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United States Government Accountability Office: 
GAO: 

Report to the Chairman, Special Committee on Aging, U.S. Senate: 

June 2011: 

Retirement Income: 

Ensuring Income throughout Retirement Requires Difficult Choices: 

GAO-11-400: 

GAO Highlights: 

Highlights of GAO-11-400, a report to the Chairman, Special Committee 
on Aging, U.S. Senate. 

Why GAO Did This Study: 

As life expectancy increases, the risk that retirees will outlive 
their assets is a growing challenge. The shift from defined benefit 
(DB) pension plans to defined contribution (DC) plans also increases 
the responsibility for workers and retirees to make difficult 
decisions and manage their pension and other financial assets so that 
they have income throughout retirement. GAO was asked to review (1) 
strategies that experts recommend retirees employ to ensure income 
throughout retirement, (2) choices retirees have made for managing 
their pension and financial assets for generating income, and (3) 
policy options available to ensure income throughout retirement and 
their advantages and disadvantages. GAO interviewed experts about 
strategies retirees should take, including strategies for five 
households from different quintiles of net wealth (assets less debt); 
analyzed nationally representative data and studies about retirees’ 
decisions; and interviewed experts and reviewed documents about 
related policy options. 

GAO received comments on a draft of this report from the Department of 
the Treasury and technical comments from the Department of Labor, 
Internal Revenue Service, Securities and Exchange Commission, Social 
Security Administration, and the National Association of Insurance 
Commissioners, and incorporated them, as appropriate. 

What GAO Found: 

Financial experts GAO interviewed typically recommended that retirees 
systematically draw down their savings and convert a portion of their 
savings into an income annuity to cover necessary expenses, or opt for 
the annuity provided by an employer-sponsored DB pension instead of a 
lump sum withdrawal. Experts also recommended that individuals delay 
receipt of Social Security benefits until reaching at least full 
retirement age and, in some cases, continue to work and save, if 
possible. For example, for the two middle net-wealth households GAO 
profiled with about $350,000 to $375,000 in net wealth, experts 
recommended purchase of annuities with a portion of savings, drawdown 
of savings at an annual rate, such as 4 percent of the initial 
balance, use of lifetime income from the DB plan, if applicable, and 
delay of Social Security. To navigate the difficult choices on income 
throughout retirement, they noted strategies depend on an individual’s 
circumstances, such as anticipated expenses, income level, health, and 
each household’s tolerance for risks, such as investment and longevity 
risk. 

Regarding the choices retirees have made, GAO found that most retirees 
rely primarily on Social Security and pass up opportunities for 
additional lifetime retirement income. Taking Social Security benefits 
when they turned 62, many retirees born in 1943, for example, passed 
up increases of at least 33 percent in their monthly inflation-
adjusted Social Security benefit levels available at full retirement 
age of 66. Most retirees who left jobs with a DB pension received or 
deferred lifetime benefits, but only 6 percent of those with a DC plan 
chose or purchased an annuity at retirement. Those in the middle 
income group who had savings typically drew down those savings 
gradually. Nonetheless, an estimated 3.4 million people (9 percent) 
aged 65 or older in 2009 had incomes (excluding any noncash 
assistance) below the poverty level. Among people of all ages the 
poverty rate was 14.3 percent. 

To help people make these often difficult choices, policy options 
proposed by various groups concerning income throughout retirement 
include encouraging the availability of annuities in DC plans and 
promoting financial literacy. Certain proposed policies seek to 
increase access to annuities in DC plans, which may be able to provide 
them at lower cost for some individuals. However, some pension plan 
sponsors are reluctant to offer annuities for fear that their choice 
of annuity provider could make them vulnerable to litigation should 
problems occur. Other proposed options aim to improve individuals’ 
financial literacy, especially to better understand risks and 
available choices for managing income throughout retirement in 
addition to the current emphasis on saving for retirement. Proposed 
options include additional federal publications and interactive tools, 
sponsor notices to plan participants on financial risks and choices 
they face during retirement, and estimates on lifetime annuity income 
on participants’ benefit statements. 

View [hyperlink, http://www.gao.gov/products/GAO-11-400] or key 
components. For more information, contact Charles Jeszeck at (202) 512-
7215 or jeszeckc@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Experts Recommend Retirees Balance Draw Down of Savings and Use of 
Lifetime Retirement Income Options: 

Many Retirees Forego Options to Secure Additional Lifetime Retirement 
Income: 

Various Proposed Policies Would Seek to Promote Access to Annuities 
through Defined Contribution Plans and Improve Financial Literacy 
about Retirement Income: 

Concluding Observations: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Demographic and Financial Characteristics of Households 
Nearing Social Security Eligibility, 2008: 

Appendix III: Demographic and Financial Characteristics of a Sample of 
Five Households Nearing Social Security Eligibility: 

Appendix IV: Retirees' Disposition of Pensions: 

Appendix V: Selected Types of Retirement Income Arrangements and 
Products: 

Appendix VI: Comments from the Department of the Treasury: 

Appendix VII: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Preretirement Earnings Replacement Rates for Workers Retiring 
in 2011 at Age 65, Percentage of Career-Average Earnings: 

Table 2: Recommended Savings Strategies, by Income Level, for Near- 
Retirement Households: 

Table 3: Estimated Probability by CRS That a Retirement Account Will 
Last for at Least a Specific Number of Years: 

Table 4: Selected Policy Options Proposed by RFI Respondents to 
Promote Access to Annuities in DC Plans: 

Table 5: Selected Options Proposed by RFI Respondents and Others to 
Improve Individuals' Understanding about Retirement Income: 

Table 6: Examples of Materials on Income in Retirement from Selected 
Federal Agencies: 

Table 7: Demographic and Financial Characteristics of Households 
Nearing Social Security Eligibility by Net Wealth Quintile, 2008: 

Table 8: Confidence Intervals for Demographic and Financial 
Characteristics of Households Nearing Social Security Eligibility by 
Net Wealth Quintile, 2008: 

Table 9: Characteristics of Household One, Lowest Net Wealth Quintile: 

Table 10: Characteristics of Household Two, Middle Net Wealth Quintile: 

Table 11: Characteristics of Household Three, Middle Net Wealth 
Quintile: 

Table 12: Characteristics of Household Four, Highest Net Wealth 
Quintile: 

Table 13: Characteristics of Household Five, Highest Net Wealth 
Quintile: 

Table 14: Confidence Intervals for Estimates of the Percentage of 
Workers That Left Employment with a DB Pension and Retired Indicating 
the Disposition of Their Pension, 2000 through 2006: 

Table 15: Confidence Intervals for Estimates of the Percentage of 
Workers That Left Employment with a DC Pension and Retired Indicating 
the Disposition of Their Pension, 2000 through 2006: 

Table 16: Descriptions of Selected Retirement Income Arrangements and 
Products: 

Figures: 

Figure 1: Sources of Aggregate Income for Households with Someone Aged 
65 or Older, 2008: 

Figure 2: Sequence of Investment Returns Can Affect the Sustainability 
of a Drawdown Strategy: 

Figure 3: Delaying Social Security Is More Cost Effective than 
Purchasing an Annuity to Enhance Retirement Income: 

Figure 4: Awards of Social Security Retired Worker Benefits by Age and 
Birth Year, 1997-2009: 

Figure 5: More People 60 and Older Are in the Labor Force, 1994-2010: 

Figure 6: Most Workers Received Lifetime Benefits from Their DB 
Pension Rather than a Cash Settlement or IRA Rollover, 2000-2006: 

Figure 7: Dispositions of DC Pensions by Retiring Workers, 2000-2006: 

Figure 8: Allocations to Equities Declined for 401(k) Account Holders 
in Their 60s, Year-End 2005-2009: 

Figure 9: Older 401(k) Investors Held Smaller Allocations in Equities 
than Younger Investors, Year-End 2009: 

Abbreviations: 

BLS: Bureau of Labor Statistics: 

CPI-U: Consumer Price Index for all urban consumers: 

CPS: Current Population Survey: 

CRS: Congressional Research Service: 

DB: defined benefit: 

DC: defined contribution: 

ERISA: Employee Retirement Income Security Act of 1974: 

EBRI: Employee Benefit Research Institute: 

HRS: Health and Retirement Study: 

IRA: individual retirement arrangement: 

IRS: Internal Revenue Service: 

Labor: Department of Labor: 

NAIC: National Association of Insurance Commissioners: 

PBGC: Pension Benefit Guaranty Corporation: 

QDIA: qualified default investment alternative: 

QJSA: qualified joint and survivor annuity: 

RFI: request for information: 

SEC: Securities and Exchange Commission: 

SSA: Social Security Administration: 

Treasury: Department of the Treasury: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

June 7, 2011: 

The Honorable Herb Kohl: 
Chairman: 
Special Committee on Aging: 
United States Senate: 

Dear Mr. Chairman: 

As the life expectancy of U.S. residents continues to increase, the 
risk that retirees will outlive their assets is a growing challenge. 
[Footnote 1] Today, a husband and wife both aged 65 have approximately 
a 47 percent chance that at least one of them will live to his or her 
90th birthday and a 20 percent chance of living to his or her 95th 
birthday.[Footnote 2] In addition to the risk of outliving one's 
assets, the sharp declines in financial markets and home equity during 
the last few years and the continued increase in health care costs 
have intensified workers' concerns about having enough savings and how 
to best manage those savings in retirement.[Footnote 3] 

In addition, the shift among employer-sponsored pension plans from 
defined benefit (DB) to defined contribution (DC) plans heightens the 
responsibility for workers and retirees to manage their pension and 
other financial assets so that their assets last throughout 
retirement. In "traditional" DB plans, a retiree is entitled to 
receive a specified, periodic annuity benefit for life, usually based 
on years of service and other factors, whereas workers in DC plans 
accumulate balances in individual accounts with employer or employee 
contributions (or frequently both) plus accrued earnings. In DC plans, 
participants are typically responsible for investing and assuming 
investment risk. 

The Department of Labor (Labor) and the Department of the Treasury 
(Treasury) regulate employer-sponsored pension plans in the private 
sector. In light of the shift from DB to DC plans, which moves 
responsibility to retirees for ensuring that assets provide income 
throughout retirement, Labor and Treasury issued a public request for 
information (RFI) in 2010 on options for facilitating access to and 
the use of lifetime retirement income sources, including lifetime 
annuities, in employer-sponsored plans and individual retirement 
arrangements (IRA).[Footnote 4] 

Given your interest in these retirement income options, we examined 
the following: 

1. What strategies do experts recommend retirees employ to ensure 
income throughout retirement? 

2. What choices have retirees made for managing their pensions and 
financial assets for generating income? 

3. What policy options are available to ensure income throughout 
retirement and what are their advantages and disadvantages for 
retirees? 

To identify the strategies that experts recommend retirees employ to 
ensure income throughout retirement, we interviewed a judgmental 
sample of a range of financial planners and other financial experts 
from different academic and industry organizations and a retiree 
interest group, which were from different geographic areas of the 
country. (See appendix I.) We focused our discussion on five 
households that we randomly selected from the Health and Retirement 
Study (HRS) in the lowest, middle, and highest net wealth quintiles 
with different combinations of pension plans in the middle and highest 
quintiles.[Footnote 5] See financial and nonfinancial characteristics 
by quintile in appendix II, and the selected households' summary 
financial data in appendix III. We also reviewed company specific 
financial product documentation and studies of retirement income 
strategies such as those describing systematic withdrawals from 
retirement savings. To review the choices retirees have made for 
managing their pension and financial assets for generating income, we 
analyzed data from the HRS, reviewed others' research, and analyzed 
data from the Social Security Administration (SSA). We reviewed 
additional data from the Employee Benefit Research Institute (EBRI), 
the Census Bureau and the Bureau of Labor Statistics (BLS). To 
identify policy options that are available to ensure income throughout 
retirement, as well as their advantages and disadvantages, we reviewed 
information from a variety of academic, consumer, industry, and 
government sources. This included selected submissions in response to 
the Labor and Treasury RFI, other publications, and interviews with 
academic, consumer, industry, and government officials. We conducted 
this performance audit from January 2010 through June 2011 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. For more 
information on our scope and methodology, see appendix I. 

Background: 

While income in retirement varies widely by source, Social Security 
benefits are the foundation of income for nearly all retiree 
households. In aggregate, Social Security is the largest source of 
retirement income for households with someone aged 65 or older, but 
other financial assets such as pension income from DB and DC plans, 
private savings, and assets such as home equity are important sources 
of retirement income for many.[Footnote 6] (See figure 1.) In 2008, 
the most recent year for which data were available, among households 
with someone aged 55 to 60, the median net wealth for the middle 
quintile of net wealth was $339,000. The median household income for 
the middle net wealth quintile was about $70,000 in the preceding 
year, according to the Health and Retirement Study. (See appendix II.) 
Earnings from work can be an important source of income for some 
households with a member aged 65 or older because, for example, a 
spouse younger than 65 may be working. Yet many people aged 65 or 
older also work. In 2010, 29.1 percent of people aged 65 to 69 worked 
at least part-time and 6.9 percent of people aged 75 or older were 
employed.[Footnote 7] 

Figure 1: Sources of Aggregate Income for Households with Someone Aged 
65 or Older, 2008: 

[Refer to PDF for image: pie-chart] 

Social Security: 36.5%; 
Employment earnings: 29.7%; 
Pension and annuity: 18.4%; 
Income from assets: 12.7%; 
Cash public assistance: 0.6%; 
Other: 2.1%. 

Source: SSA, Office of Retirement and Disability Policy, Income of the 
Population 55 or Older, 2008. 

Notes: "Household" here refers to what SSA identifies as aged units-- 
either a married couple living together or a nonmarried person. The 
age of a married couple is the age of the husband if he is 55 or 
older; if the husband is younger than 55, the age of the married 
couple is the age of the wife. Thus a married couple is considered to 
be 65 or older if the husband is 65 or older or if the husband is 
younger than 55 and his wife is 65 or older. Data reported by the 
Social Security Administration for pension income includes regular 
payments from IRA, Keogh, or 401(k) plans. Nonregular (nonannuitized 
or lump sum) withdrawals from IRA, Keogh, and 401(k) plans are not 
included. Social Security income includes retirement, auxiliary (such 
as spousal), survivors, and disability benefits. Data reported for 
income from assets includes interest income, income from dividends, 
rents or royalties, and estates or trusts. Other income includes 
noncash benefits, veteran's benefits, unemployment compensation, 
workers' compensation, and personal contributions. Income from others 
is excluded. The 95 percent confidence intervals for the share of 
aggregate income are 35.9 to 37.1 percent for Social Security, 29.1 to 
30.3 for employment earnings, 17.9 to 18.9 for pension and annuity 
income, 12.3 to 13.1 for income from assets, 1.9 to 2.3 for other, and 
0.5 to 0.7 for cash public assistance. 

[End of figure] 

Social Security benefits provide annually inflation-adjusted income 
for life--and in 2008 were on average the source of 64.8 percent of 
total income for recipient households with someone aged 65 or older. 
[Footnote 8] Under changes legislated in 1983, the retirement age for 
an unreduced benefit (the full retirement age) is gradually increasing 
from age 65, beginning with retirees born in 1938, and will reach age 
67 for those born in 1960 or later.[Footnote 9] 

Despite these changes, the cost of Social Security benefits is 
projected to exceed sources of funding, and the program is projected 
to be unable to pay a portion of scheduled benefits by 2036.[Footnote 
10] In 2010, for the first time since 1983, the Social Security trust 
funds began paying out more in benefits than they received through 
payroll tax revenue, although trust fund interest income more than 
covers the difference, according to the 2011 report of the Social 
Security trust funds' Board of Trustees.[Footnote 11] However, changes 
to Social Security could eliminate or reduce the size of this 
projected long-term shortfall. 

At retirement, DB plan participants are eligible for a specified 
payment for life (either immediately or deferred, and with or without 
benefits for a surviving spouse), but some DB plans also give 
participants a choice, sometimes a difficult choice, to forego a 
lifetime annuity and instead take a lump sum cash settlement 
(distribution) or roll over funds to an IRA. DC participants face a 
number of difficult choices regarding their account balances, such as 
leaving money in the plan, purchasing an annuity,[Footnote 12] or 
transferring or rolling over their balance into an IRA. Employers who 
sponsor qualified plans and enable departing participants to receive 
lump sum distributions must also give participants the option to have 
these amounts directly rolled over into an IRA or another employer's 
tax-qualified plan.[Footnote 13] 

Workers entering retirement today typically face greater 
responsibilities for managing their retirement savings than those who 
retired in the past. Social Security continues to provide a foundation 
of inflation-adjusted income for life, but fewer retirees today have 
defined benefit plans providing lifetime income. DC plans have become 
much more common and they generally do not offer annuities, so 
retirees are left with increasingly important decisions about managing 
their retirement savings.[Footnote 14] Participants in DB plans also 
face similar decisions when the plan offers a lump sum option, 
including not only whether to take the annuity or lump sum, but 
decisions about managing these savings if a lump sum is elected. 

For households with someone aged 65 or older with income from assets, 
such as interest and dividends, the estimated median amount of asset 
income for households in the third (middle) income quintile was $1,022 
in 2008. For those in the highest income quintile the median was 
$8,050.[Footnote 15] Financial assets provide income, but can also 
provide flexibility to draw down funds as needed during retirement. 
For workers with a self-directed lump sum or other retirement savings, 
the money can be taken in periodic distributions for which there are 
strategies to help reduce the chance that a retiree does not outlive 
his or her money. For example, retirees could draw down a portion of 
their balance as a form of regular income to supplement Social 
Security and possibly DB pension income, investing the balance of 
savings in a diversified portfolio of mutual funds containing equities 
and fixed income securities. 

