an annuity as a default option of
pension benefits (i.e., apply QJSA provisions).
* Have PBGC or another government agency provide annuities to employers
and/or employees (i.e., as a competitor to provide or sell annuities).
* Develop more adequate annuity products (not a policy option per se).
* Provide tax incentives for employers and/or insurance providers to
provide annuities to retirees.
* Apply the same tax penalties for taking a lump sum at retirement as
are applied for pre-retirement lump sum distributions.
* Simplify various DB plan rules to level the playing field with DC
plans.
* Amend ERISA Investment Advisor rules to clarify that plan sponsors
may provide information/education on managing income during retirement.
* Change benefit portability rules/regulations.
* Allow employer plans to distribute a certain amount of pension
benefits as annuity income and the remainder with participant
discretion.
* Allow plan sponsors or employers to form or join purchasing pools to
offer annuities.
* Set minimum standards for state insurance guaranty funds.
* Enable government to act as an insurer for commercial annuity
providers (i.e., federal guaranty program).
* Require pension/retirement plans that allow retirees to elect lump
sums to also offer the option to annuitize some benefits at a later
date.
* Require pension/retirement plans offering distributions in the form
of an annuity to offer an inflation-indexed annuity option.
* Require all DC plans that do not normally pay out in the form of an
annuity to roll out all lump sum distributions to a new type of IRA
that pays benefits in the form of a J&S annuity.
The Role of Information and Education:
* Helping participants to understand longevity risk (i.e., risk of
outliving assets).
* Strategies/advice for managing retirement income during retirement
(i.e., decumulation).
* Helping participants/retirees understand financial risks that they
will face in retirement (e.g., inflation, lower standard of living,
investment).
* Helping participants assess needs in retirement (i.e., health,
income, etc.).
* Annuities-what are they? How do they work?, etc.
* Improving financial literacy.
* Payout options plans make available to retiring participants (e.g.,
description and/or value of retirement benefits under available
options).
* Seeking financial "advice," and other resources for retirement income
planning.
* How to project potential retirement income from pensions/retirement
plan savings.
* The value of expected DB and/or DC plan benefits (i.e., what a
participant's accumulation is likely to provide).
* How to compare annuity and lump sum amounts (i.e., how to compare
equivalent amounts).
* De-emphasize information and education on investing/investments vis-
à-vis retirement income needs.
* Available annuity products employers could offer.
* The tradeoffs of extending one's working life.
* The pricing of annuity products (i.e., administrative fees).
* How guaranteed lifetime income from a participant's retirement plan
could enhance government provided retirement income.
* How various types of retirement savings plans are taxed.
* How to take inventory of retirement income sources.
Phase II:
We analyzed the responses to the questions above to develop the phase
II questionnaire. The purpose of the second phase was to provide the
panelists with the opportunity to consider the other panelists'
responses to the first phase and to respond in a structured,
quantifiable way. Phase II, which ran from April 3 to April 18, 2003,
consisted of several closed-ended questions on the categorized
responses to phase I (all response codes/categories were included in
follow-up questions).
In phase II, panelists rated these items on various dimensions (e.g.,
major/minor factor, effectiveness of options, help/hinder coverage,
ease of compliance) depending on the theme. We also asked the experts
to rank responses to phase I questions one and three. We pretested the
questions for the second phase; using the same methods as in phase I.
Twenty-two of the 24 panelists that completed the phase I survey also
completed phase II (about 92 percent response rate for those included
in phase II). Those that did not complete this phase were dropped from
subsequent phases.