An alternative to self-managing periodic distributions from savings is 
to use one's savings to purchase an immediate annuity from an 
insurance company that guarantees income for life. An immediate 
annuity can help to protect a retiree against the risk of 
underperforming investments, the risk of outliving one's assets 
(longevity risk) and, when an inflation-adjusted annuity is purchased, 
the risk of inflation diminishing one's purchasing power.[Footnote 16] 
Researchers have concluded that annuities have important benefits. For 
example, according to one association of actuaries, it is more 
efficient to pool the risk of outliving one's assets than to self-
insure by accumulating enough assets to provide enough income in case 
one lives to a very old age.[Footnote 17] Annuities provide income at 
a rate that can help retirees avoid overspending their assets and 
provide a floor of guaranteed income to prevent unnecessarily spending 
too little for fear of outliving assets, according to one association. 
Annuities can also relieve retirees of some of the burden of managing 
their investments at older ages when their capacity to do so may 
diminish, which may also make them susceptible to fraudulent sales. On 
the other hand, annuities may be inappropriate or expensive for people 
who have predictably shorter-than-normal life expectancies. Likewise, 
funds used to purchase immediate annuities are no longer available to 
cover large unplanned expenses. Also, immediate annuities that provide 
for bequests have higher costs.[Footnote 18] 

There is little consensus about how much income constitutes "enough" 
retirement income. Retirement income adequacy may be defined relative 
to a standard of minimum needs, such as the poverty rate, or to the 
level of spending households experienced during working years. Some 
economists and financial advisors consider retirement income adequate 
if the ratio of retirement income to preretirement income--called the 
replacement rate--is from 65 to 85 percent, although some retirees may 
need considerably less or more than this. Typically, however, retirees 
do not need to replace 100 percent of preretirement income to maintain 
living standards for several reasons. For example, retirees will no 
longer need to save for retirement and their payroll and income tax 
liability will likely fall. However, some researchers cite 
uncertainties about health and long-term care costs as reasons a 
higher replacement rate may be necessary.[Footnote 19] Table 1 shows 
replacement rates from Social Security benefits for low and high 
earners retiring in 2011, as well as the remaining amount of 
preretirement income from other sources necessary to achieve a 75 
percent replacement rate.[Footnote 20] 

Table 1: Preretirement Earnings Replacement Rates for Workers Retiring 
in 2011 at Age 65, Percentage of Career-Average Earnings: 

Source of replacement rate income: Social Security; 
Low earners' replacement rate: 55.2%; 
High earners' replacement rate: 33.9%. 

Source of replacement rate income: Replacement rate needed from other 
sources to achieve 75 percent replacement rate; 
Low earners' replacement rate: 19.8%; 
High earners' replacement rate: 41.1%. 

Sources: GAO analysis and the 2011 Annual Report of the Board of 
Trustees of the Federal Old-Age and Survivors Insurance and Federal 
Disability Insurance Trust Funds, Table VI.F10. 

Notes: Replacement rates represent the sum of annual scheduled benefit 
amounts and other retirement income as a percent of career-average 
annual earnings. A "low earner" is someone whose career average 
earnings are about 45 percent of the national average wage index, 
while a "high earner" has career average earnings of about 160 percent 
of the average wage index. The national average wage index for 2009 
was $40,711.61. 

Social Security benefits for retired workers at full retirement age 
(age 66 for workers born 1943 to 1954) in 2011 provide 90 percent of 
the first $680 of average indexed monthly earnings, 32 percent of 
additional earnings up to $4,100, and 15 percent of earnings above 
$4,100. 

[End of table] 

The Employee Retirement Income Security Act of 1974 (ERISA) is the 
primary statute governing private pension plans, including DB and DC 
plans.[Footnote 21] It seeks to protect the interests of employee 
benefit plan participants and their beneficiaries. Title I of ERISA, 
enforced by Labor, sets standards of conduct and requires 
accountability for the people who run or provide investment advice to 
plans, known as plan fiduciaries,[Footnote 22] and requires 
administrators to provide participants with certain disclosures, 
including periodic benefit statements as well as a summary plan 
description. Title IV of ERISA created the Pension Benefit Guaranty 
Corporation (PBGC) as a U.S. government corporation to provide plan 
termination insurance for certain DB pension plans that are unable to 
pay promised benefits. The Internal Revenue Service (IRS), under Title 
II of ERISA, and subsequent amendments to the Internal Revenue Code 
(the Code), generally is responsible for ensuring that plans meet 
certain requirements for tax qualification and for interpreting rules 
in Title I of ERISA regarding participation, vesting, benefit accrual, 
and minimum funding. Tax qualification enables employers to make tax- 
deductible contributions and the plan to earn interest on a tax- 
deferred basis. The tax advantages are intended to encourage employers 
to establish and maintain pension plans for their employees and 
advance other public policy objectives. For example, certain 
provisions of the Code set required minimum distributions from tax-
deferred accounts, such as traditional IRAs and qualified plans, 
generally by April 1 in the year following the year in which the 
account holder reaches age 70 ½. These required minimum distributions 
help to ensure that account holders withdraw tax-deferred savings in 
retirement rather than accumulate savings for their estate. 

Once an individual withdraws his or her funds from either a DB or DC 
plan, a myriad of laws and regulations typically applies, depending on 
the investment decisions that the individual makes with those funds. 
In this instance, the individual is no longer a plan participant 
governed by ERISA, but is now essentially a retail investor governed 
by the laws and regulations that are pertinent to the particular 
product or asset in which he or she chooses to invest, and whether or 
not the funds are in an IRA.[Footnote 23] The different laws, 
regulations, and agencies that may come into play vary depending on 
the type of assets held.[Footnote 24] 

Various other federal and state agencies may regulate the investment 
or insurance products offered in pension plans or outside of plans on 
the retail market. For example, the Securities and Exchange Commission 
(SEC) regulates mutual funds, which are pooled investments in a 
portfolio of securities. In addition, certain types of annuities may 
be regulated by states, while other types may also be subject to 
federal securities laws and thus regulation by the SEC. For example, 
the SEC, among others, regulates variable annuities, including 
regulation of disclosure and sales practices. (See appendix V on 
selected retirement income arrangements and products.) Insurance 
company annuities are generally regulated by state insurance 
departments, which set reserve requirements for the insurance 
companies offering annuities. More recently, states are also 
regulating sales and marketing practices and policy terms and 
conditions to ensure that consumers are treated fairly when they 
purchase insurance products and file claims. Although each state has 
its own insurance regulator and laws, the National Association of 
Insurance Commissioners (NAIC) provides a national forum for 
addressing and resolving major insurance issues and for allowing 
regulators to develop consistent policies on the regulation of 
insurance when consistency is deemed appropriate. 

State guaranty associations protect individuals with annuities up to 
specified limits in the event of insurer insolvency. If an insurance 
company becomes insolvent, guaranty associations assess solvent 
insurers to pay covered claims to affected policyholders. However, the 
associations are not state agencies, and their specified limits and 
the extent of coverage vary across states. 

Experts Recommend Retirees Balance Draw Down of Savings and Use of 
Lifetime Retirement Income Options: 

Experts we interviewed tended to recommend that retirees draw down 
their savings strategically and systematically and that they convert a 
portion of their savings into an income annuity to cover necessary 
expenses or opt for the annuity provided by an employer-sponsored DB 
pension, rather than take a lump sum.[Footnote 25] The experts also 
frequently recommended that retirees delay receipt of Social Security 
benefits until they reach at least full retirement age.[Footnote 26] 
However, according to the experts, the combination of these strategies 
depends on an individual's household circumstances, such as the 
standard of living the household seeks, its financial resources, and 
its tolerance for risks such as investment, inflation, and longevity 
risk. 

To learn what these experts recommend, we presented them with the 
financial profiles of five actual near-retirement households whose 
data we drew from the HRS as of 2008.[Footnote 27] We randomly 
selected households from the lowest, middle, and highest net wealth 
quintiles and households with varying types of pensions. See table 2 
for a summary of their recommendations for each of these households 
and appendix III for a more detailed description of each household's 
financial characteristics. 

Table 2: Recommended Savings Strategies, by Income Level, for Near- 
Retirement Households: 

Net wealth quintile and sample household: Lowest quintile (household 
1); 
Total net wealth[A]: $2,000; 
Gross financial wealth[B]: $0; 
Marital status: Single; 
Pension type: None; 
Experts we spoke to tended to recommend: Continue working and 
accumulating assets, if possible. Delay Social Security. 

Net wealth quintile and sample household: Middle quintile (household 
2); 
Total net wealth[A]: $349,000; 
Gross financial wealth[B]: $191,000; 
Marital status: Married; 
Pension type: DC; 
Experts we spoke to tended to recommend: Purchase annuity and 
systematically draw down balance of financial assets. Delay Social 
Security. Continue working and accumulating assets, if possible. 

Net wealth quintile and sample household: Middle quintile (household 
3); 
Total net wealth[A]: $373,000; 
Gross financial wealth[B]: $170,000; 
Marital status: Married; 
Pension type: DB; 
Experts we spoke to tended to recommend: Take DB annuity income,[C] 
purchase annuity, and systematically draw down balance of financial 
assets. Delay Social Security. Continue working and accumulating 
assets, if possible. 

Net wealth quintile and sample household: Highest quintile (household 
4); 
Total net wealth[A]: $1,597,000; 
Gross financial wealth[B]: $1,262,000; 
Marital status: Married; 
Pension type: DB; 
Experts we spoke to tended to recommend: Take DB annuity income and 
systematically draw down financial assets. Delay Social Security. 

Net wealth quintile and sample household: Highest quintile (household 
5); 
Total net wealth[A]: $1,518,000; 
Gross financial wealth[B]: $579,000; 
Marital status: Married; 
Pension type: DB and DC; 
Experts we spoke to tended to recommend: Liquidate some real estate, 
take DB annuity income,[C] and systematically draw down financial 
assets. Spouse in poor health take Social Security early and spouse in 
good health delay.[D] 

Source: GAO analysis of HRS data. 

Notes: These estimates have sampling errors associated with them. For 
95 percent confidence intervals and additional household financial 
characteristics, see appendix II. 

[A] Total net wealth is the sum of gross financial wealth, the market 
value of homes and other real estate, housing debt, nonhousing debt, 
and the value of vehicles, rounded to the nearest thousand. 

[B] Gross financial wealth is the sum of the present value of a DB 
plan, DC plan, IRA assets, business assets, and other financial 
assets, rounded to the nearest thousand. The value of homes and other 
real estate, housing debt, vehicles, and nonhousing debt are excluded. 

[C] The present value of these DB plans was about $30,000. 

[D] One of the members of this household may not be able to continue 
working to delay taking Social Security as their self-reported health 
status was "poor," compared with "good" and "very good" for most of 
the other respondents and spouses in these households. 

[End of table] 

Draw Down a Portion of Savings Systematically for Income, Liquidity, 
and Inflation Protection: 

Experts we interviewed recommend that when retirees use their savings 
or other assets to supplement other sources of retirement income, they 
draw down a portion of these reserves at a systematic rate. The 
drawdown rate should preserve some liquidity--immediately available 
funds--in case of unexpected events such as high medical costs. Such a 
drawdown should be part of a larger strategy that includes a certain 
amount of lifetime retirement income (such as Social Security, defined 
benefit, and annuity income). Drawdowns should be taken from assets 
invested in a broadly diversified portfolio comprised of medium 
exposure to stocks and the balance in bonds and cash. However, drawing 
down assets invested in stocks and bonds was recommended with the 
caveat that holding stocks and bonds leaves households exposed to the 
uncertainty in financial markets over an unknown number of retirement 
years.[Footnote 28] 

The systematic drawdown of financial assets can be based on a "smooth" 
and sustainable level of income throughout retirement or on a 
retiree's remaining life expectancy. The smooth drawdown approach 
takes annual withdrawals based on assumptions about one's life 
expectancy and future investment return.[Footnote 29] According to the 
Congressional Research Service (CRS), an approach based on a retiree's 
remaining life expectancy could involve withdrawing amounts in light 
of the retiree's remaining life expectancy in the year that a 
withdrawal occurs. One example, under the Code, would be required 
minimum distributions, which help to ensure that account holders 
withdraw tax-deferred retirement savings in retirement rather than for 
estate planning. The minimum distributions are calculated based partly 
on life expectancy. 

[Side bar: 
Hypothetical “Smooth” Systematic Drawdown Plan: 
Starting balance of $100,000. Four percent annual drawdown in year 1 
and increase by 3 percent inflation each year.
Income draw: 
Year 1, $4,000; 
Year 2, $4,120; 
Year 3, $4,244; 
Year 4, $4,371; 
Year 5, $4,502; 
Year 20, $7,014. 

Ending balance either grows or declines depending on investment 
performance. End of side bar] 

The experts we spoke to recommended a smooth systematic drawdown from 
retiree investments, but their recommendations varied on the rate of 
drawdown, depending on retirees' acceptance of the risk of running out 
of money and the experts' own assumptions about future investment 
returns. For example, those we spoke to recommended annual withdrawals 
of 3 to 6 percent of the value of the investments in the first year of 
retirement, with adjustments for inflation in subsequent years. These 
rates generally comport with CRS estimates for assuring a lifelong 
source of income.[Footnote 30] Using historical rates of investment 
return on a limited selection of stocks and bonds, CRS estimated that 
a drawdown rate of 4 percent on an investment portfolio with 35 
percent U.S. stocks and 65 percent in corporate bonds would be 89.4 
percent likely to last 35 years or more.[Footnote 31] (See additional 
probabilities from the CRS estimates in table 3.) Importantly, 
drawdown rates identified by CRS are based on historical rates of 
return, and there is no assurance that future investment returns will 
match historical returns. 

Table 3: Estimated Probability by CRS That a Retirement Account Will 
Last for at Least a Specific Number of Years: 

Probabilities that money will last a given number of years, excluding 
the impact of investment fees and taxes: 

25 years or more; 
Initial annual drawdown rate: 4%: 97.7%; 
Initial annual drawdown rate: 5%: 87.8%; 
Initial annual drawdown rate: 6%: 65.2%. 

30 years or more; 
Initial annual drawdown rate: 4%: 94.0%; 
Initial annual drawdown rate: 5%: 77.0%; 
Initial annual drawdown rate: 6%: 49.5%. 

35 years or more; 
Initial annual drawdown rate: 4%: 89.4%; 
Initial annual drawdown rate: 5%: 66.9%; 
Initial annual drawdown rate: 6%: 38.8%. 

Source: CRS Monte Carlo simulation of a portfolio consisting of 35 
percent S&P 500 index and 65 percent AAA-rated corporate bonds. 

Note: There is no assurance that future investment returns will match 
historical rates of return. In addition, CRS estimates are based on 
investment returns from 1926 to 2007, while the S&P 500 declined 38.5 
percent in 2008 (providing a total return of -37.0 percent). The 
probabilities of drawdown shown in the table depend upon the validity 
of the assumptions used to create the Monte Carlo simulation model. 

[End of table] 

According to the experts we spoke to and literature we reviewed, 
another factor that can affect the success of drawdown strategies is 
the sequence of investment returns: if the drawdowns begin after the 
value of the investments has declined, the income drawn would deplete 
a greater proportion of the investments than if growth had occurred 
before the income were drawn. If, for example, annual investment 
returns on retirement savings are up 7 percent in the first year, then 
down 13 percent in the following year, and then up 27 percent, with 
subsequent returns throughout retirement a repetition of the first 3 
years, the average return would be 7 percent. If the sequence of 
returns in the second and third year were reversed, holding all else 
constant, the average annual return would be the same; yet if 
withdrawals are made each year, savings would be depleted sooner with 
the first sequence of returns (see figure 2).[Footnote 32] 

Figure 2: Sequence of Investment Returns Can Affect the Sustainability 
of a Drawdown Strategy: 

[Refer to PDF for image: illustration] 

Circular sequences: 

Annual investment return sequence: sustainable for 18 years: 
Start: 
Up 7%; 
Down 13%; 
Up 27%. 

Annual investment return sequence: sustainable for 24 years: 
Start: 
Up 7%; 
Up 27%; 
Down 13%. 

Source: GAO analysis; Moshe A. Milevsky and Alexandra C. Macqueen. 

Notes: We assumed a $100,000 initial investment at age 65, an annual 
drawdown rate of 9 percent, and withdrawals taken monthly. We used an 
unusually high initial drawdown rate to illustrate both return 
sequences resulting in the retiree running out of money before age 90. 
The time-weighted arithmetic average return for both sequences is 7 
percent, and the time-weighted geometric average for both is 5.74 
percent. The scenario is based on GAO analysis and Moshe A. Milevsky 
and Alexandra C. Macqueen, Pensionize Your Nest Egg: How to Use 
Product Allocation to Create a Guaranteed Income For Life, (Ontario, 
Calif.: John Wiley & Sons Canada, Ltd., 2010). 