As part of the analysis, we calculated the frequency of responses to
identify the highest rated items for phase II. The results in this
section are displayed based on responses that were rated in the top two
rating categories for questions 1 and 3-6, as well as the top five
responses identified most frequently in the top five for questions 2
and 7. To be included in the top five for the rating questions, at
least 85 percent of panelists had to respond to the question. For the
questions with a five-point scale, we collapsed the scale to a three-
point scale by combining the top two available responses and combing
the bottom two available responses. For example, if the five-point
scale included extremely effective, very effective, moderately
effective, somewhat effective, slightly or not effective, the three-
point scale will be: extremely or very effective; moderately effective;
and somewhat, slightly or not effective. For the ranking questions (2
and 7), we identified the most frequent responses ranked in the top
five by calculating the frequency in which they were in the top five.
We report the top five responses for all phase II questions in this
appendix.
Factors Affecting Payout Options:
In the phase I questionnaire, we asked each member of the panel "What
do you consider to be the top 5 factors in pensions and retirement
affecting the payout options offered to retiring participants and/or
elected by retirees? (In your response, you might consider trends in
employer pensions, worker preferences, workforce coverage and
participation, retirement, the economy, or any other trends you believe
are important. Please identify the most significant first)." We
compiled a list of the factors that experts identified and categorized
them. We then presented the list of factors to the experts in phase II
and asked them to rate how great a factor, if at all, are each of the
trends were in affecting payout options offered to retiring
participants and/or elected by retirees. The ratings were made on a
four-point scale ranging from "major factor" to "not a factor"
(panelists were also given the option of responding "no answer").
Table 7: Top Five Answers That Were Identified as Either a Major or
Moderate Factor Affecting the Pension Options Offered and/or Elected by
Retiring Participants:
Category by rank order: 1. Lack of consumer knowledge /understanding
about annuitization and/or key risks they will face in retirement;
Major factor: 19; Moderate factor: 3; Minor factor: 0; Not a factor: 0;
Number of responses: 22.
Category by rank order: 2. Individuals believe they can do better
managing the money than can an annuity; Major factor: 18; Moderate
factor: 3; Minor factor: 1; Not a factor: 0; Number of responses: 22.
Category by rank order: 2. Trends in types of employer sponsored
plans; Major factor: 11; Moderate factor: 10; Minor factor: 1; Not a
factor: 0; Number of responses: 22.
Category by rank order: 3. Participants' expectations about needs in
retirement (e.g., income, expenses, longevity); Major factor: 15;
Moderate factor: 5; Minor factor: 2; Not a factor: 0; Number of
responses: 22.
Category by rank order: 4. Widespread media, investment community, and
employee focus on account balances; Major factor: 16; Moderate factor:
3; Minor factor: 3; Not a factor: 0; Number of responses: 22.
Source: GAO analysis of phase II results.
[End of table]
We also asked panelists to rank the factors identified as at least
moderate in question 1. Responses in the top five for the question,
"among the factors that you checked as 'at least moderate,' what would
you rank as the top 5 factors affecting plan payout options offered
and/or elected by retiring participants?" are shown in table 8.
Table 8: Top Five Answers That Were Most Frequently Included in the Top
Five Factors Affecting the Pension Options Offered and/or Elected by
Retiring Participants:
Category by rank order: 1. Lack of consumer knowledge/understanding
about annuitization and/or key risks they will face in retirement;
Number of responses: 14.
Category by rank order: 2. Individuals believe that they can better
manage their money than can an annuity; Number of responses: 13.
Category by rank order: 3. Participants' expectations about needs in
retirement (e.g., income, expenses, longevity); Number of responses:
10.
Category by rank order: 4. Challenges to offering an annuity, such as
administrative cost/burden, or compliance with applicable rules
(including QJSA, PBGC premiums, etc.); Number of responses: 9.
Category by rank order: 5. The role of financial advisors; Number of
responses: 7.
Source: GAO analysis of phase II results.
[End of table]
Options That Could Encourage More Annuitization of Pension and
Retirement Plan Savings:
In phase I, we asked panelists: "What options, if any, could
policymakers consider that could encourage more annuitization of
pension and retirement plan savings at retirement? What are the likely
effects and tradeoffs associated with each of these options with
respect to plan sponsors, participants, the pensions and investment
community, and the federal government? (Please consider such options as
mandates, incentives, other government actions, information and
education, etc. in your response.)" After categorizing responses to
this question, we asked the following series of questions in phase II.
The ratings were made on a five-point scale for each of these questions
(panelists were also given the option of responding "no answer").
1. How effective, if at all, would each of the following options be in
encouraging more annuitization of pension and retirement plan savings?
5. In your opinion, would the following options help or hinder pension
and retirement plan coverage?
6. How easy or difficult would it be for plan sponsors to comply with
and/or act on the following options?
Table 9: Top Five Answers That Were Identified as Either Extremely
Effective or Very Effective Options in Encouraging More Annuitization
of Pension and Retirement Plan Savings:
Category by rank order: 1. Provide tax incentives for employees who
receive qualified annuity income (i.e., favorable tax treatment of
annuity income); Extremely or very effective: 19; Moderately
effective: 1; Somewhat, slightly or not effective: 1; Number of
responses: 21.
Category by rank order: 1. Mandating pension/retirement saving plan
benefits be paid as annuities (partial or full); Extremely or very
effective: 19; Moderately effective: 0; Somewhat, slightly or not
effective: 2; Number of responses: 21.
Category by rank order: 2. Provide tax incentives for employers and/or
insurance providers to provide annuities to retirees; Extremely or
very effective: 17; Moderately effective: 1; Somewhat, slightly or not
effective: 3; Number of responses: 21.
Category by rank order: 3. Mandating qualified DC plans offer an
annuity as a default option of pension benefits (i.e., apply QJSA
provisions); Extremely or very effective: 17; Moderately effective: 3;
Somewhat, slightly or not effective: 2; Number of responses: 22.
Category by rank order: 3. Require qualified DC plans to offer an
annuity option; Extremely or very effective: 17; Moderately effective:
3; Somewhat, slightly or not effective: 2; Number of responses: 22.
Source: GAO analysis of phase II results.
[End of table]
Table 10: Top Five Answers That Were Identified as Either Greatly
Helping or Generally Helping Pension and Retirement Plan Coverage:
Category by rank order: 1. Provide tax incentives for employers and/or
insurance providers to provide annuities to retirees; Greatly or
generally help: 18; Neither help nor hinder: 3; Greatly or generally
hinder: 0; Number of responses: 21.
Category by rank order: 1. Increase information and education to
participants/ retirees; Greatly or generally help: 18; Neither help
nor hinder: 2; Greatly or generally hinder: 1; Number of responses: 21.
Category by rank order: 1. Provide tax incentives for employees who
receive qualified annuity income (i.e., favorable tax treatment of
annuity income); Greatly or generally help: 18; Neither help nor
hinder: 2; Greatly or generally hinder: 1; Number of responses: 21.
Category by rank order: 2. Simplify various DB plan rules to level the
playing field with DC plans; Greatly or generally help: 17; Neither
help nor hinder: 4; Greatly or generally hinder: 0; Number of
responses: 21.
Category by rank order: 3. Have PBGC or another government agency
provide annuities to employers and/or employees (i.e., as a competitor
to provide or sell annuities); Greatly or generally help: 10; Neither
help nor hinder: 7; Greatly or generally hinder: 2; Number of
responses: 19.
Source: GAO analysis of phase II results.
[End of table]
Table 11: Top Five Answers That Were Identified as Either Very Easy or
Easy for Plan Sponsors to Comply with and/or Act on:
Category by rank order: 1. Amend ERISA Investment Advisor rules to
clarify that plan sponsors may provide information/education on
managing income during retirement; Very easy or easy: 13; Neither easy
nor difficult: 5; Very difficult or difficult: 1; Number of responses:
19.
Category by rank order: 2. Provide tax incentives for employees who
receive qualified annuity income (i.e., favorable tax treatment of
annuity income); Very easy or easy: 13; Neither easy nor difficult: 4;
Very difficult or difficult: 2; Number of responses: 19.