[End of figure] 

Lifetime Retirement Income Sources and Increased Social Security 
Benefits Can Provide Additional Income Security: 

Experts we spoke to generally recommended lifetime retirement income 
from DB plans, when DB plans are available to workers, and income 
annuities, in conjunction with systematic drawdown of other savings, 
to provide a greater level of retirement income security. Furthermore, 
they frequently recommend retirees delay Social Security to boost 
inflation-adjusted lifetime retirement income.[Footnote 33] 

Lifetime Retirement Income from DB Plans: 

When the choice of taking a lump sum in exchange for lifetime 
retirement income from a DB plan is available,[Footnote 34] the 
experts we spoke with generally recommended that retirees take 
lifetime retirement income because it would reduce their exposure to 
investment and longevity risks. However, private sector DB plans do 
not typically provide inflation protection. Without inflation 
protection, the value of the income may be greatly diminished over a 
long retirement. For example, income of $1,000 per month in 1980 would 
have purchasing power closer to $385 a month 30 years later in 2009. 
[Footnote 35] When a DB income stream does not adjust with inflation, 
many experts recommended investing other savings in stocks and bonds, 
which have on average returned above the rate of inflation. 
Nevertheless, for retirees who want guaranteed income, experts we 
spoke to considered lifetime retirement income from DB plans 
preferable over purchasing an annuity with a lump sum distribution, 
since DB plans may be able to provide payments at a higher rate than 
is available through an insurance annuity outside of the plan. 

Lifetime Retirement Income from Annuities: 

The experts we spoke with also recommended that retirees enhance their 
guaranteed income by purchasing an annuity with some limited portion 
of their savings. The income needed from an annuity depends, in part, 
on the amount of living expenses not covered by other sources of 
guaranteed income such as Social Security or a DB pension. For those 
that want a higher level of predictable income, an annuity can reduce 
the uncertainty that comes with managing a portfolio of investments 
and systematically drawing down income. The experts noted that 
retirees may have more difficulty managing a portfolio of investments 
as they age. 

With regard to our sample of near-retirement households, the experts 
we spoke to recommended that the middle quintile households purchase 
annuities with a portion of their savings, but that the lowest 
quintile household accumulate some precautionary cash savings before 
purchasing an annuity or investing in securities. Furthermore, they 
suggested that the two households in the highest quintile had 
sufficient resources to go without annuities, unless the individuals 
were very risk averse and felt the need for additional protection for 
longevity. With regard to the middle quintile household without a DB 
plan, experts specified that they should consider using a portion, 
such as half, of their $191,000 in financial assets to purchase an 
inflation-adjusted annuity. Based on current annuity rates, a premium 
valued at half of $191,000 would provide an additional $355 per month 
($4,262 in the first year) until the death of the last surviving 
spouse, and include annual increases tied to the Consumer Price Index. 
[Footnote 36] A monthly payment in the first year at this rate would 
provide slightly more than the annual income provided by a 4 percent 
drawdown.[Footnote 37] By purchasing an annuity, this household would 
reduce its exposure to the risks inherent in a drawdown strategy--
namely, the risks of longevity, inflation, and market volatility. This 
household would also have some liquidity by having kept half of its 
initial savings available to cover unexpected expenses or to leave for 
a bequest. 

For all the advantages of annuities, however, some of the experts we 
spoke to noted that there is commonly a psychological hurdle involved 
in the difficult decision to exchange a large principal payment for an 
unknown number of small monthly payments. In addition, some planners 
tempered their recommendations for annuities, given what they viewed 
as the credit risk of annuity insurance companies or the risk of 
defaulting on their obligation to make annuity payments. On the other 
hand, an economist and an actuary we spoke to--who do not work for 
insurance companies--maintain that the credit risk is small relative 
to the risks inherent in holding stocks and bonds.[Footnote 38] 

Annuities also carry some disadvantages with regard to estate and tax 
planning. Regarding a retiree's estate, annuities are typically not 
refundable upon death, whereas any funds that remain with the 
deceased's systematic drawdown strategy could be left to 
beneficiaries. With regard to taxes, the income from annuities 
purchased with nonqualified funds is taxed as ordinary income, whereas 
part of the investment return from a systematic drawdown strategy of 
nonqualified savings is often taxed at lower capital gains or dividend 
tax rates. 

Delay Social Security: 

Financial experts we spoke to recommended that retirees delay their 
receipt of Social Security benefits in order to increase the amount 
they receive from this guaranteed inflation-adjusted retirement 
income, particularly since Social Security benefits are the foundation 
of income for nearly all retiree households. Although, the experts 
cited factors to consider before choosing to delay Social Security 
benefits, such as one's health and personal life expectancy and the 
availability of other sources of income. 

Under market conditions at the time of the drafting of this report, we 
found that by delaying Social Security benefits an individual can gain 
additional retirement income at a lower cost than from an immediate 
annuity. While individuals may choose reduced Social Security benefits 
at the early eligibility age of 62, the payments they will receive at 
full retirement age (age 66 for those born from 1943 to 1954) will be 
higher, and continue to increase incrementally the longer they wait, 
up to age 70.[Footnote 39] The total estimated amount of benefits 
collected by electing to delay receipt of benefits from age 62 up to 
age 70 is intended to be approximately actuarially equivalent, but 
determinations of actuarial equivalence at any particular time depend 
on assumptions as to current and projected interest and mortality 
rates. The amount of money that a retiree would forego by waiting to 
start benefits until age 66 is less than the amount needed to purchase 
an annuity that would provide the additional monthly income available 
by waiting until full retirement age. If, for example, a person 
collects $12,000 per year at age 62 and every year thereafter (with 
yearly adjustments for inflation), they could wait until age 66 and 
collect $16,000 per year (33 percent more with additional adjustments 
for inflation from age 62 to 66) and every year thereafter.[Footnote 
40] By beginning to collect benefits at age 62 they would have 
collected a total of $48,000 by age 66, and could then purchase an 
inflation-adjusted annuity to provide income to make up the 
difference. However, the cost of the annuity for a single male would 
be 47.4 percent more than the $48,000 they could collect from age 62 
through 65. (See figure 3.) 

Figure 3: Delaying Social Security Is More Cost Effective than 
Purchasing an Annuity to Enhance Retirement Income: 

[Refer to PDF for image: illustration] 

Scenario A – To secure $16,000 each year beginning at age 66, take 
$48,000 in Social Security benefits age 62 to 65, then pay about 
$71,000 for an annuity ($23,000 more than benefits received). 

Male age: 
62: $12,000; 
63: $12,000; 
64: $12,000; 
65: $12,000; 
66: $12,000; 
Purchase an inflation-adjusted annuity for about $71,000 to provide
an additional $4,000 annually; total: $16,000; 
Remainder of life: $12,000 yearly. 

Scenario B – To secure $16,000 each year beginning at age 66, forego 
$48,000 in Social Security benefits age 62 to 65. 

Male age: 
62-65: Forgo $48,000
66: $16,000. 

Source: GAO analysis based on formulas from SSA and an annuity quote 
from Income Solutions. 

Notes: This is a quote for a single-life immediate annuity for a male 
resident in the State of Washington, currently aged 66, with no 
beneficiary. If the annuity were based on a female's life, the cost of 
the annuity would be more. 

[End of figure] 

Many Retirees Forego Options to Secure Additional Lifetime Retirement 
Income: 

Most of today's retirees have taken early (and therefore, reduced) 
Social Security benefits, though increasing numbers of people of 
retirement age are also working. While most with DB pensions are 
receiving lifetime retirement income, few have purchased annuities 
with DC or other assets. Retirement age investors generally have 
limited allocations in stocks. Though most retirees tap their 
financial assets gradually, some exhaust their resources and many, 
particularly those in the oldest age group, live in poverty. 

Most Retirees Have Chosen Reduced Social Security Benefits, though 
Increasing Numbers of Retirement Age Individuals Work: 

The experts we talked with frequently recommend that retirees delay 
taking Social Security to increase their lifetime retirement income, 
but most of today's retirees took Social Security before their full 
retirement age, which has committed many to substantially lower 
monthly benefits than if they had waited. Among those who were 
eligible to take benefits within 1 month after their 62nd birthday 
from 1997 through 2005, 43.1 percent did so, according to Social 
Security administrative data compiled by the Office of the Chief 
Actuary.[Footnote 41] An estimated 72.8 percent took benefits before 
age 65, and only 14.1 percent took benefits the month they reached 
their full retirement age, which varied from age 65 to age 66 
depending on birth year.[Footnote 42] In addition, only about 2.8 
percent took benefits after their 66th birthday. By taking the 
benefits on or before their 63rd birthday, 49.5 percent of 
beneficiaries born in 1943 passed up increases of at least 25 to 33 
percent in monthly inflation-adjusted benefits that would have been 
available, had they waited until their full retirement age.[Footnote 
43] (See figure 4.) 

Figure 4: Awards of Social Security Retired Worker Benefits by Age and 
Birth Year, 1997-2009: 

[Refer to PDF for image: line graph] 

Percentage of claimants: 

Age: 62; Benefits first available; 
Birth year: 1935: 0.47%;	
Birth year: 1937: 0.46%;	
Birth year: 1939: 0.43%;	
Birth year: 1941: 0.41%;	
Birth year: 1943: 0.39%.

Age: 63; 
Birth year: 1935: 0.01%;	
Birth year: 1937: 0.01%;	
Birth year: 1939: 0.01%;	
Birth year: 1941: 0.01%;	
Birth year: 1943: 0.01%.

Age: 64; 
Birth year: 1935: 0.03%;	
Birth year: 1937: 0.04%;	
Birth year: 1939: 0.02%;	
Birth year: 1941: 0.02%;	
Birth year: 1943: 0.02%.

Age: 65; 
Birth year: 1935: 0.17%; (full retirement age); 
Birth year: 1937: 0.15%; (full retirement age); 
Birth year: 1939: 0.13%; (full retirement age); 
Birth year: 1941: 0.13%; (full retirement age); 
Birth year: 1943: 0.01%.

Age: 66; 
Birth year: 1935: 0%;	
Birth year: 1937: 0%;	
Birth year: 1939: 0%;	
Birth year: 1941: 0%;	
Birth year: 1943: 0.14%; (full retirement age). 

Age: 67; 
Birth year: 1935: 0;	
Birth year: 1937: 0;	
Birth year: 1939: 0;	
Birth year: 1941: 0; 
Birth year: 1943: 0. 

Age: 68; 
Birth year: 1935: 0;	
Birth year: 1937: 0;	
Birth year: 1939: 0;	
Birth year: 1941: 0;	
Birth year: 1943: 0. 

Age: 69; 
Birth year: 1935: 0;	
Birth year: 1937: 0;	
Birth year: 1939: 0;	
Birth year: 1941: 0;	
Birth year: 1943: 0. 

Age: 70; 
Birth year: 1935: 0.01%	
Birth year: 1937: 0.01%	
Birth year: 1939: 0.01%	
Birth year: 1941: 0;	
Birth year: 1943: 0. 

Source: GAO analysis of data from the SSA, Office of the Chief Actuary. 

Note: This graph is based on actual awards of retired worker benefits 
plus projections of the number of workers who had not taken benefits 
by the end of 2009. Disability benefit recipients are excluded. 

[End of figure] 

This early retirement pattern changed little over the 1997 to 2009 
period, while under law enacted in 1983, the Social Security full 
retirement age shifted by birth year from age 65 to 66 for those born 
1938 to 1943.[Footnote 44] The proportion of those who took benefits 
the first month they were eligible declined from 47.2 percent to 39.4 
percent, but the percentage of those who waited until the month they 
reached their respective full retirement age also decreased--from 17.4 
to 13.9 percent.[Footnote 45] 

While most people who are collecting Social Security retirement 
benefits do not work, many do continue working at an older age. As 
shown in figure 5, the proportion of older adults in the workforce has 
increased over the last several years. 

Figure 5: More People 60 and Older Are in the Labor Force, 1994-2010: 

[Refer to PDF for image: vertical bar graph] 

Labor force participation rate (percent): 
(also indicates the 95% confidence interval for each entry) 

Age group: 60-64; 
1994: 45%;	
2000: 47%;	
2005: 52%;	
2010: 55%.	 

Age group: 65-69; 
1994: 22%;	
2000: 25%;	
2005: 28%;	
2010: 31%.	 

Age group: 70-74; 
1994: 12%;	
2000: 14%;	
2005: 16%;	
2010: 18%.	 

Source: Bureau of Labor Statistics - Current Population Survey. 

Notes: BLS identifies the labor force as employed residents aged 16 or 
older as well as those unemployed and seeking work. From 2005 to 2010 
the unemployment rate rose from 3.2 percent to 7.3 percent for those 
aged 60 to 64 and from 3.5 percent to 6.7 percent for those aged 65 or 
older. Active duty members of the military and institutionalized 
residents are excluded from these data. 

[End of figure] 

These increases in labor force participation may, in part, have arisen 
in response to changes in the Social Security law effective in 2000 
that eliminated penalties for earning wages while collecting Social 
Security benefits after their full retirement age.[Footnote 46] With 
these changes, more people who are eligible or receiving benefits are 
working. 

Most Workers Leaving Employment with a DB Pension and Retiring 
Received Lifetime Annuities: 

Experts we spoke to generally recommend taking lifetime retirement 
income, and most workers leaving employment with a DB pension and 
retiring received lifetime retirement income from their DB annuity. An 
estimated 67.8 percent of workers who left employment and retired with 
a DB pension from 2000 through 2006 commenced the DB annuity; fewer 
deferred benefits.[Footnote 47] (See figure 6.) Limited data suggest 
that among retiring workers who indicated they had an option to take a 
cash settlement, IRA rollover, or an annuity, an estimated 8.6 percent 
took a cash settlement, and 10.3 percent rolled over funds to an IRA. 
[Footnote 48] (See appendix IV, table 14.) 

Figure 6: Most Workers Received Lifetime Benefits from Their DB 
Pension Rather than a Cash Settlement or IRA Rollover, 2000-2006: 

[Refer to PDF for image: vertical bar graph] 

Disposition of DB pensions (percent): 
(also indicates the 95% confidence interval upper bound and lower 
bound for each entry) 

Receiving benefits: 67.8%; 
Expect future benefit: 15.0%; 
Cash settlement: 7.9%; 
IRA rollover: 6.4%. 

Source: GAO analysis of HRS data, including pension data compiled by 
Alan Gustman, et al. 

Note: Some respondents chose a combination of options, so the sum of 
percentages exceeds 100.0 percent. This analysis is limited to 
respondents in the HRS, 2000-2006. See appendix IV for details and 
confidence intervals for these estimates. ERISA requires DB plan 
sponsors to offer participants an annuity benefit, but they may also 
provide a lump sum benefit option. 

The Code permits a plan sponsor to provide a participant an 
involuntary cash settlement if the vested value of their pension is 
$5,000 or less. Among retirees who received a DB lump sum (cash 
settlement or IRA rollover) some received a lump sum of $5,000 or less. 

[End of figure] 

As most retirees leaving employment with a DB pension and retiring 
receive an annuity benefit, many households with retirees have some 
pension or annuity income (apart from Social Security). In 2008, an 
estimated 40.7 percent of households with a member aged 65 or older 
received pension or other annuity income.[Footnote 49] 

Few with DC Plans Choose or Purchase an Annuity: 

The experts we spoke with recommended that retirees enhance their 
guaranteed income by purchasing an annuity with some limited portion 
of their savings, yet few workers leaving employment with DC pensions 
and retiring (6.1 percent) converted their funds or a portion of the 
money to an annuity. (See figure 7.) An estimated 38.8 percent that 
reported leaving employment with a DC pension and retiring during the 
2000 to 2006 period left funds in the account, and 30.3 percent rolled 
them over to an IRA. Fewer chose to take a withdrawal (15.8 percent). 
This analysis, however, only reveals the decisions that retirees made 
immediately or soon after leaving employment. In some cases some of 
the retirees may have purchased annuities at a later time.[Footnote 50] 

Figure 7: Dispositions of DC Pensions by Retiring Workers, 2000-2006: 

[Refer to PDF for image: vertical bar graph] 

Disposition of DC pensions (percent): 
(also indicates the 95% confidence interval upper bound and lower 
bound for each entry) 

Amount left in account: 38.8%; 
IRA rollover: 30.3%; 
Annuitized: 6.1%; 
Withdrawal: 15.8%. 

Source: GAO analysis of HRS data, including pension data compiled by 
Alan Gustman, et al. 

Notes: Some respondents chose a combination of options. The figures 
shown indicate the percentage of respondents who selected one or more 
options. Analysis is limited to respondents in the HRS, 2000-2006. See 
appendix IV for details and confidence intervals for these estimates. 

[End of figure] 

Although traditional insured life annuities provide predictable 
lifetime retirement income, the amounts of income they provided 
retirees has been modest. The vast majority of annuity sales are sales 
of deferred annuities--annuities that provide purchasers investment 
opportunities to increase savings while deferring federal income taxes 
with an option to draw a guaranteed lifetime retirement income stream 
at a later time. However, purchasers of these annuities typically do 
not convert them to an income stream.[Footnote 51] In 2009, 94.4 
percent of annuity sales were deferred annuities ($225 billion of the 
$239 billion). In contrast, sales of traditional fixed immediate 
annuities purchased to provide lifetime retirement income totaled 
about $7.5 billion (3.1 percent of total sales).[Footnote 52] This 
represents a small portion of retirees' assets (an estimated 1.5 
percent of the IRA and nonpension financial assets held by those aged 
66 in 2008, for example). If this amount had been used to purchase 100 
percent joint and survivor immediate annuities for all those aged 66, 
these annuities would provide only an estimated 0.26 percent of this 
group's aggregate total household income.[Footnote 53] Annuities can 
be purchased with either pension assets on which income taxes have 
been deferred (tax qualified) or with other assets. In 2009, more than 
half (57.9 percent) of the amount of annuities purchased came from tax-
qualified sources. 