Category by rank order: 3. Provide tax incentives for employers and/or
insurance providers to provide annuities to retirees; Very easy or
easy: 14; Neither easy nor difficult: 4; Very difficult or difficult:
3; Number of responses: 21.
Category by rank order: 4. Apply the same tax penalties for taking a
lump sum at retirement as are applied for pre-retirement lump sum
distributions; Very easy or easy: 11; Neither easy nor difficult: 3;
Very difficult or difficult: 5; Number of responses: 19.
Category by rank order: 5. Increase information and education to
participants/retirees; Very easy or easy: 11; Neither easy nor
difficult: 6; Very difficult or difficult: 4; Number of responses: 21.
Source: GAO analysis of phase II results.
[End of table]
The Role of Information and Education in Managing Pension and
Retirement Plan Savings during Retirement:
In phase I, we asked panelists, "What types of information and
education could help retiring participants make more optimal decisions
regarding the use (i.e., saving and spending) of pension and retirement
plan savings during retirement? How and in what form could each type of
information or education be delivered?" After categorizing the
responses to that question, we followed up with a rating and ranking
question about the effectiveness of each type of information and
education.
We then presented the list of types to the experts in phase II and
asked them to rate how effective, if at all, each type of information
and education would be in helping retiring participants make more
optimal decisions. The ratings were made on a five-point scale ranging
from "extremely effective" to "slightly or not effective" (panelists
were also given the option of responding "no answer"). We calculated
the frequency of responses for the types rated in the phase II
questionnaire.
Table 12: Top Five Answers That Were Identified as Either Extremely
Effective or Very Effective Types of Information and Education in
Helping Retiring Participants Make More Optimal Decisions:
Category by rank order: 1. Helping participants/retirees understand
financial risks that they will face in retirement (e.g., inflation,
lower standard of living, investment); Extremely or very effective:
21; Moderately effective: 0; Somewhat, slightly or not effective: 1;
Number of responses: 22.
Category by rank order: 2. Helping participants to understand longevity
risk (i.e., risk of outliving assets); Extremely or very effective:
20; Moderately effective: 1; Somewhat, slightly or not effective: 1;
Number of responses: 22.
Category by rank order: 3. Helping participants assess needs in
retirement (i.e., health, income, etc.); Extremely or very effective:
18; Moderately effective: 3; Somewhat, slightly or not effective: 1;
Number of responses: 22.
Category by rank order: 4. How to compare annuity and lump sum amounts
(i.e., how to compare equivalent amounts); Extremely or very
effective: 17; Moderately effective: 3; Somewhat, slightly or not
effective: 2; Number of responses: 22.
Category by rank order: 5. The value of expected DB and/or DC plan
benefits (i.e., what a participant's accumulation is likely to
provide); Extremely or very effective: 16; Moderately effective: 4;
Somewhat, slightly or not effective: 2; Number of responses: 22.
Source: GAO analysis of phase II results.
[End of table]
We also asked panelists to rank the types of information and education
identified as at least moderately effective in phase I. The top five
most commonly ranked responses to the question, "Among the types of
information and education that you rated 'at least moderately
effective,' what would you rank as the five most effective types to
help retirees make more optimal decisions?" are shown in table 13.
Table 13: Top Five Answers That Were Most Frequently Included in the
Top Five Types of Information and Education to Help Retirees Make More
Optimal Decisions:
Category by rank order: 1. Helping participants to understand longevity
risk (i.e., risk of outliving assets); Number of responses: 20.
Category by rank order: 2. Helping participants/retirees understand
financial risks that they will face in retirement (e.g., inflation,
lower standard of living, investment); Number of responses: 18.
Category by rank order: 3. Annuities-what are they? how do they work?,
etc; Number of responses: 15.
Category by rank order: 4. How to compare annuity and lump sum amounts
(i.e., how to compare equivalent amounts); Number of responses: 12.