In Order to Reduce Market Risks, Investors Approaching Retirement 
Generally Have Chosen to Reduce Allocations to Stocks: 

Although experts we spoke to recommended a moderate exposure to stocks 
to support a retirement income drawdown strategy, households near 
retirement had a wide range of allocations to stocks (equities), 
according to analysis by EBRI.[Footnote 54] In the volatile stock 
market from 2005 to 2009, allocations to equities declined among older 
401(k) investors (those in their 60s). While some of the decrease in 
allocations to equities may have resulted from the decline in stock 
prices relative to bond prices, some reflects investors' decisions to 
reduce allocations to stocks. During 2008, for example, investors 
withdrew a net total of $234 billion from stock funds and added a net 
$28 billion to their bond fund holdings, according to the Investment 
Company Institute[Footnote 55]. The proportion of 401(k) investors 
with no allocations to equities changed little, but the proportion 
with allocations of 80 percent or more of their assets to equities 
fell from 32.6 percent to 22.3 percent. (See figure 8.) 

Figure 8: Allocations to Equities Declined for 401(k) Account Holders 
in Their 60s, Year-End 2005-2009: 

[Refer to PDF for image: vertical bar graph] 

Percentage of balance allocated to equities: 0; 
2005: 19.8%; 
2007: 17.7%; 
2009: 18.9%. 

Percentage of balance allocated to equities: 1-20; 
2005: 8.3%; 
2007: 7.1%; 
2009: 10.4%. 

Percentage of balance allocated to equities: 21-40; 
2005: 8%; 
2007: 9.7%; 
2009: 12.9%. 

Percentage of balance allocated to equities: 41-60; 
2005: 11.2%; 
2007: 17.2%; 
2009: 20.3%. 

Percentage of balance allocated to equities: 61-80; 
2005: 19.9%; 
2007: 18.2%; 
2009: 15.2%. 

Percentage of balance allocated to equities: over 80; 
2005: 32.6%; 
2007: 30.1%; 
2009: 22.3%. 

Source: Employee Benefits Research Institute. 

Note: These results are based on the Investment Company Institute/EBRI 
401(k) database, which included information concerning 20.7 million 
plan participants with $1.2 trillion in 401(k) assets at the end of 
2009. This represents an estimated 44 percent of all 401(k) assets. 
While some of the decrease in allocations to equities may have 
resulted from the decline in stock prices relative to bond prices, 
some reflects investors' decisions to reduce allocations to stocks. 
From the end of 2005 to the end of 2009 the total cumulative return 
for the Standard and Poor's 500 stock market index was a 2.7 percent 
loss. Over this same period the Barclays Capital U.S. Aggregate Bond 
Index returned 24.4 percent. 

[End of figure] 

By the end of 2009, smaller proportions of 401(k) investors in their 
60s held high proportions of their balances in equities than younger 
investors. Although certain experts we spoke with recommended that 
some retirees hold between 40 and 60 percent of financial assets in 
stocks, about one-fifth (20.3 percent) of 401(k) investors aged 60 to 
69 had such allocations, according to EBRI's analysis. (See figure 9.) 

Figure 9: Older 401(k) Investors Held Smaller Allocations in Equities 
than Younger Investors, Year-End 2009: 

[Refer to PDF for image: vertical bar graph] 

Percent of investors with the indicated allocation to equities in 
their 401(k) account, year-end 2009: 

Age Group: 30-39; 
Allocation to equities: 
0-20%: 15%; 
greater than 20-40%: 5.3%; 
greater than 40-60%: 9%; 
greater than 60-80%: 19.8%; 
Over 80%: 51%. 

Age Group: 40-49; 
Allocation to equities: 
0-20%: 16.6%; 
greater than 20-40%: 6.3%; 
greater than 40-60%: 10.4%; 
greater than 60-80%: 27.4%; 
Over 80%: 39.2%. 

Age Group: 50-59; 
Allocation to equities: 
0-20%: 21.1%; 
greater than 20-40%: 8.6%; 
greater than 40-60%: 18.2%; 
greater than 60-80%: 26.2%; 
Over 80%: 26%. 

Age Group: 60-69; 
Allocation to equities: 
0-20%: 29.3%; 
greater than 20-40%: 12.9%; 
greater than 40-60%: 20.3%; 
greater than 60-80%: 15.2%; 
Over 80%: 22.3%. 

Source: Employee Benefits Research Institute. 

[End of figure] 

Most Retirees with Financial Assets Have Tapped Them Gradually, but 
Others Have Few Assets and Outlive Them: 

Although many retirees lack substantial savings, most have some 
savings and have typically drawn on those savings gradually, as the 
experts we spoke to recommend. According to Urban Institute 
researchers' analysis of associations between household assets, age 
and income data from HRS survey responses gathered over the 1998 to 
2006 period, individuals in the highest income quintile typically 
accumulated wealth, at least until their eighties.[Footnote 56] Those 
in the middle income quintile typically started to spend down wealth 
at somewhat earlier ages, but, as the experts we spoke to recommended, 
gradually enough to likely have assets when they die. Those in the 
lowest income quintile typically have few nonannuitized assets and 
spend them fairly quickly. 

Economists' analysis of U.S. Census survey data from 1997, 1998, 2001, 
2002, 2004, and 2005 indicate a comparatively modest rate of 
withdrawals prior to the age at which the Code required minimum 
distribution requirements apply.[Footnote 57] Also, as a household 
gradually draws down and consumes the principal of their savings, 
their living expenses, rising with inflation, will be an ever bigger 
portion of their declining principal. 

Although many retirees draw on resources gradually, some older people 
are at risk of outliving their financial assets, particularly if a 
significant adverse health event occurs. Our analysis of HRS data 
indicates that among individuals born in 1930 or earlier that had net 
household financial assets of $15,000 or more in 1998, an estimated 
7.3 percent of those alive in 2008 had net financial assets of $2,000 
or less.[Footnote 58] 

Entering a nursing home is associated with substantial declines in 
household wealth for households with a person aged 70 or older. 
[Footnote 59] Although several experts we spoke to recommended it, few 
retirees purchase long-term care insurance to protect themselves from 
some of the risk that they will be impoverished by having to pay for 
nursing home services and certain assisted living services, as 
premiums can be expensive.[Footnote 60] 

Apart from whether individuals outlive their assets, millions of 
retirees live in poverty late in life. Even with the widespread 
availability of Social Security, Medicare, and Medicaid benefits, in 
2009 an estimated 3.4 million people aged 65 or older lived in 
poverty. The poverty rate for this age group (8.9 percent), however, 
was lower than for all U.S. residents (14.3 percent).[Footnote 61] On 
the other hand, poverty among women aged 75 and older is much greater 
than for men. During the 2005 to 2009 period, the Census Bureau 
estimated that 13.5 percent of women in this age group had incomes 
below the poverty line in the previous year compared with 7.7 percent 
of men.[Footnote 62] 

In the future, it is unclear to what extent similar patterns will hold 
for retirees. For example, investment returns may differ from 
historical rates of return. Also, DB plans and the lifetime retirement 
income that retirees frequently received were more common for current 
retirees. The shift away from DB plans toward DC plans may mean that 
increased retirement savings and other options for generating 
retirement income from savings, such as annuities, might become more 
important for retirees in the future. 

Various Proposed Policies Would Seek to Promote Access to Annuities 
through Defined Contribution Plans and Improve Financial Literacy 
about Retirement Income: 

Proposed Options for Promoting Access to Annuities through Employer DC 
Plans Take Many Forms: 

Multiple experts told us about increasing lifetime retirement income 
by purchasing an annuity, but DC plans typically do not offer access 
to annuities and their participants infrequently use annuities when 
leaving employment and retiring. The February 2010 Labor/Treasury RFI 
asked about ways to facilitate access to lifetime retirement income 
products such as annuities in DC plans, and a number of policy options 
were proposed by respondents.[Footnote 63] (See table 4.) These policy 
options in responses to the RFI came from industry, consumer, 
academic, and other groups. 

Table 4: Selected Policy Options Proposed by RFI Respondents to 
Promote Access to Annuities in DC Plans: 

Policy option: Revise the Safe Harbor Provision for Selecting Annuity 
Providers; 
Basic description: Labor would revise its 2008 regulation that 
establishes a safe harbor for the selection of an annuity provider.[A] 
Although the current regulation provides a general process sponsors 
may use to meet their fiduciary responsibilities when they select an 
annuity provider, certain industry groups suggested that it lacks 
sufficient detail. Some proposed revising a key condition of the 
current safe harbor that requires sponsors, specifically, to assess 
the ability of an insurance company to make all future payments under 
an annuity contract. 

Policy option: Require sponsors to offer an annuity as a choice; 
Basic description: Legislation could require that sponsors of DC plans 
offer annuities as a choice to plan participants. 

Policy option: Encourage sponsors to offer a default annuity; 
Basic description: Sponsors would be encouraged to offer an annuity as 
the participant's election by default in DC plans. For example, some 
industry groups suggested that Labor clarify its regulation on 
qualified default investment alternatives (QDIA) regarding the 
conditions under which sponsors could include annuities as QDIAs.[B] 
Another option for DC plans would require an annuity as the default 
way to take pension benefits, as with DB plans. 

Policy option: Modify tax law on minimum distributions for deeply 
deferred annuities; 
Basic description: A legislative exemption from required minimum 
distributions for deeply deferred annuities could make it easier for 
sponsors to offer a deeply deferred annuity, or "longevity insurance." 
A deeply deferred annuity is a type of income annuity that can be 
purchased near or at retirement, and regular annuity payments start 
after reaching an advanced age, such as 80 or 85. (See appendix V on 
selected types of retirement arrangements and products.) Individuals 
can presently purchase these newer annuities on the retail market. 

Policy option: Modify spousal protection provisions; 
Basic description: Proposed changes to the Code or regulations 
regarding spousal protections include exempting DC plans, allowing 
spousal consent procedures to occur electronically,[C] or clarifying 
the requirements for newer products such as annuities with guaranteed 
living benefits.d For spousal protections in most DC plans such as 
401(k) plans, an individual can elect a lump sum payment without 
spousal consent, but needs to obtain the consent of his/her spouse to 
elect any life annuity that is not a qualified joint and survivor 
annuity.[E] 

Source: GAO analysis based on RFI responses. 

[A] 73 Fed. Reg. 58,447 (Oct. 7, 2008). 29 C.F.R. § 2550.404a-4. The 
safe harbor is an optional way for sponsors or other fiduciaries of 
defined contribution plans to satisfy their responsibilities under 
ERISA. It includes general conditions for fiduciaries to satisfy when 
selecting a provider of annuities for benefit distributions from 
defined contribution plans. 

[B] The QDIA regulation limits liability for sponsors of DC 
participant-directed plans that automatically invest contributions in 
specific types of investments. The types of investments which may be 
QDIAs generally include lifecycle (i.e., target-date) funds, balanced 
funds, and managed accounts. 29 C.F.R. § 2550.404c-5. For more 
information, see GAO, Defined Contribution Plans: Key Information on 
Target Date Funds as Default Investments Should Be Provided to Plan 
Sponsors and Participants, GAO-11-118 (Washington, D.C.: Jan. 31, 
2011). According to one industry group, the existing regulation 
already permits sponsors to include annuities as QDIAs. 

[C] For example, regulations on electronic disclosures do not allow 
solely an electronic waiver for these decisions, such as with a 
Personal Identification Number, since Treasury/IRS found that such 
procedures would not sufficiently protect the integrity of the 
spouse's consent. 71 Fed. Reg. 61,877 (Oct. 20, 2006). 26 C.F.R. § 
1.401(a)-21(d)(6). 

[D] Newer annuity products with guaranteed living benefits, such as 
guaranteed lifetime withdrawal benefits, include variable annuities 
that have riders to provide various protections or additional 
features, subject to certain restrictions. (See appendix V.) These 
newer products also raise other questions, including their cost, 
complexity, vesting rules, and protections of state guaranty 
associations. 

[E] According to IRS publications, requirements on spousal protections 
do not apply to DC plans (other than money purchase plans) that meet 
all of the following criteria: (a) the plan provides that the 
participant's nonforfeitable accrued benefit is payable in full, on 
the participant's death, to the surviving spouse (unless the 
participants elects with spousal consent that the benefit be paid 
instead to a designated beneficiary); (b) the participant does not 
elect to receive benefits in the form of a life annuity; and (c) the 
plan is not a transferee or offset plan with respect to the 
participant. 26 U.S.C. § 401(a)(11)(B)(iii). 

[End of table] 

Revise the Safe Harbor Provision for Selecting Annuity Providers: 

According to several respondents who favored this option, revising the 
safe harbor provision would have an advantage of helping to ease 
concerns of some sponsors of DC plans about offering an annuity as a 
payout choice. In turn, the availability of an annuity to plan 
participants could possibly increase the number of retirees who 
consider it as a way to withdraw pension benefits for predictable 
lifetime retirement income. Additionally, this could help participants 
who would otherwise purchase an annuity in the retail market on terms 
that might not be as favorable. For example, annuities, especially in 
larger plans, might be available at institutional prices and thus at 
lower prices than on the retail market. Annuities at group rates 
typically have lower prices than individual annuities.[Footnote 64] 
Participants might also benefit from the fact that the plan 
fiduciaries are required to fulfill fiduciary responsibilities for the 
annuity selection, including the prudent selection and monitoring of 
products and providers offered in the plan.[Footnote 65] Individuals 
on their own might be less likely to be in a position or to have 
experience to conduct as thorough and analytical a selection as the 
plan fiduciary, who is required to conduct a diligent analysis as a 
fiduciary. 

However, revising the safe harbor provision could expose participants 
to additional risks, including the risk that the insurance company 
providing annuities becomes insolvent and unable to make promised 
payments. Depending on the specific features of a policy change in 
this area, it could have the effect of lessening protections and 
recourse for participants, as compared to the current 
regulation.[Footnote 66] For example, some industry respondents 
proposed eliminating, modifying, or providing specific criteria for 
the condition in the safe harbor that requires sponsors to assess the 
ability of an insurance company to make all future payments under an 
annuity contract. Labor officials said that protecting participants 
against the risk of insurer insolvency is a key issue as they consider 
revisions to the safe harbor regulation, given that retirees may 
depend on annuities for decades. The insolvency of Executive Life 
Insurance Company in the early 1990s is a case in point.[Footnote 67] 
While states are generally responsible for insurance regulation 
including the solvency of insurers, the degree of regulation can vary 
in some aspects. There is also variation in the protections of state 
guaranty associations to cover policyholders. For example, all state 
guaranty associations generally protect an annuity's value up to at 
least $100,000.[Footnote 68] According to an official from the 
National Organization of Life and Health Insurance Guaranty 
Associations, as of May 2011, roughly two-thirds of the associations 
provide coverage of $250,000 or more, and roughly one-third have 
limits of at least $100,000 for annuities.[Footnote 69] Given such 
variation, some respondents raised the possibility of providing a 
federal guarantee to help states protect policyholders in cases of 
insurer insolvency.[Footnote 70] 

Require Sponsors to Offer an Annuity as a Choice: 

Some consumer and other groups recommended requiring DC plan sponsors 
to offer annuities as a choice to plan participants, which would 
require legislative efforts to amend ERISA or the Code. This would 
make the availability of lifetime retirement income more widespread, 
although the effect such amendments might have on the rate of 
participants' adoption of annuities is uncertain. Since its passage in 
1974, ERISA has required DB plans to offer such a choice.[Footnote 71] 
Similarly, DC plans could be required to offer the choice of an 
annuity for income in retirement.[Footnote 72] However, even with 
greater access to annuities in their plans, participants frequently 
have foregone this opportunity for lifetime retirement income and many 
may continue not to use this choice for lifetime retirement income. 
From the sponsors' perspective, such a requirement could impose 
greater costs and administrative burdens, and possibly increase their 
exposure to fiduciary liability. For example, this might involve the 
selection and monitoring of an annuity provider, including costs to 
hire any experts to assist with these decisions. As we have previously 
reported, sponsors may be concerned about being held liable for these 
decisions and paying any losses to participants in the event the 
annuity provider cannot meet its financial obligations.[Footnote 73] 
Also, the requirements for qualified joint and survivor annuities, 
including spousal consent to waive the qualified joint and survivor 
annuity, present administrative burdens and costs, according to 
several industry groups. A few industry or other groups noted that the 
administrative burdens or risk of lawsuits could even lead some 
employers, such as small employers, not to carry DC plans at all. 

Encourage Sponsors to Offer a Default Annuity: 

A default arrangement could increase the use of annuities without an 
affirmative decision from participants to do so. Certain respondents 
noted that, to the extent that participants are unlikely to opt out of 
the default annuity, use of annuities would increase. Accordingly, 
automatic enrollment and default investments have been adopted in some 
DC plans when workers save for retirement, partly to overcome such 
tendencies as procrastinating or not making decisions. With the 
declining availability of DB plans and the lifetime retirement income 
they frequently provide, a default annuity in DC plans could help to 
promote lifetime retirement income for more participants. 

Other respondents or experts have noted disadvantages with default 
annuities, such as irreversibility or financial penalties. Unlike 
automatic enrollment or default investments to save for retirement, 
annuitization by default may not allow for a subsequent change. 
[Footnote 74] For some participants, default immediate life annuities 
may not be appropriate given their health and other circumstances. 
Other types of annuities, such as deferred variable annuities, provide 
more flexibility to reallocate investments or make withdrawals, yet 
surrender and other charges and fees may apply.[Footnote 75] Another 
disadvantage to a default annuity would be setting a standard level of 
how much to use for the annuity. The appropriate portion to annuitize 
may vary among participants, given their particular circumstances such 
as other sources of income. 

Modify Tax Law on Minimum Distributions for Deeply Deferred Annuities: 

Deeply deferred annuities, or "longevity insurance,"[Footnote 76] 
which initiate payments at an advanced age, could provide protection 
against longevity risk and could do so at a substantially lower price 
than a traditional immediate annuity.[Footnote 77] For example, 
according to one association, the cost of a deeply deferred annuity 
purchased at age 65 with payments beginning at age 85 is approximately 
10 to 15 percent of the cost of an annuity providing the same amount 
of income that begins payments immediately.[Footnote 78] Also, 
longevity insurance provides income at advanced ages, when risks of 
poverty or outliving assets among the elderly may rise,[Footnote 79] 
and sets a finite period for systematic or other withdrawals to last. 
While longevity insurance is available on the retail market, current 
provisions for required minimum distributions make it challenging to 
offer this product in DC plans or IRAs, according to certain industry 
groups. Longevity insurance purchased with tax-deferred funds can pose 
problems for taxpayers if the insurance does not permit annuity 
payments to be made until a date that is substantially after minimum 
distributions must begin--for example, if the contract provides for no 
payments to be made until age 85.[Footnote 80] 

On the other hand, questions exist about this newer product, according 
to Treasury officials and certain academic experts. For example, it is 
unclear to what extent older people might understand and be willing to 
purchase deeply deferred annuities whose payments may not begin for 
decades, if at all. Further, a proposed exemption from minimum 
distributions could potentially reduce revenue to the federal 
government since a tax exemption for deeply deferred annuities would 
result in some foregone revenue, although the extent of any foregone 
revenue is unclear. However, the purpose of the minimum distribution 
provisions is to ensure that tax-deferred retirement saving is used 
for retirement rather than estate planning purposes. Depending on how 
tax expenditures are structured, they also may raise questions about 
fairness, such as the extent to which low-or high-income individuals 
would benefit from a proposed exemption. 

Modify Spousal Protection Provisions: 

According to several industry groups, changes in requirements about 
qualified joint and survivor annuities (QJSA), including the 
procedures to document the spouse's consent, could lower 
administrative burdens and costs so that sponsors might become more 
willing to make annuities available. A QJSA generally guarantees 
payments for the life of the participant and the participant's 
surviving spouse. Some plans, including DB plans, are subject to 
requirements to offer a QJSA as a default and obtain spousal consent 
to not elect the joint and survivor annuity.[Footnote 81] For DC plans 
that are subject to the requirements for some or all participants, 
part of the procedures to elect a distribution other than the QJSA 
include notarized or in-person consent by the spouse, which some 
industry groups described as burdensome. However, these procedures 
have helped to protect spouses of participants with decisions about 
lifetime retirement income. For example, in DB plans, QJSA 
requirements under the Retirement Equity Act of 1984 and its 
implementing regulations sought to ensure that spouses are aware and 
consent to a pension distribution other than a joint annuity that 
would provide payments throughout their retirement.[Footnote 82] The 
QJSA procedures for DB plans do not apply uniformly to DC plans, and 
we have previously reported that spousal protections in DC plans 
already have limitations. For example, a plan participant may withdraw 
from or roll over an account balance without the consent of his or her 
spouse.[Footnote 83] Women on average continue to live longer and be 
more vulnerable to poverty at older ages than men, and reducing QJSA 
requirements might further lessen spousal protections in DC plans as 
compared to DB plans. 

Proposed Approaches Vary to Improve Individuals' Understanding about 
Retirement Income: 

Improving individuals' financial literacy can be one important 
component in helping them manage retirement income appropriately. 
Financial literacy can be described as the ability to make informed 
judgments and to take effective actions regarding the current and 
future use and management of money. One way of improving consumer 
financial literacy is through financial education--that is, the 
processes whereby individuals improve their knowledge and 
understanding of financial products, services, and concepts. A wide 
variety of delivery mechanisms exist to provide financial education, 
including classroom curricula, print materials, Web sites, broadcast 
media, and individual counseling. As we recently testified,[Footnote 
84] at the federal level, more than 20 federal agencies have programs 
or initiatives related to financial literacy and these efforts are 
coordinated by the Financial Literacy and Education Commission (FLEC). 
[Footnote 85] 

Ensuring the financial literacy of older people has become 
particularly important given the transition to a financial account-
based retirement system and the increasing responsibility of 
individuals to manage their assets in retirement. According to many 
respondents as well as experts we interviewed, education aimed at 
helping manage retirement income should cover, in particular, the 
financial risks faced in retirement, such as longevity risk, inflation 
risk, and investment risk, among others. Appropriate financial 
education can help prevent individuals from over-estimating their 
expected investment returns or sustainable withdrawal rates, which 
might make it more difficult to maintain their lifestyle in 
retirement. It can also serve to help individuals understand various 
difficult choices to mitigate these risks as well as how to evaluate 
or compare choices, such as what factors to consider. Such education 
can be particularly important given the complexity of annuities and 
other retirement investment vehicles. Besides annuities, managing a 
lump sum distribution and approaches that combine annuities and more 
liquid assets are other choices for individuals. Individuals or plan 
sponsors might not be aware that they can pursue combinations of 
income in retirement, such as annuitizing part of the pension benefit, 
rather than just all or none of it. Having adequate information on the 
variety of options available--and their corresponding advantages and 
disadvantages--allows individuals to tailor their decisions to their 
particular circumstances. 

Various entities proposed policy options that seek to better inform 
individuals about income in retirement, and these options use 
different approaches, such as financial education or notices involving 
pensions. Multiple policy options, such as those offered in response 
to the RFI or in reports we reviewed, could work together to improve 
financial literacy on income throughout retirement. (See table 5.) 
Some industry groups or academic experts stated that financial 
education alone has its limitations and is not the only approach for 
improving consumers' financial behavior. Financial education may 
sometimes be more useful as a complement to other tools, such as 
personalized investment advice or policy options like the use of 
defaults. 

Table 5: Selected Options Proposed by RFI Respondents and Others to 
Improve Individuals' Understanding about Retirement Income: 

Policy option: Develop and disseminate additional federal government 
materials; 
Basic description: The federal government, as part of its efforts on 
financial education, would include materials, such as additional 
publications and interactive tools, on managing pension and other 
financial assets during retirement. 

Policy option: Require sponsors to provide a notice for plan 
participants; 
Basic description: This would statutorily require that sponsors 
periodically provide plan participants with a notice on the general 
financial risks and choices that individuals face in retirement. 

Policy option: Encourage voluntary education in plans by issuing clear 
guidance; 
Basic description: Labor would issue guidance on the types of 
information that constitute education about income in retirement. 
Labor's existing guidance, an interpretive bulletin from 1996, 
specifies the types of general information considered to be investment 
education rather than investment advice, which is a fiduciary act and 
carries fiduciary duties and liability.[A] 

Policy option: Require sponsors to provide an estimate of lifetime 
annuity income on benefit statements; 
Basic description: For benefit statements of DC plan participants, 
sponsors could be required to show an estimate of the balance's 
equivalent in lifetime retirement income as well as a total account 
balance. For example, a legislative proposal, the Lifetime Income 
Disclosure Act, would require Labor to provide assumptions for 
sponsors to use in providing participants with annual lifetime 
retirement income disclosures.[B] 

Source: GAO analysis of RFI responses and other documents. 

[A] 29 C.F.R. § 2509.96-1. 

[B] S. 267 was introduced in Congress on February 3, 2011, and H.R. 
677 was introduced on February 11, 2011. Plan sponsors would receive 
relief from fiduciary liability for the estimate, to the extent they 
follow legislative and regulatory provisions. 

[End of table] 

Develop and Disseminate Additional Federal Government Materials: 

Currently, federal agencies provide some educational resources for the 
general public about income in retirement as part of their efforts on 
financial education. Certain agencies, such as SSA and Labor, have 
taken various steps, as shown in table 6. 

Table 6: Examples of Materials on Income in Retirement from Selected 
Federal Agencies: 

Federal agency: SSA; 
Examples of materials on income in retirement: Various materials on 
Social Security benefits are available,[A] including Web sites or 
publications with factors to consider about when to claim benefits as 
well as many online calculators to estimate benefits or the 
population's life expectancy. 

Federal agency: SSA; 
Examples of materials on income in retirement: SSA's Financial 
Literacy Research Consortium began in 2009 with cooperative agreements 
to three research centers to conduct research and develop materials to 
improve financial literacy and retirement planning. However, according 
to SSA's FY 2012 budget justification, funding is not provided for the 
Financial Literacy Research Consortium. 

Federal agency: Labor; 
Examples of materials on income in retirement: The online and print 
publication, Taking the Mystery Out of Retirement Planning, includes 
chapters and calculators to help individuals understand their sources 
and amounts of income and expenditures before and in retirement.[B] 
The publication includes a chapter entitled "Making Your Money Last," 
which provides a few pages on choices like annuities, systematic 
withdrawals, or combinations of approaches such as partial 
annuitization. 

Source: GAO analysis of agency documents. 

[A] An important way for individuals to learn about Social Security 
benefits is the annual statement provided to workers aged 25 and 
older, which includes information on the worker's earnings and 
projected benefits. We have previously reported in 2005 that SSA's 
goals of the statement include educating the public about Social 
Security programs, aiding in financial planning, and ensuring the 
worker's earnings records are complete and accurate. However, in light 
of the current budgetary situation, SSA recently announced that it has 
suspended issuing annual statements. 

[B] The online version of the publication is available at [hyperlink, 
http://www.dol.gov/ebsa/publications/nearretirement.html]. 

[End of table] 

We found that few other resources on how to ensure income throughout 
retirement were available from the federal government.[Footnote 86] 
With federal financial education, much of the retirement focus has 
typically been on saving for retirement. 

Although many sources of information are available from the private 
sector, the federal government may be in a position to contribute to 
financial education on managing pension and other financial assets in 
retirement. The federal government can produce objective information 
and partner with organizations outside of the government to deliver 
its materials, which we have previously reported.[Footnote 87] 
Leveraging partnerships with public and private sector stakeholders, 
the federal government may help to reach many target audiences. This 
could include those without plan sponsors such as the roughly half of 
the private sector workforce not participating in a pension or those 
who have rolled over pension assets to an IRA. Meanwhile, certain 
research suggests that information from various financial service 
companies may raise some concerns about possible limitations or 
conflicts of interest.[Footnote 88] Regarding conflicts of interest, 
we recently reported that participants in 401(k) plans may be unaware 
that service providers, when furnishing education, may have 
undisclosed financial interests, including on investment funds in 
their plan or products outside the plan from roll-over balances. 
[Footnote 89] Older people without pension plans or who have withdrawn 
funds from their plans may receive information on products that are 
not in their best interest or even fraudulent.[Footnote 90] 

On the other hand, certain educational materials from the federal 
government on income throughout retirement may have some limitations. 
For example, Labor officials told us that their educational materials 
on this topic may be fairly general, and plan sponsors may be more 
aware of participants' circumstances and could better tailor 
retirement education accordingly. 

Require Sponsors to Provide a Notice for Plan Participants: 

In 2003, we recommended that Congress 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.[Footnote 91] The notice could 
be provided at certain key milestones, including when a participant 
separates from service or at retirement. Although this policy option 
has not been enacted, ERISA requires sponsors of DC plans to provide 
participants a notice as part of their quarterly benefit statements 
about the benefits of a well-balanced and diversified portfolio as 
they save for retirement, which includes a link to a Labor Web site 
for further information.[Footnote 92] According to Labor and Treasury 
officials, plan sponsors are not required to provide a notice to 
participants on managing pension assets in retirement, such as the 
general financial risks and choices they face. Once retired or outside 
their plan, individuals might be more susceptible to sales of products 
that are not in their best interest or even constitute fraud. Without 
additional information reinforced over time while participating in the 
plan, participants could later make decisions that fail to sustain 
their incomes and, as a result, potentially place a heavier burden on 
public need-based assistance or other resources. 

Encourage Voluntary Education in Plans by Issuing Clear Guidance: 

Labor has provided an interpretive bulletin on participant investment 
education as distinguished from investment advice in plans, but many 
respondents observed that this bulletin and industry efforts generally 
focus on saving for retirement, rather than on income throughout 
retirement. According to a few industry groups, greater clarity on 
education as distinguished from investment advice, as related to 
income in retirement, may allay sponsors' and service providers' fears 
of fiduciary liability by explaining the types of general information 
on income in retirement that would not be considered to be investment 
advice. With such clarity, more sponsors and service providers may 
pursue voluntary efforts to educate plan participants in general on 
income and expenses in retirement. Sponsors with assistance from 
providers could tailor such education to their plan participants. Some 
plans already offer such education.[Footnote 93] 

However, any future guidance from Labor on investment education about 
income in retirement, if poorly implemented, could have potential 
disadvantages. For example, we recently recommended that Labor 
evaluate and revise its interpretive bulletin on investment education, 
including the ability to highlight proprietary funds which may result 
in greater revenue to the service provider.[Footnote 94] As Labor 
officials consider possible guidance on income in retirement, they 
said that an inappropriate balance between education and advice could 
result in plan participants receiving so-called "education" from 
service providers with conflicts of interest and not having recourse 
against fiduciaries. According to Labor officials, education on income 
throughout retirement may also involve spending plan assets to varying 
extents on choices not available in the plan, which could potentially 
be challenged as unreasonable expenses from plan assets under certain 
circumstances. Further, while guidance could encourage sponsors to 
voluntarily provide education, it may not require it. Some sponsors 
might not provide education on income throughout retirement due to 
reasons other than fiduciary concerns, such as costs or not viewing it 
as their role. 

Require Sponsors to Provide an Estimate of Lifetime Annuity Income on 
Benefit Statements: 

Given the rise of DC plans which provide pension benefits as an 
account balance, many industry, consumer, and academic groups noted 
that an estimate on the participant benefit statement could present, 
or "frame," the pension benefit as a stream of income in retirement 
rather than just an account balance, which could help to change how 
participants in DC plans perceive or ultimately withdraw their benefit 
at retirement.[Footnote 95] For example, the Thrift Savings Plan, a DC 
plan for federal workers, recently began to include such an estimate 
on annual statements for participants,[Footnote 96] and 
representatives of a service provider for other plans told us it does 
so on quarterly statements. In addition, including an estimate of 
annuity income, as the Lifetime Income Disclosure Act[Footnote 97] 
would require if passed, could improve retirement planning by 
indicating the estimated income stream available based on a worker's 
account balance. This may be a difficult calculation for participants, 
according to certain experts we interviewed. As workers save for 
retirement, seeing an estimated monthly or annual income stream as 
well as an account balance could possibly help them to increase saving 
and understand how much they actually need to save to last throughout 
retirement. 

However, this proposed option is subject to many assumptions and 
complexities, and certain industry or consumer groups expressed 
concerns that an estimate could potentially confuse or discourage 
participants. Although the current account balance may be simpler to 
convert to an annuity estimate, a few industry groups cautioned that 
such an estimate of annuity income could be quite low in some cases 
and might even discourage saving by those with smaller balances, such 
as younger participants. However, an estimate based on a projection of 
the worker's future balance at retirement would entail additional 
assumptions, such as future rates of return, and raise questions about 
how to account for investment risk, if at all. Another area of 
complexity is the level of uniformity or flexibility with 
assumptions.[Footnote 98] While some industry groups noted that the 
federal government could provide uniformity and consistency across 
plan sponsors by prescribing assumptions for sponsors to use, other 
industry groups preferred flexibility, such as tailoring estimates to 
a plan's actual annuity products. 

Concluding Observations: 

Given the long-term trends of rising life expectancy and the shift 
from DB to DC plans, aging workers must increasingly focus not just on 
accumulating assets for retirement but also on how to manage those 
assets to have an adequate income throughout their retirement. Workers 
are increasingly finding themselves depending on retirement savings 
vehicles that they must self-manage, where they not only must save 
consistently and invest prudently over their working years, but must 
now continue to make comparable decisions throughout their retirement 
years. Even for the minority of workers with significant retirement 
savings, making their savings last may prove challenging. However, for 
the majority of workers who approach retirement with small account 
balances--workers with balances of $100,000 or less--the stakes are 
far greater. For those with little or no pension or other financial 
assets, ensuring income in retirement may involve difficult choices, 
including how long to wait before claiming Social Security benefits in 
order to receive higher benefits, how long to work, and how to adjust 
consumption and lifestyle to lower levels of income in retirement. 
Social Security benefits serve as the foundation of income in 
retirement and a key source of lifetime retirement income, but many 
older people claim benefits at the earliest age and pass up the 
opportunity for a higher monthly benefit beginning at full retirement 
age or later. By claiming benefits early, whether for health or other 
important reasons, individuals take a smaller benefit when they could 
potentially work longer and receive a higher monthly benefit. Although 
retirement savings may be larger in the future as more workers have 
opportunities to save over longer periods through strategies such as 
automatic enrollment in DC plans, many will likely continue to face 
little margin for error. Poor or imprudent investment decisions may 
mean the difference between a secure retirement and poverty. 