Category by rank order: 5. Helping participants assess needs in
retirement (i.e., health, income, etc.); Number of responses: 11.
Source: GAO analysis of phase II results.
[End of table]
Phase III:
The third phase, which was conducted via e-mail, ran from May 6 to May
13, 2003. The purpose of this phase was to provide panelists with some
of the key findings from phase II and obtain feedback about the
results, as well as to identify other ways that a retiree could
preserve their retirement savings. We conducted a pretest of the
questionnaire and made changes as necessary. Ten experts (45 percent of
the 22 panelists that completed phase II) responded with comments or
responses to our questions.
In the third phase, we asked panelists the following questions.
"For each of the options below please discuss what actions (policy or
otherwise), if any, could encourage more retirees to preserve their
pension and retirement savings plan assets. Please discuss some of the
potential tradeoffs, such as the effect on plan coverage, plan
compliance, and effectiveness for preserving pension and retirement
savings plan assets, of the options identified.":
1. Options to encourage retiring participants to preserve their pension
assets at retirement by deferring the receipt of benefits (i.e.,
leaving assets in an account balance), or rolling over assets directly
to an IRA at retirement.
2. Options to assist retirees in managing their assets personally with
the objective of providing an income stream to help them balance income
and expenditures.
3. What other options, if any, should be considered to help retiring
participants preserve their pension and retirement savings plan assets
at retirement?
Originally, we asked the panelists to respond to these three questions
about actions that could encourage the preservation of pension and
retirement savings plan assets. Based on feedback about the length of
and time commitment needed to respond to the phase III questionnaire,
we narrowed the focus and gave panelists the option of only responding
to question one. Some respondents provided answers for all three of the
questions and others only responded to question one. Responses to this
questionnaire are presented at http://www.gao.gov/cgi-bin/getrpt?gao-
03-990sp.
[End of section]
Appendix IV: GAO's Delphi Panel of Experts:
John Ameriks
Senior Research Fellow
TIAA-CREF Institute:
Jeffrey R. Brown
Assistant Professor of Finance
College of Business
University of Illinois at Urbana-Champaign:
Edward E. Burrows
Independent Consulting Actuary
Boston, Massachusetts:
Jamie Delaplane
Davis and Harman, LLP:
John Hotz
Deputy Director
Pension Rights Center:
Ron Gebhardtsbauer
Senior Pension Fellow
American Academy of Actuaries:
Teresa Ghilarducci
Associate Professor of Economics
University of Notre Dame:
Melissa J. Kahn
Vice President
MetLife:
Sanford Koeppel
Vice President, Legislative and Regulatory Affairs
Prudential Retirement
The Prudential Insurance Company of America:
Jules H. Lichtenstein
Senior Policy Advisor
AARP Public Policy Institute:
Judith F. Mazo
Senior Vice President and Director of Research
The Segal Company:
Olivia S. Mitchell
Executive Director,
Pension Research Council
International Foundation of Employee Benefit Plans
Professor of Insurance & Risk Management,
Wharton School:
Alicia Munnell
Peter F. Drucker
Professor of Management Sciences
Center for Retirement Research,
Boston College:
Kim Mustin
Vice President
Scudder Investments Retirement Services:
Diane Oakley
TIAA-CREF Consulting Services
Vice President
Special Consulting Services:
John P. Parks
President
MMC&P Retirement Benefit Services:
John C. Penney, Jr.
Senior Pension Policy Consultant
John Hancock Life Insurance Company:
Anna Rappaport
Mercer Human Resource Consulting:
Kathryn Ricard
Vice President,
Retirement & Pensions
American Council of Life Insurers:
Dallas Salisbury
President and CEO
Employee Benefits Research Institute:
John C. Scott
Director, Retirement Policy
American Benefits Council:
Norman Stein
Douglas Arant
Professor University of Alabama
School of Law:
Christopher T. Stephen, Esq.