Even for the half of the workforce participating in pension plans, 
employers as plan sponsors are currently not required to provide 
notices on the financial risks and choices that participants face in 
retirement. In our 2003 report, we included a Matter for Congressional 
Consideration to require sponsors to provide a notice to plan 
participants on risks in retirement. With the ongoing shift in pension 
plans and the transition from lifetime retirement income toward 
account balances, we believe that this continues to be important. 
Absent such a requirement, many more workers may likely face key 
retirement decisions without sufficient knowledge to decide which 
choices are in their best interest. Without objective information from 
employers and the federal government, even those retirees who have 
adequate savings may be at risk of not having sufficient retirement 
income. For those in the already large segment of the population 
depending on limited retirement savings, making prudent choices is 
especially important and difficult. 

Agency Comments and Our Evaluation: 

We provided officials from the Department of the Treasury, IRS, 
Department of Labor, SEC, and the National Association of Insurance 
Commissioners with a draft of this report. The Department of the 
Treasury provided comments indicating that the report is a helpful 
addition to the dialogue and analysis regarding the topic. See 
appendix VI. Officials from the Department of the Treasury, IRS, 
Department of Labor, SEC, and the National Association of Insurance 
Commissioners provided technical comments that we incorporated in the 
report, where appropriate. We also provided a copy of the draft to 
officials from SSA for a technical review, and they also provided 
technical comments that we incorporated where appropriate. 

As agreed with your office, unless you publicly announce its contents 
earlier, we plan no further distribution until 30 days after the date 
of this letter. At that time, we will send copies of this report to 
the Secretary of the Treasury, Commissioner of Internal Revenue, 
Secretary of Labor, Chairman of the Securities and Exchange 
Commission, Chief Executive Officer of the National Association of 
Insurance Commissioners, Commissioner of the Social Security 
Administration, and other interested parties. In addition, this report 
will be available at no charge on GAO's Web site at [hyperlink, 
http://www.gao.gov]. 

If you or your staff have any questions concerning this report, please 
contact me at (202) 512-7215 or jeszeckc@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made key contributions 
to this report are listed in appendix VII. 

Sincerely yours, 

Signed by: 

Charles Jeszeck: 
Director, Education, Workforce, and Income Security Issues: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

To identify the strategies experts recommend retirees employ to ensure 
income throughout retirement we interviewed a judgmental sample of a 
range of financial planners and other financial experts from different 
academic and industry organizations and a retiree interest group, 
which were from different geographic areas of the country. As part of 
these interviews, to ensure we identified strategies that apply to 
households across the net wealth spectrum and with both defined 
benefit (DB) and defined contribution (DC) pension plans, we randomly 
selected five households from the Health and Retirement Study (HRS) 
[Footnote 99] conducted by the University of Michigan in the lowest, 
middle, and highest net wealth quintiles with different combinations 
of pension plans in the middle and highest quintiles. See appendix III 
for selected characteristics of these five households. See appendix II 
for selected financial and demographic data about these net wealth 
groups. The HRS is a nationally representative longitudinal survey of 
older adults sponsored by the National Institute on Aging and the 
Social Security Administration. The survey is administered in waves 
(generally every 2 years) and includes information on respondent 
demographics, health status, service receipt, and household 
characteristics, among other things. An additional HRS dataset, 
produced by the RAND Corporation, includes recoded variables and more 
detailed information on household finances. Using RAND's March 2010 
compilation of HRS data for waves 1992 through 2008 and HRS data 
compiled by Gustman, et al., we identified these net wealth groups 
using 2008 total net wealth data from RAND (including second homes) as 
well as the present value of households' DB and DC pensions in 2006. 
We limited our sample to households with a member nearing typical 
retirement age (aged 55 to 60) in 2008 and adjusted income and asset 
values for inflation to 2008 dollars. These net wealth estimates did 
not include the present value of expected Social Security benefits. We 
assessed the reliability of the data we used by reviewing pertinent 
system and process documentation, interviewing knowledgeable 
officials, and conducting electronic testing on data fields necessary 
for our analysis. We found the data we reviewed reliable for the 
purposes of our analysis. [Footnote 100] 

We drew a random selection of five typical households from the first 
(lowest), third (middle), and fifth (highest) net wealth quintiles. To 
do so, we further restricted our analysis to households with net 
wealth within 10 percent of the median for each of these three 
quintile groups. For example, for the lowest quintile, median net 
wealth was $2,000 so we selected households with net wealth in the 
$1,800 to $2,200 range. Based on data for the first (lowest) quintile 
(see appendix III), we selected a single-person household with neither 
a DB nor a DC pension, two or three living children (not necessarily 
living in the household), who reported being in "fair" or "good 
health," and who did not own a house. Based on data for the third 
(middle) quintile, we selected two households consisting of married 
couples that owned their home, with either the respondent or spouse in 
"good" or "very good" health, and with two living children. From this 
quintile we selected one couple with only a DB pension and another 
with only a DC pension. Based on data for the fifth (highest) 
quintile, we selected two households consisting of married couples 
that owned their home. We selected one with either the respondent or 
spouse in "good" or "very good" health, two living children, and who 
had both a DB and a DC pension. We selected another couple from this 
quintile with only a DB pension, with members in "fair", "good", or 
"very good" health, and no restriction concerning the number of their 
living children. This procedure provided five households with 
characteristics approximately equal to median values for their net 
wealth quintile in these respects, but may not be in other ways. 

We shared data on these households with the experts we 
interviewed[Footnote 101] and discussed the strategies that the 
experts would recommend these households' utilize and their trade-
offs. See the households' summary financial data in appendix III. We 
also reviewed company-specific financial product documentation and 
studies of retirement income strategies such as those describing 
systematic withdrawals from retirement savings, including the results 
of Monte Carlo simulations.[Footnote 102] 

To review the choices retirees have made for managing their pension 
and financial assets for generating income, we analyzed data from the 
HRS, reviewed others' analyses of the HRS, and analyzed data from the 
Social Security Administration, compiled by the Office of the Chief 
Actuary. We reviewed other data sources including data on retirement 
account holdings from the Employee Benefit Research Institute, labor 
force participation data from the Bureau of Labor Statistics, and 
poverty estimates from the Census Bureau's Current Population Survey. 

We analyzed data concerning the disposition of pensions using HRS 
data, including data compiled by RAND and Gustman, et al. We 
restricted this analysis to workers that reported leaving employment 
with a DB or DC pension plan and retiring between 2000 through 2006. 
We also included only respondents that were in the HRS data set during 
each wave, 2000 through 2006. Furthermore, we assembled and analyzed 
data for a subset of these respondents that provided information 
concerning the availability of a lump sum option for their DB pension 
in the same HRS wave in which they reported a pension disposition. 

To identify policy options that are available to ensure income 
throughout retirement as well as their advantages and disadvantages, 
we collected and reviewed information representing a variety of 
academic, consumer, industry, and government sources. We analyzed over 
40 public comments from diverse groups submitted in response to the 
Department of Labor's (Labor) and the Department of the Treasury's 
(Treasury) 2010 request for information (RFI) on lifetime income, and 
at relevant congressional and Treasury-Labor department hearings. In 
addition to the RFI submissions, we also reviewed other publications 
from a variety of academic, consumer, and industry sources. We 
reviewed reports from Labor's Employee Retirement Income Security Act 
(ERISA) Advisory Council, and financial literacy materials on 
retirement income available from federal agencies including the online 
version of Labor's Taking the Mystery Out Of Retirement Planning and 
the Financial Literacy and Education Commission's Web site, 
[hyperlink, http://www.MyMoney.gov]. We conducted interviews with a 
variety of academic, consumer, and industry sources. Interviews with 
officials of federal government agencies included Labor, the 
Securities and Exchange Commission (SEC), Treasury, the Internal 
Revenue Service (IRS), and Treasury staff of the Financial Literacy 
and Education Commission. Lastly, we reviewed applicable federal laws 
and regulations. 

[End of section] 

Appendix II: Demographic and Financial Characteristics of Households 
Nearing Social Security Eligibility, 2008: 

These demographic and financial characteristics are for households in 
the HRS in which either the respondent or spouse was in the 55 to 60 
age range in 2008. Except as noted, the income figures apply to income 
in 2007 and asset figures apply to assets at the time of the 2008 HRS 
interview, typically mid-2008. Estimates are expressed in 2008 
dollars. See table 8 for confidence intervals of these household 
characteristics. 

Table 7: Demographic and Financial Characteristics of Households 
Nearing Social Security Eligibility by Net Wealth Quintile, 2008: 

Demographic or financial characteristic: (italics indicate income): 
The percent of households with income from work and for those with 
such income, the median amount in 2007; 
1st quintile (lowest)[A]: 58.7%, $26,000; 
3rd quintile (middle)[A]: 83.5%, $62,000; 
5th quintile (highest)[A]: 83.7%, $96,000. 

Demographic or financial characteristic: (italics indicate income): 
Household's total income; 
1st quintile (lowest)[A]: $23,000; 
3rd quintile (middle)[A]: $70,000; 
5th quintile (highest)[A]: $140,000. 

Demographic or financial characteristic: (italics indicate income): 
Household's median net wealth in 2008[A]; 
1st quintile (lowest)[A]: $2,000; 
3rd quintile (middle)[A]: $339,000; 
5th quintile (highest)[A]: $1,508,000. 

Demographic or financial characteristic: (italics indicate income): 
Percent of households with DB pensions, and for those with DB 
pensions, the median estimated present value[B]; 
1st quintile (lowest)[A]: 5.9%, $16,000; 
3rd quintile (middle)[A]: 62.3%, $132,000; 
5th quintile (highest)[A]: 69.6%, $357,000. 

Demographic or financial characteristic: (italics indicate income): 
The percent of households with DC pensions, and for those with DC 
pensions, the median estimated present value[B]; 
1st quintile (lowest)[A]: 18.9%,$5,000; 
3rd quintile (middle)[A]: 52.0%, $42,000; 
5th quintile (highest)[A]: 64.6%, $174,000. 

Demographic or financial characteristic: (italics indicate income): 
Gross financial assets (excluding pensions and IRAs); 
1st quintile (lowest)[A]: $50; 
3rd quintile (middle)[A]: $13,000; 
5th quintile (highest)[A]: $145,000. 

Demographic or financial characteristic: (italics indicate income): 
The percentage of married couples; 
1st quintile (lowest)[A]: 33.8%; 
3rd quintile (middle)[A]: 64.0%; 
5th quintile (highest)[A]: 83.2%. 

Demographic or financial characteristic: (italics indicate income): 
The percent of households with living children, and for those with 
children, the median number they had[C]; 
1st quintile (lowest)[A]: 86.7%, 2.6; 
3rd quintile (middle)[A]: 88.6%, 1.9; 
5th quintile (highest)[A]: 88.4%, 1.9. 

Demographic or financial characteristic: (italics indicate income): 
The median self-reported level of health for the respondent (R) and 
spouse (S): excellent, very good, good, fair, or poor; 
1st quintile (lowest)[A]: 4 - fair (R) 3 - good (S); 
3rd quintile (middle)[A]: 3 - good (R) 2 - very good (S); 
5th quintile (highest)[A]: 2 - very good (R&S). 

Demographic or financial characteristic: (italics indicate income): 
The percentage of households that owned a home, and for those that 
did, the median amount of home equity of their primary and other 
residences; 
1st quintile (lowest)[A]: 31.7%, $11,000; 
3rd quintile (middle)[A]: 93.4%, $107,000; 
5th quintile (highest)[A]: 97.8%, $326,000. 

Demographic or financial characteristic: (italics indicate income): 
The percentage of households with a home that had a mortgage; 
1st quintile (lowest)[A]: 66.0%; 
3rd quintile (middle)[A]: 75.9%; 
5th quintile (highest)[A]: 64.5%. 

Demographic or financial characteristic: (italics indicate income): 
The median combined level of household risk aversion where 1 indicates 
least risk averse and 6 being most risk averse; 
1st quintile (lowest)[A]: 4.7 (from 1-6); 
3rd quintile (middle)[A]: 4.4 (from 1-6); 
5th quintile (highest)[A]: 3.9 (from 1-6). 

Demographic or financial characteristic: (italics indicate income): 
The median estimate of the probability of leaving an inheritance of 
$100,000 or more[D]; 
1st quintile (lowest)[A]: 0.0%; 
3rd quintile (middle)[A]: 50.0%; 
5th quintile (highest)[A]: 90.0%. 

Source: GAO analysis of HRS data. 

[A] These net wealth groups are based on assets in individual 
retirement accounts (which are a type of individual retirement 
arrangement, or IRA), present value of DB and DC assets, and other 
financial and nonfinancial assets net of debt, but not the present 
value of Social Security assets. Nonfinancial assets include home 
equity, business ownership, and the net value of vehicles. 

[B] The source of DB and DC pension data is HRS data compiled by 
Gustman, et al. for 2006. We adjusted the estimated present values of 
these pensions to express their value in 2008 dollars. 

[C] Includes children in the household as well as those living 
elsewhere. 

[D] For couples providing responses, this is the average of both 
responses. 

[End of table] 

Table 8 presents the confidence intervals for data in table 7, based 
on a 95 percent confidence level. 

Table 8: Confidence Intervals for Demographic and Financial 
Characteristics of Households Nearing Social Security Eligibility by 
Net Wealth Quintile, 2008: 

Demographic or financial characteristic: (italics indicate income): 
The percent of households with income from work For those with such 
income, the median amount in 2007; 
1st quintile (lowest): 53.8% to 63.6%; $23,266 to 30,389; 
3rd quintile (middle): 79.1% to 87.3%; $55,570 to $67,569; 
5th quintile (highest): 79.3% to 87.5%; $84,623 to $106,635. 

Demographic or financial characteristic: (italics indicate income): 
Household's total income; 
1st quintile (lowest): $20,526 to $25,379; 
3rd quintile (middle): $66,256 to $73,806; 
5th quintile (highest): $126,303 to $152,750. 

Demographic or financial characteristic: (italics indicate income): 
Household's median net wealth in 2008; 
1st quintile (lowest): $422 to $3,955; 
3rd quintile (middle): $312,190 to $367,327; 
5th quintile (highest): $1,405,301 to $1,610,021. 

Demographic or financial characteristic: (italics indicate income): 
Percent of households with DB pensions, For those with DB pensions, 
the median estimated present value; 
1st quintile (lowest): 3.8% to 8.8%; $10,700 to $23,918; 
3rd quintile (middle): 57.2% to 67.4%; $112,145 to $158,908; 
5th quintile (highest): 64.7% to 74.6%; $289,520 to $432,774. 

Demographic or financial characteristic: (italics indicate income): 
The percent of households with DC pensions, and for those with DC 
pensions, the median estimated present value; 
1st quintile (lowest): 15.0% to 22.8%; $3,728 to $7,815; 
3rd quintile (middle): 46.8% to 57.3%; $32,208 to $60,369; 
5th quintile (highest): 59.6% to 69.6%; $132,863 to $211,275. 

Demographic or financial characteristic: (italics indicate income): 
Gross financial assets (excluding pensions and IRAs); 
1st quintile (lowest): $23 to $111; 
3rd quintile (middle): $10,000 to $17,129; 
5th quintile (highest): $124,071 to $180,782. 

Demographic or financial characteristic: (italics indicate income): 
The percentage of married couples; 
1st quintile (lowest): 29.1% to 38.4%; 
3rd quintile (middle): 58.9% to 69.2%; 
5th quintile (highest): 79.2% to 87.2%. 

Demographic or financial characteristic: (italics indicate income): 
The percent of households with living children, and for those with 
children, the median number they had; 
1st quintile (lowest): 82.5% to 90.1%; 2.4 to 2.9; 
3rd quintile (middle): 84.5% to 92.0%; 1.8 to 2.0; 
5th quintile (highest): 84.4% to 91.7%; 1.8 to 2.0. 

Demographic or financial characteristic: (italics indicate income): 
The percentage of households that owned a home and for those that did, 
the median amount of home equity of their primary and other residences; 
1st quintile (lowest): 27.1% to 36.3%; $5,920 to $19,057; 
3rd quintile (middle): 90.5% to 95.6%; $99,350 to $120,068; 
5th quintile (highest): 95.5% to 99.1%; $301,628 to $379,557. 

Demographic or financial characteristic: (italics indicate income): 
The percentage of households with a home that had a mortgage; 
1st quintile (lowest): 57.8% to 74.1%; 
3rd quintile (middle): 71.2% to 80.5%; 
5th quintile (highest): 59.4% to 69.6%. 

Demographic or financial characteristic: (italics indicate income): 
The median combined level of household risk aversion where 1 indicates 
being the least risk averse and 6 being the most risk averse; 
1st quintile (lowest): 4.3 to 4.9; 
3rd quintile (middle): 4.0 to 4.6; 
5th quintile (highest): 3.7 to 4.2. 

Demographic or financial characteristic: (italics indicate income): 
The median estimate of the probability of leaving an inheritance of 
$100,000 or more; 
1st quintile (lowest): 0.0% to 0.0%; 
3rd quintile (middle): 49.0% to 53.0%; 
5th quintile (highest): 84.9% to 90.0%. 

Source: GAO analysis of HRS data. 

[End of table] 

[End of section] 

Appendix III: Demographic and Financial Characteristics of a Sample of 
Five Households Nearing Social Security Eligibility: 

Below are selected demographic and financial characteristics of five 
households whose retirement prospects we discussed with financial 
planners and retirement income experts. We randomly selected these 
households from a sample of near-retirement households in the HRS in 
which the respondent and spouse were in the 55 to 60 age range in 
2008. We selected one household from households in the lowest of five 
net wealth groups, two households from the households in the middle 
net wealth group, and two households in the highest net wealth group. 