Sr. Principal, Legislative Affairs
National Rural Electric Cooperative Association:
Jack VanDerhei
Temple University and EBRI Fellow:
[End of section]
Appendix V: Comments from the Department of The Treasury:
DEPARTMENT OF THE TREASURY WASHINGTON, D.C.
ASSISTANT SECRETARY:
July 22, 2003:
Barbara D. Bovbjerg Director:
Education, Workforce, and Income Security Issues U.S. General
Accounting Office:
441 G Street, N. W., Room 5930 Washington, D.C. 20548:
Dear Ms. Bovbjerg:
Thank you for sharing a draft copy of Private Pensions: Participants
Need Information on Risks They Face in Managing Pension Assets at and
During Retirement (GAO-03-810) with the Department of Treasury.
We were pleased to see that another recent report, Private Pensions:
Process Needed to Monitor the Mandated Interest Rate for Pension
Calculations (GAO-03-313) included an appendix describing the concept
of matching discount rates to the time structure of pension
liabilities. The Administration recently made a proposal for replacing
the 30-year Treasury as the mandated discount rate used in many pension
calculations.[NOTE 1] This proposal includes discounting both pension
liabilities and computing lump sum equivalents using a set of duration
matched discount rates, commonly called a yield curve, therefore
reflecting the time structure of the liabilities.
In the context of this GAO report, we would like to point out that the
Administration has made a recent legislative pension proposal one
aspect of which touches directly on the computation of lump sums
payouts. Under current law, pension liabilities and lump sum
equivalents are discounted using different rates. The rate used for
computing lump sum equivalents is substantially lower than the rate
used to discount liabilities. Everything else being equal, this makes
lump sums economically more attractive than annuities. The
Administration proposal is to use the same discount rate for
discounting liabilities and computing lump sum equivalents, that is,
the same yield curve used to measure pension liabilities will also be
used to compute lump sum payments. The intent of this proposal is to
have discount rates apply to annuities and lump sum payments in a
consistent and neutral manner, thereby eliminating a built-in bias in
the pension rules for one form of benefit payment. These rules would
set the lower bound
for lump payments; sponsors would still be free, as they are under
current law, to be more generous if they wished.
Workers receiving lump sums, especially those in their 50's, 60's and
older, would be better off under the Administration proposal than under
an alternative that would compute lump sums using a single long term
corporate interest rate. Workers electing lump sums at relatively
younger ages would have a higher proportion of their future payments
discounted at long-term interest rates than workers retiring at
relatively older ages. This is appropriate given the different time
frames over which they had been expecting to receive their benefits.
While moving from the 30-year Treasury rate to any corporate bond based
rate will result in lower lump sum payments for younger workers who
leave their jobs, under the yield curve approach older workers closer
to retirement age will be little affected by the change.
Again, we appreciate the opportunity to review the draft report.
Sincerely,
Mark J. Warshawsky:
Acting Assistant Secretary for Economic Policy:
Signed by Mark J. Warshawsky:
NOTE:
[1] The Administration's Proposal For Accurately Measuring Pension
Liabilities, Testimony of the Honorable Peter R. Fisher, Under
Secretary of Treasury, Subcommittee on Select Revenue Measures
Committee on Ways and Means and the Subcommittee on Employer-Employee
Relations Committee on Education and the Workforce, United States House
of Representatives, July 15, 2003.
[End of section]
FOOTNOTES
[1] DB plans promise to provide a benefit that is generally based on an
employee's salary and years of service. Under a DC plan, employees have
individual accounts to which the employer, employee, or both make
periodic contributions. DC plan benefits are based on contributions to
and investment returns on individual accounts, and participants may
access their accounts before, at, or during retirement. According to
Bureau of Labor Statistics data, 36 percent of private sector workers
participated in a DC plan, while 19 percent of private sector workers
participated in a DB plan in 2000.
[2] Certain DC plans are required to make an annuity payout option
available to participants. These plans are called money purchase plans.