Table 9: Characteristics of Household One, Lowest Net Wealth Quintile: 

Characteristic: Gender and age of respondent in 2008: 
Value for household #1: Female, 58. 

Characteristic: Age of spouse, middle of 2008; 
Value for household #1: NA. 

Characteristic: Marital status; 
Value for household #1: Single. 

Characteristic: Net wealth; 
Value for household #1:$2,000. 

Characteristic: Pension status; 
Value for household #1: No pension. 

Characteristic: Market value of homes and other real estate; 
Value for household #1: $0. 

Characteristic: Housing debt; 
Value for household #1: $0. 

Characteristic: Present value of DB plan; 
Value for household #1: $0. 

Characteristic: Value of DC plan; 
Value for household #1: $0. 

Characteristic: Value of IRA assets; 
Value for household #1: $0. 

Characteristic: Value of vehicles; 
Value for household #1: $2,000. 

Characteristic: Value of business assets; 
Value for household #1: $0. 

Characteristic: Value of other financial assets; 
Value for household #1: $0. 

Characteristic: Nonhousing debt; 
Value for household #1: $0. 

Characteristic: Total income; 
Value for household #1: $22,000. 

Characteristic: Income from earnings; 
Value for household #1: $22,000. 

Characteristic: Expected annual Social Security benefit if first taken 
at age 66 (respondent); 
Value for household #1: $11,000. 

Characteristic: Self-reported health status (respondent/spouse); 
Value for household #1: Fair. 

Characteristic: Living children; 
Value for household #1: 3. 

Characteristic: Respondent's estimate of the probability that they 
will leave a bequest of $10,000 or more; 
Value for household #1: 10%. 

Characteristic: Respondent's estimate of the probability that they 
will leave a bequest of $100,000 or more; 
Value for household #1: 0%. 

Characteristic: Level of risk aversion on a scale of 1 to 6, with 6 
being the most risk averse (respondent); 
Value for household #1: 3. 

Source: GAO analysis of HRS data. 

[End of table] 

Table 10: Characteristics of Household Two, Middle Net Wealth Quintile: 

Characteristic: Gender and age of respondent in 2008; 
Value for household #2: Female, 57. 

Characteristic: Age of spouse, middle of 2008; 
Value for household #2: 57. 

Characteristic: Marital status; 
Value for household #2: Married. 

Characteristic: Net wealth; 
Value for household #2: $349,000. 

Characteristic: Pension status; 
Value for household #2: DC only. 

Characteristic: Market value of homes and other real estate; 
Value for household #2: $280,000. 

Characteristic: Housing debt; 
Value for household #2: ($128,000). 

Characteristic: Present value of DB plan; 
Value for household #2: $0. 

Characteristic: Value of DC plan; 
Value for household #2: $133,000. 

Characteristic: Value of IRA assets; 
Value for household #2: $8,000. 

Characteristic: Value of vehicles; 
Value for household #2: $8,000. 

Characteristic: Value of business assets; 
Value for household #2: $0. 

Characteristic: Value of other financial assets; 
Value for household #2: $50,000. 

Characteristic: Nonhousing debt; 
Value for household #2: ($3,000). 

Characteristic: Total income; 
Value for household #2: $115,000. 

Characteristic: Income from earnings (respondent/spouse); 
Value for household #2: $33,000/$78,000. 

Characteristic: Expected annual Social Security benefit if first taken 
at age 66 (respondent/spouse); 
Value for household #2: $14,000/$24,000. 

Characteristic: Self-reported health status (respondent/spouse); 
Value for household #2: Very good/Very good. 

Characteristic: Living children; 
Value for household #2: 2. 

Characteristic: Respondent's estimate of the probability that they 
will leave a bequest of $10,000 or more; 
Value for household #2: 100%. 

Characteristic: Respondent's estimate of the probability that they 
will leave a bequest of $100,000 or more; 
Value for household #2: 100%. 

Characteristic: Level of risk aversion on a scale of 1 to 6, with 6 
being the most risk averse (respondent/spouse); 
Value for household #2: Don't know 5. 

Source: GAO analysis of HRS data. 

[End of table] 

Table 11: Characteristics of Household Three, Middle Net Wealth 
Quintile: 

Characteristics: Gender and age of respondent in 2008; 
Value for household #3: Female, 57. 

Characteristics: Age of spouse, middle of 2008; 
Value for household #3: 57. 

Characteristic: Marital status; 
Value for household #3: Married. 

Characteristic: Net wealth; 
Value for household #3: $373,000. 

Characteristic: Pension status; 
Value for household #3: DB only. 

Characteristic: Market value of homes and other real estate; 
Value for household #3: $170,000. 

Characteristic: Housing debt; 
Value for household #3: ($17,000). 

Characteristic: Present value of DB plan; 
Value for household #3: $31,000. 

Characteristic: Value of DC plan; 
Value for household #3: $0. 

Characteristic: Value of IRA assets; 
Value for household #3: $128,000. 

Characteristic: Value of vehicles; 
Value for household #3: $50,000. 

Characteristic: Value of business assets; 
Value for household #3: $0. 

Characteristic: Value of other financial assets; 
Value for household #3: $10,000. 

Characteristic: Nonhousing debt; 
Value for household #3: $0. 

Characteristic: Total income; 
Value for household #3: $57,000[A]. 

Characteristic: Income from earnings (respondent/spouse); 
Value for household #3: $8,000/$26,000. 

Characteristic: Expected annual Social Security benefit if first taken 
at age 66 (respondent/spouse); 
Value for household #3: $6,000/$12,000. 

Characteristic: Self-reported health status (respondent/spouse); 
Value for household #3: Good/Good. 

Characteristic: Living children; 
Value for household #3: 2. 

Characteristic: Respondent's estimate of the probability that they 
will leave a bequest of $10,000 or more; 
Value for household #3: 100%. 

Characteristic: Respondent's estimate of the probability that they 
will leave a bequest of $100,000 or more; 
Value for household #3: 100%. 

Characteristic: Level of risk aversion on a scale of 1 to 6, with 6 
being the most risk averse (respondent/spouse); 
Value for household #3: 6/6. 

Source: GAO analysis of HRS data. 

[A] Includes $22,000 from a pension or annuity. 

[End of table] 

Table 12: Characteristics of Household Four, Highest Net Wealth 
Quintile: 

Characteristic: Gender and age of respondent in 2008; 
Value for household #4: Male, 59. 

Characteristic: Age of spouse, middle of 2008; 
Value for household #4: 57. 

Characteristic: Marital status; 
Value for household #4: Married. 

Characteristic: Net wealth; 
Value for household #4: $1,597,000. 

Characteristic: Pension status; 
Value for household #4: DB only. 

Characteristic: Market value of homes and other real estate; 
Value for household #4: $300,000. 

Characteristic: Housing debt; 
Value for household #4: $0. 

Characteristic: Present value of DB plan; 
Value for household #4: $492,000. 

Characteristic: Value of DC plan; 
Value for household #4: $0. 

Characteristic: Value of IRA assets; 
Value for household #4: $625,000. 

Characteristic: Value of vehicles; 
Value for household #4: $35,000. 

Characteristic: Value of business assets; 
Value for household #4: $0. 

Characteristic: Value of other financial assets; 
Value for household #4: $145,000. 

Characteristic: Nonhousing debt; 
Value for household #4: $0. 

Characteristic: Total income; 
Value for household #4: $112,000. 

Characteristic: Income from earnings (respondent/spouse); 
Value for household #4: $64,000/$42,000. 

Characteristic: Expected annual Social Security benefit if first taken 
at age 66 (respondent/spouse); 
Value for household #4: $22,000/$16,000. 

Characteristic: Self-reported health status (respondent/spouse); 
Value for household #4: Very good/Good. 

Characteristic: Living children; 
Value for household #4: 0. 

Characteristic: Respondent's estimate of the probability that they 
will leave a bequest of $10,000 or more; 
Value for household #4: 85%. 

Characteristic: Respondent's estimate of the probability that they 
will leave a bequest of $100,000 or more; 
Value for household #4: 10%. 

Characteristic: Level of risk aversion on a scale of 1 to 6, with 6 
being the most risk averse (respondent/spouse); 
Value for household #4: 5/6. 

Source: GAO analysis of HRS data. 

[End of table] 

Table 13: Characteristics of Household Five, Highest Net Wealth 
Quintile: 

Characteristic: Gender and age of respondent in 2008; 
Value for household #5: Female, 57. 

Characteristic: Age of spouse, middle of 2008; 
Value for household #5: 60. 

Characteristic: Marital status; 
Value for household #5: Married. 

Characteristic: Net wealth; 
Value for household #5: $1,518,000. 

Characteristic: Pension status; 
Value for household #5: DB and DC. 

Characteristic: Market value of homes and other real estate; 
Value for household #5: $1,100,000[A]. 

Characteristic: Housing debt; 
Value for household #5: ($36,000). 

Characteristic: Present value of DB plan; 
Value for household #5: $29,000. 

Characteristic: Value of DC plan; 
Value for household #5: $30,000. 

Characteristic: Value of IRA assets; 
Value for household #5: $140,000. 

Characteristic: Value of vehicles; 
Value for household #5: $10,000. 

Characteristic: Value of business assets; 
Value for household #5: $0. 

Characteristic: Value of other financial assets; 
Value for household #5: $380,000. 

Characteristic: Nonhousing debt; 
Value for household #5: ($135,000). 

Characteristic: Total income; 
Value for household #5: $119,000[B]. 

Characteristic: Income from earnings (respondent/spouse); 
Value for household #5: $0/$52,000. 

Characteristic: Expected annual Social Security benefit if first taken 
at age 66 (respondent/spouse); 
Value for household #5: $0/$18,000. 

Characteristic: Self-reported health status (respondent/spouse); 
Value for household #5: Poor/Good. 

Characteristic: Living children; 
Value for household #5: 2. 

Characteristic: Respondent's estimate of the probability that they 
will leave a bequest of $10,000 or more; 
Value for household #5: 98%. 

Characteristic: Respondent's estimate of the probability that they 
will leave a bequest of $100,000 or more; 
Value for household #5: 80%. 

Characteristic: Level of risk aversion on a scale of 1 to 6, with 6 
being the most risk averse (respondent/spouse); 
Value for household #5: 5/4. 

Source: GAO analysis of HRS data. 

[A] This consists of a primary residence valued at $700,000 and other 
real estate valued at $400,000. 

[B] This includes $65,000 of capital income, such as gross rental 
income, dividends, interest, and other asset income. 

[End of table] 

[End of section] 

Appendix IV: Retirees' Disposition of Pensions: 

Table 14 provides estimates and confidence intervals for estimates of 
the percentage of workers who reported the disposition of their 
pension upon leaving work with a DB pension and retiring. Based on 
analysis of our sample of HRS respondents, we are 95 percent confident 
that the actual proportion of workers is between the low and high 
percentage indicated in each cell. See appendix I for details 
concerning our methodology for developing these estimates. 

Table 14: Confidence Intervals for Estimates of the Percentage of 
Workers That Left Employment with a DB Pension and Retired Indicating 
the Disposition of Their Pension, 2000 through 2006: 

DB pension disposition: Receiving benefits; 
Was a lump sum option available? 
A. Yes, either full or partial lump sum available for one or more DB 
pension: 68.3% (60.7 to 75.8%); 
B. No: 77.3% (70.0 to 83.6%); 
C. All: 67.8% (64.8 to 70.8%). 

DB pension disposition: Expect future benefit; 
Was a lump sum option available? 
A. Yes, either full or partial lump sum available for one or more DB 
pension: 18.4 (12.3 to 26.0%); 
B. No: 18.7 (12.8 to 26.0%); 
C. All: 15.0 (12.5 to 17.4%). 

DB pension disposition: Cash settlement; 
Was a lump sum option available? 
A. Yes, either full or partial lump sum available for one or more DB 
pension: 8.6 (4.6 to 14.4%); 
B. No: 3.8 (1.6 to 7.2%); 
C. All: 7.9 (6.3 to 9.6%). 

DB pension disposition: IRA rollover; 
Was a lump sum option available? 
A. Yes, either full or partial lump sum available for one or more DB 
pension: 10.3 (5.8 to 16.7%); 
B. No: 1.1 (0.2 to 3.6%); 
C. All: 6.4 (4.9 to 8.4%). 

DB pension disposition: Total number of observations; 
Was a lump sum option available? 
A. Yes, either full or partial lump sum available for one or more DB 
pension: 208; 
B. No: 247; 
C. All: 1336. 

Source: GAO analysis of HRS data, including pension data compiled by 
Alan L. Gustman, Thomas L. Steinmeier, and Nahid Tabatabai, Pensions 
in the Health and Retirement Study (Cambridge, Mass.: Harvard 
University Press, 2010). 

Note: Respondents may have chosen a combination of options, so the sum 
of percentages in each column may exceed 100.0 percent. Analysis is 
limited to respondents age 60 or older in 2006 in the HRS 2000 through 
2006. Estimates concerning those that had an option or did not have an 
option to take a lump sum were based on responses concerning this 
option during the 2000 through 2006 period. 

[End of table] 

Table 15 addresses the dispositions of DC pensions by workers who left 
employment with a pension and retired. 

Table 15: Confidence Intervals for Estimates of the Percentage of 
Workers That Left Employment with a DC Pension and Retired Indicating 
the Disposition of Their Pension, 2000 through 2006: 

DC pension disposition: Amount left in account; 
Estimate with (confidence interval) (percent): 38.8% (35.3 to 42.3%). 

DC pension disposition: IRA rollover; 
Estimate with (confidence interval) (percent): 30.3 (27.1 to 33.6). 

DC pension disposition: Convert to annuity; 
Estimate with (confidence interval) (percent): 6.1 (4.5 to 8.0). 

DC pension disposition: Withdrawal; 
Estimate with (confidence interval) (percent): 15.8 (13.4 to 18.2). 

DC pension disposition: Transfer to new employer; 
Estimate with (confidence interval) (percent): 0.2 (0.02 to 0.7). 

Total number of observations: 1,109. 

Source: GAO analysis of HRS data, including pension data compiled by 
Alan L. Gustman, Thomas L. Steinmeier, and Nahid Tabatabai, Pensions 
in the Health and Retirement Study (Cambridge, Mass.: Harvard 
University Press, 2010). 

Note: Respondents may have chosen a combination of options. Analysis 
is limited to respondents in the HRS 2000 through 2006. 

[End of table] 

[End of section] 

Appendix V: Selected Types of Retirement Income Arrangements and 
Products: 

Table 16 describes selected types of arrangements which are tax- 
advantaged and products that may provide retirement income. They 
include tax-advantaged retirement arrangements, annuity products, and 
investment products. This list is not meant to be exhaustive, but 
rather to provide a sense of certain types of financial arrangements 
and products that may provide income throughout retirement. 

Table 16: Descriptions of Selected Retirement Income Arrangements and 
Products: 

Tax-advantaged retirement arrangements: 

Type of arrangement or product: Defined benefit (DB) pension plans; 
Basic description: DB plans promise to provide a benefit that is 
generally based on an employee's years of service and, frequently, 
salary (i.e., for "traditional" pension plans; "hybrid" pension plans, 
such as cash balance plans, may use a formula to determine benefits 
that may be expressed as a hypothetical account balance). Income taxes 
typically apply when pension benefits are taken. 

Type of arrangement or product: Defined contribution (DC) pension 
plans; 
Basic description: DC plans provide benefits based on contributions 
and investment returns to individual accounts for employees. The 
employee, the employer, or both periodically make contributions and/or 
direct investments (e.g., 401(k) plans, 403(b) plans, 457 plans, money 
purchase plans, stock bonus plans). For tax-qualified plans, income 
taxes are typically deferred on contributions and investment earnings 
until withdrawals of pension benefits. 

Type of arrangement or product: Individual retirement accounts[A]; 
Basic description: Individual retirement accounts are retirement 
savings arrangements that allow the holder to make tax-deductible and 
nondeductible contributions to an individual account and to preserve 
assets from pension plans on a tax-deferred basis under certain 
conditions. Amounts withdrawn from traditional individual retirement 
accounts are fully or partially taxable in the year withdrawals are 
made. A variation is the Roth individual retirement account, which, 
under certain conditions, allows the holder to make nondeductible 
contributions to an individual account and realize tax-free growth of 
the balance from interest, dividends, and capital gains, with tax-free 
withdrawals in retirement. 

Annuity products: 

Type of arrangement or product: Immediate fixed annuities; 
Basic description: Immediate annuities are insurance products that 
provide immediate income for a pre-determined period of time such as 
for the life of the contract holder or a specified number of years. 
Payments promise a set regular amount based on a certain interest rate. 

Type of arrangement or product: Immediate variable annuities; 
Basic description: Like immediate fixed annuities, these contracts 
provide immediate income for a pre-determined period of time. Unlike 
immediate fixed annuities, the payments may increase or decrease based 
on performance of underlying investments the purchaser selects. 

Type of arrangement or product: Deferred fixed annuities; 
Basic description: Deferred annuities generally have an accumulation, 
or investment, phase as well as the option of a payout, or income, 
phase. There may be a one-time purchase or a series of purchases made 
over time. Payments from the annuity for a set regular amount are to 
begin in the future rather than immediately. An example of a variation 
is a deeply deferred annuity, also known as commercial "longevity 
insurance," which may begin payments starting after a late age, such 
as 85. 

Type of arrangement or product: Deferred variable annuities; 
Basic description: Deferred annuities have an accumulation and 
potentially a payout phase where the accumulation and regular payments 
may vary based on performance of underlying investments the purchaser 
selects. The payout phase may feature fixed or variable payments. 