[3] In this report, we refer to lump sums received directly by
participants as cash settlements.
[4] DC plans with individual accounts that offer an annuity must
provide them on a gender-neutral basis. See Norris v. Arizona Governing
Committee, 463 U.S. 1073 (1983).
[5] Certain life annuities that plans and insurance companies may offer
are available to address such needs. For example, life annuities with
guarantee periods or refunds that pay the remaining balance to a
beneficiary if an annuitant dies, as well as annuities that offer
inflation protection are available.
[6] Some respondents had one or more pensions with and received more
than one type of pension payout. As a result, some respondents are
included in more than one benefit payout category. Therefore, because
of the overlap across pension payout categories, individual percentages
cannot be summed.
[7] 29 U.S.C. 1055(a)(1). These plans must also provide for a qualified
preretirement survivor annuity (QPSA) providing that where a vested
participant dies before the annuity starting date, the QPSA shall be
provided to the surviving spouse. 29 U.S.C. 1055(a)(2).
[8] Minimum funding standards establish the minimum amounts that plan
sponsors must contribute to ensure that their plans have sufficient
assets to pay benefits when due. While technically complex, these
standards are designed to ensure that the value of benefits accumulated
to date under the plan and the plan's assets bear a reasonable
relationship to one another such that the plan can pay benefits due
participants when they retire.
[9] In addition, the plan is subject to the survivor annuity
requirements to the extent that they are transferee plans of plans that
are otherwise subject to the requirement. 29 U.S.C. 1055(b)(1)(C)(iii);
26 C.F.R. 1.401(a)(20) A-5.
[10] Federal Register Vol., 67, 62419, Oct. 7, 2002 (notice of proposed
rulemaking).
[11] 26 U.S.C. 401(a)(31).
[12] Section 417(e) of the Internal Revenue Code specifies a set of
mortality factors and a discount rate that DB plan sponsors must use to
calculate lump sums.
[13] DB participants who are eligible to receive benefits earlier than
their plan's normal retirement age may also choose to defer receipt of
benefits.
[14] For more information on how we reviewed BLS data, please see
appendix I.
[15] Data were not available to obtain detailed figures on the types of
annuities that plans make available at retirement. For example, besides
the QJSA annuity, DB plans may offer subsidized annuities at a plan-
specified early retirement age ("early retirement subsidies") or
annuities with a guarantee period ("period-certain" annuities).
[16] "Salaried Employee Benefits Provided by Major U.S. Employers,
2001-2002." Hewitt Associates. This report summarizes the principal
benefit plans for salaried employees of 945 major U.S. employers. All
information is based on plan-by-plan specifications collected directly
from participating plan sponsors in 2001-2002 Hewitt Associates
Specbook.
[17] "45th Annual Survey of Profit Sharing and 401(k) Plans." Profit
Sharing/401(k) Council of America. This survey summary reports the
2001plan year experience of 937 plans with nearly 3.2 million
participants. Respondents consist of 79 profit-sharing plans, 414
401(k) plans, and 444 combination profit sharing/401(k) plans.
[18] See appendix III for detailed results on factors that may affect
benefit payment options offered to or elected by retiring participants
identified by our expert panel.
[19] Some respondents had more than one pension and some had more than
one form of pension payout. As a result, the addition of individual
percentages may not equal their combined sum.
[20] Specifically, we use the following criteria to identify a
participant as having a choice of benefit payouts: retired DB
participants who receive or report they had the option to receive
benefits as a lump sum; and all DC participants. Although few DC plans
offer to pay an annuity, DC retirees can use their DC plan benefits to
purchase an annuity outside of their plan. Consequently, all retirees
with a choice of payouts have an annuity payout available or can use
plan assets to purchase an annuity privately at retirement.
[21] The price per annuity dollar decreases with the age at retirement
and with the prevailing rate of interest.
[22] See appendix II for additional results from our statistical
analysis.
[23] Retirees may choose to annuitize a portion of their pension
benefits and keep a portion as a cash settlement.
[24] Individual annuities that pay income are referred to as immediate
annuities. Income payments provided by immediate annuities may be fixed
or variable.
[25] Variable annuities can be used either to accumulate assets or to
provide payments at regularly scheduled intervals. Unlike fixed
annuities, variable annuities provide income payments that fluctuate in
amount based on the market performance of the annuitant's underlying
annuity portfolio.
[26] See appendix III for additional results from our expert panel.
[27] Mandatory annuitization could be achieved by requiring all tax-
qualified pension plans to payout benefits to participants at
retirement as a life annuity. For example, such a mandate could
prescribe that the portion of a participant's accrued benefits below a
certain dollar level be payable entirely as an annuity.
[28] For example, capital gains tax rates could apply to income
received from qualified plan annuities instead of income tax rates that
currently apply. Another way to provide favorable tax treatment of
annuity income would be to exempt a certain portion of such income (up
to a specified amount) from taxation.
[29] For more information on the mandated interest rate DB plans must
use to determine lump sum payouts and in other important pension
calculations, see U.S. General Accounting Office, Private Pensions:
Process Needed to Monitor the Mandated Interest Rate for Pension
Calculations, GAO-03-313 (Washington, D.C.: Feb. 2003).
[30] Currently, if a departing participant, prior to attaining age 59-
½, chooses to receive a lump sum directly and does not have his or her
employer transfer the amount directly to an IRA or another qualified
plan, the lump sum amount is subject to an excise tax of 10 percent in
addition to ordinary income taxes. Also, the employer is required to
withhold 20 percent of lump sum amount if the participant elects to
receive it directly.
[31] See appendix III for additional results on types of information
and education identified by our expert panel.
[32] These figures are based on the total number of responses to phase
II of our expert panel, in which 22 of the 24 participants who
completed phase I of this process submitted completed responses to the
phase II questionnaire.
[33] "Retirement Risk Survey: Report of Findings." Matthew Greenwald
and Associates, Inc., and the Employee Benefits Research Institute.
January 2002.
[34] See U.S. General Accounting Office, Retirement Saving:
Opportunities to Improve DOL's SAVER Act Campaign, GAO-01-634
(Washington, D.C.: June 2001).
[35] Report of the Working Group on Planning for Retirement. U.S.
Department of Labor, Employee Benefits Security Administration.
November 14, 2001.
[36] HRS oversamples (100%) Hispanics, Blacks, and Florida residents.
[37] We included all DC retirees since in addition to managing one's DC
account balance, DC participants generally have the opportunity to
purchase an annuity privately, even if the DC plan does not offer an
annuity directly. Because employers may require DB participants to
receive a pension as a lump sum if the cash equivalent amount is below
a specific dollar threshold, DB participants that took a lump-sum
payout at or below this threshold in our count of retirees were not
assumed to have demonstrated a choice of pension payout by receiving a
lump-sum payout.
[38] Harold A. Linstone and Murray Turnoff, eds., The Delphi Method:
Techniques and Applications (Reading, Massachusetts: Addison-Wesley,
1975).
[39] The Delphi method, developed by the RAND Corporation in the 1950s,
is most commonly applied in a group-discussion forum. We modified the
approach to have the group discussion take place in the form of a Web-
based forum.
[40] DB respondents who reported receiving a cash settlement are asked
by the HRS what they did with the money. One response for these
retirees includes "Rolled over money into an IRA," but because we could
not obtain analogous information on DC respondents, we counted these
respondents as having taken a cash settlement rather than as having
rolled benefits into an IRA.
[41] An exception concerns those DB participants who have benefits
worth less than $5,000 ($3,500 before August 1997). Because employers
can require participants with such "de minimus" accounts to take a cash
settlement, even if otherwise they would have to offer an annuity from
the plan, we drop any such retirees from the sample when we analyze
only those with a choice of payout options.
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