Type of arrangement or product: Indexed annuities; 
Basic description: Indexed annuities offer a return computed by 
reference to (but not necessarily the same as) an outside index such 
as the S&P 500 Composite Stock Price Index, often promising a minimum 
contract value regardless of index performance. 

Type of arrangement or product: Annuities with guaranteed living 
benefits; 
Basic description: Newer annuities, including variable annuities, 
frequently offer optional features that provide various protections or 
guarantees, subject to certain restrictions. For example, a minimum 
withdrawal benefit provides for periodic withdrawals of a specified 
percentage of the investment (e.g., 5% to 7%) and further provides 
that the insurance company will continue payments of that amount if 
the account is depleted by reason of permitted withdrawals and/or 
investment performance. These withdrawals generally will continue 
until the original investment has been recouped or, in the case of a 
so-called "lifetime withdrawal benefit," for the life of the contract 
owner. 

Investment products: 

Type of arrangement or product: Mutual funds; 
Basic description: Mutual funds are pooled investments in a portfolio 
of securities that are managed professionally. Investors buy shares in 
the fund, which represents an indirect ownership interest in the 
fund's securities. Mutual funds may include stocks, bonds, cash 
instruments, as well as combinations of these asset classes (e.g., 
balanced funds, payout funds, target-date funds). 

Type of arrangement or product: Payout funds; 
Basic description: These funds combine an investment portfolio with a 
distribution, or payout, component. They may serve in place of 
systematic drawdowns by making payments of a certain percent or for a 
particular period of time. 

Type of arrangement or product: Target-date funds; 
Basic description: Target-date funds, or lifecycle funds, allocate 
investments among various asset classes with the goal of reducing 
investment risk as the retirement date approaches. These funds differ 
widely in their allocations among asset types before, at and during 
retirement. 

Type of arrangement or product: Treasury Inflation Protected 
Securities (TIPS); 
Basic description: TIPS are Treasury securities indexed to the rate of 
inflation. Both interest payments and the return of the principal at 
maturity are adjusted for inflation. 

Source: GAO analysis of government and industry documents. 

[A] IRA also refers to individual retirement arrangements, including 
individual retirement accounts and individual retirement annuities. 

[End of table] 

[End of section] 

Appendix VI: Comments from the Department of the Treasury: 

Department Of The Treasury: 
Washington, D.C. 20220: 

June 3, 2011: 
Charles A. Jeszeck, Director: 
Education, Workforce, and Income Security Issues: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Re: GAO Report on Retirement Income (GA0-11-400): 

Dear Charlie: 

Thank you for sending us the draft of GAO's report titled, "Retirement 
Income: Ensuring Income throughout Retirement Requires Difficult 
Choices" (GAO-11-400). 

The report provides information and analysis pertaining to key issues 
that were raised in the Request for Information (RFI) that the 
Department of the Treasury and the Department of Labor published on 
this subject (at 75 FR 5253, Feb. 2, 2010). As we have stated on 
previous occasions, the RFI was intended to invite comments on 
whether, and, if so, how, to give participants better options for 
managing retirement savings or accessing lifetime income or other 
arrangements that are designed to provide a stream of income after 
retirement. 

The report is a helpful addition to the ongoing dialogue and analysis 
regarding the importance of steps that might be taken to address the 
risk of outliving one's retirement savings and to give people 
additional options to manage those savings during their lifetime after 
retirement. We will take the information and analysis in the report 
into account as we consider guidance to issue in response to the 
public comments we have received. 

Very truly yours, 

Signed by: 

J. Mark Iwry: 
Senior Advisor to the Secretary and Deputy Assistant Secretary for 
Retirement and Health Policy (Office of Tax Policy): 

[End of section] 

Appendix VII: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Charles Jeszeck, (202) 512-7215 or jeszeckc@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Michael J. Collins, Assistant 
Director; Joseph A. Applebaum; Carl S. Barden; Susan C. Bernstein; 
Jason A. Bromberg; Michael Brostek; Tara E. Carter; Patrick S. Dynes; 
Sharon L. Hermes; Mitchell B. Karpman; Gene G. Kuehneman Jr.; Mimi 
Nguyen; Benjamin P. Pfeiffer; Bryan G. Rogowski; Matthew J. Saradjian; 
Roger J. Thomas; Frank Todisco; Karen C. Tremba; and Walter K. Vance 
made key contributions to this report. 

[End of section] 

Related GAO Products: 

401(K) Plans: Improved Regulation Could Better Protect Participants 
from Conflicts of Interest. [hyperlink, 
http://www.gao.gov/products/GAO-11-119]. Washington, D.C.: January 28, 
2011. 

Defined Contribution Plans: Key Information on Target Date Funds as 
Default Investments Should Be Provided to Plan Sponsors and 
Participants. [hyperlink, http://www.gao.gov/products/GAO-11-118]. 
Washington, D.C.: January 31, 2011. 

Consumer Finance: Regulatory Coverage Generally Exists for Financial 
Planners, but Consumer Protection Issues Remain. [hyperlink, 
http://www.gao.gov/products/GAO-11-235]. Washington, D.C.: January 18, 
2011. 

Social Security Reform: Raising the Retirement Ages Would Have 
Implications for Older Workers and SSA Disability Rolls. [hyperlink, 
http://www.gao.gov/products/GAO-11-125]. Washington, D.C.: November 
18, 2010. 

State and Local Government Pension Plans: Governance Practices and 
Long-term Investment Strategies Have Evolved Gradually as Plans Take 
On Increased Investment Risk. [hyperlink, 
http://www.gao.gov/products/GAO-10-754]. Washington, D.C. August 24, 
2010. 

Retirement Income: Challenges for Ensuring Income throughout 
Retirement. [hyperlink, http://www.gao.gov/products/GAO-10-632R]. 
Washington, D.C.: April 28, 2010. 

Social Security: Options to Protect Benefits for Vulnerable Groups 
When Addressing Program Solvency. [hyperlink, 
http://www.gao.gov/products/GAO-10-101R]. Washington, D.C.: December 
7, 2009. 

Retirement Savings: Automatic Enrollment Shows Promise for Some 
Workers, but Proposals to Broaden Retirement Savings for Other Workers 
Could Face Challenges. [hyperlink, http://www.gao.gov/products/GAO-10-
31]. Washington, D.C.: October 23, 2009. 

Retirement Savings: Better Information and Sponsor Guidance Could 
Improve Oversight and Reduce Fees for Participants. [hyperlink, 
http://www.gao.gov/products/GAO-09-641]. Washington, D.C.: September 
4, 2009. 

Private Pensions: Alternative Approaches Could Address Retirement 
Risks Faced by Workers but Pose Trade-offs. [hyperlink, 
http://www.gao.gov/products/GAO-09-642]. Washington, D.C.: July 24, 
2009. 

Financial Literacy and Education Commission: Progress Made in 
Fostering Partnerships, but National Strategy Remains Largely 
Descriptive Rather Than Strategic. [hyperlink, 
http://www.gao.gov/products/GAO-09-638T]. Washington, D.C.: April 29, 
2009. 

Private Pensions: Conflicts of Interest Can Affect Defined Benefit and 
Defined Contribution Plans. [hyperlink, 
http://www.gao.gov/products/GAO-09-503T]. Washington, D.C.: March 24, 
2009. 

Individual Retirement Accounts: Additional IRS Actions Could Help 
Taxpayers Facing Challenges in Complying with Key Tax Rules. 
[hyperlink, http://www.gao.gov/products/GAO-08-654]. Washington, D.C.: 
August 14, 2008. 

Defined Benefit Pensions: Plan Freezes Affect Millions of Participants 
and May Pose Retirement Income Challenges. [hyperlink, 
http://www.gao.gov/products/GAO-08-817]. Washington, D.C.: July 21, 
2008. 

Private Pensions: Fulfilling Fiduciary Obligations Can Present 
Challenges for 401(k) Plan Sponsors. [hyperlink, 
http://www.gao.gov/products/GAO-08-774]. Washington, D.C.: July 16, 
2008. 

Individual Retirement Accounts: Government Actions Could Encourage 
More Employers to Offer IRAs to Employees. [hyperlink, 
http://www.gao.gov/products/GAO-08-590]. Washington, D.C.: June 4, 
2008. 

Private Pensions: Low Defined Contribution Plan Savings May Pose 
Challenges to Retirement Security, Especially for Many Low-Income 
Workers. [hyperlink, http://www.gao.gov/products/GAO-08-8]. 
Washington, D.C.: November 29, 2007. 

Retirement Security: Women Face Challenges in Ensuring Financial 
Security in Retirement. [hyperlink, 
http://www.gao.gov/products/GAO-08-105]. Washington, D.C.: October 11, 
2007. 

State and Local Government Retiree Benefits: Current Status of Benefit 
Structures, Protections, and Fiscal Outlook for Funding Future Costs. 
[hyperlink, http://www.gao.gov/products/GAO-07-1156]. Washington, 
D.C.: September 24, 2007. 

Retirement Decisions: Federal Policies Offer Mixed Signals about When 
to Retire. [hyperlink, http://www.gao.gov/products/GAO-07-753]. 
Washington, D.C.: July 11, 2007. 

Defined Benefit Pensions: Conflicts of Interest Involving High Risk or 
Terminated Plans Pose Enforcement Challenges. [hyperlink, 
http://www.gao.gov/products/GAO-07-703]. Washington, D.C.: June 28, 
2007. 

Employer-Sponsored Health and Retirement Benefits: Efforts to Control 
Employer Costs and the Implications for Workers. [hyperlink, 
http://www.gao.gov/products/GAO-07-355]. Washington, D.C.: March 30, 
2007. 

Private Pensions: Changes Needed to Provide 401(k) Plan Participants 
and the Department of Labor Better Information on Fees. [hyperlink, 
http://www.gao.gov/products/GAO-07-21]. Washington, D.C.: November 16, 
2006. 

Baby Boom Generation: Retirement of Baby Boomers Is Unlikely to 
Precipitate Dramatic Decline in Market Returns, but Broader Risks 
Threaten Retirement Security. [hyperlink, 
http://www.gao.gov/products/GAO-06-718]. Washington, D.C.: July 28, 
2006. 

Social Security Reform: Answers to Key Questions. [hyperlink, 
http://www.gao.gov/products/GAO-05-193SP]. Washington, D.C.: May 2005. 

Older Workers: Labor Can Help Employers and Employees Plan Better for 
the Future. [hyperlink, http://www.gao.gov/products/GAO-06-80]. 
Washington, D.C.: December 5, 2005. 

Redefining Retirement: Options for Older Americans. [hyperlink, 
http://www.gao.gov/products/GAO-05-620T]. Washington, D.C.: April 27, 
2005. 

Highlights of a GAO Forum: The Federal Government's Role in Improving 
Financial Literacy. [hyperlink, 
http://www.gao.gov/products/GAO-05-93SP]. Washington, D.C.: November 
15, 2004. 

Consumer Protection: Federal and State Agencies Face Challenges in 
Combating Predatory Lending. [hyperlink, 
http://www.gao.gov/products/GAO-04-280]. Washington, D.C.: January 30, 
2004. 

Private Pensions: Participants Need Information on Risks They Face in 
Managing Pension Assets at and during Retirement. [hyperlink, 
http://www.gao.gov/products/GAO-03-810]. Washington, D.C.: July 29, 
2003. 

Retiree Health Insurance: Gaps in Coverage and Availability. 
[hyperlink, http://www.gao.gov/products/GAO-02-178T]. Washington, 
D.C.: November 1, 2001. 

Pension Plans: Characteristics of Persons in the Labor Force Without 
Pension Coverage. [hyperlink, 
http://www.gao.gov/products/GAO/HEHS-00-131]. Washington, D.C.: August 
22, 2000. 

Social Security Reform: Implications of Raising the Retirement Age. 
[hyperlink, http://www.gao.gov/products/GAO/HEHS-99-112]. Washington, 
D.C.: August 27, 1999. 

Social Security Reform: Raising Retirement Ages Improves Program 
Solvency but May Cause Hardship for Some. [hyperlink, 
http://www.gao.gov/products/GAO/T-HEHS-98-207]. Washington, D.C.: July 
15, 1998. 

[End of section] 

Footnotes: 

[1] Since 1970, life expectancies at age 65 have risen by about 2 
years for women and nearly 4 years for men. 

[2] These life expectancies are based on Social Security cohort life 
tables, using a weighted average for people born in 1950 (i.e., 
turning 65 in 2015) and for people born in 1940 (i.e., turning 65 in 
2005) to approximate expectancies for people turning 65 in 2011. See 
Felicitie C. Bell and Michael L. Miller, Life Tables for the United 
States Social Security Area 1900-2100, Actuarial Study No. 120, SSA 
Pub. No. 11-11536 (Washington, D.C., Social Security Administration, 
Office of the Chief Actuary, August 2005). 

[3] GAO has highlighted such concern in earlier reports. See, for 
example, GAO, Retirement Income: Challenges for Ensuring Income 
throughout Retirement, [hyperlink, 
http://www.gao.gov/products/GAO-10-632R] (Washington, D.C.: Apr. 28, 
2010); Private Pensions: Alternative Approaches Could Address 
Retirement Risks Faced by Workers but Pose Trade-offs, [hyperlink, 
http://www.gao.gov/products/GAO-09-642] (Washington, D.C.: July 24, 
2009); Private Pensions: Low Defined Contribution Plan Savings May 
Pose Challenges to Retirement Security, Especially for Many Low-Income 
Workers, [hyperlink, http://www.gao.gov/products/GAO-08-8] 
(Washington, D.C.: Nov. 29, 2007); and Baby Boom Generation: 
Retirement of Baby Boomers is Unlikely to Precipitate Dramatic Decline 
in Market Returns, but Broader Risks Threaten Retirement Security, 
[hyperlink, http://www.gao.gov/products/GAO-06-718] (Washington, D.C.: 
July 28, 2006). 

[4] U.S. Department of the Treasury and U.S. Department of Labor, 
Request for Information Regarding Lifetime Income Options for 
Participants and Beneficiaries in Retirement Plans. 75 Fed. Reg. 5,253 
(Feb. 2, 2010). Labor is currently reviewing the rules under the 
Employee Retirement Income Security Act (ERISA) and the Treasury is 
currently reviewing the plan qualification rules under the Internal 
Revenue Code to determine whether, and, if so, how the departments 
could or should enhance, by regulation or otherwise, the retirement 
security of participants in employer-sponsored retirement plans and in 
IRAs by facilitating access to, and the use of, lifetime income or 
other arrangements designed to provide a lifetime stream of income 
after retirement. IRAs can be individual retirement accounts or 
individual retirement annuities. 

[5] The HRS is a national, longitudinal survey of older people 
produced by the University of Michigan sponsored by the National 
Institute of Aging. We used HRS data to identify quintiles based on 
net wealth--IRA assets, present value of DB and DC pension assets, and 
other financial and nonfinancial assets net of debt, but excluded the 
present value of Social Security assets. Nonfinancial assets include 
home equity, business ownership, and the net value of vehicles. 

[6] A DB plan promises to provide a benefit that is generally based on 
an employee's years of service and, frequently, salary. Typically, DB 
annuity payments are received on a monthly basis by the retired 
participant and continue as long as the recipient lives (and also for 
the lifetime of the surviving spouse if the participant is married and 
this form of benefit is taken). DC plan benefits, primarily those from 
401(k) plans, are based on the contributions and investment returns in 
individual accounts. For each participant, typically both the plan 
sponsor and the participant may periodically contribute a specific 
dollar amount or percentage of pay into each participant's account. 
Private savings include bank account balances and IRA funds. IRAs are 
retirement savings arrangements which allow workers to make tax- 
deductible and nondeductible contributions to an individual account. 
For workers who meet certain conditions regarding their income or who 
are not otherwise eligible to participate in an employer-sponsored 
pension plan, contributions to a regular (traditional) IRA receive 
favorable tax treatment; workers may be eligible to take an income tax 
deduction on some or all of the contributions they make to their 
traditional IRA. Amounts withdrawn from a traditional IRA are fully or 
partially taxable in the year withdrawals are made. If the taxpayer 
made only deductible contributions, withdrawals are fully taxable. 
Investment income on funds in the account is tax deferred until funds 
are withdrawn. Workers below certain income limits may also contribute 
to Roth IRAs, which do not provide an income tax deduction on 
contributions, but permit tax free withdrawals. Individuals may also 
transfer funds to a Roth IRA, but must pay taxes on the pretax amounts 
transferred. 

[7] These estimates are from the BLS analysis of Current Population 
Survey (CPS) data. The 95 percent confidence intervals for these 
estimates are 28.2 to 30.0 percent and 6.3 to 7.5 percent, 
respectively, for adults aged 65 to 69 and adults aged 75 or older. 

[8] Data for 2008 were the most recent available. This estimate is the 
mean proportion of income from Social Security for households in which 
one or more member is a Social Security recipient aged 65 or older. 
For 34.2 percent of such households, Social Security benefits were the 
source of 90 percent or more of income. See Social Security 
Administration, Income of the Population 55 or Older, 2008 
(Washington, D.C., April 2010), 300 (table 9.A1). The 95 percent 
confidence intervals for these estimates are 64.1 to 65.5 percent and 
33.5 to 34.9 percent respectively. 

[9] Those born in 1938 were the first to be affected when they turned 
62 in 2000 and faced a greater reduction for retiring at that age. 

[10] These estimates are based on results using intermediate 
assumptions in the 2011 report of the Social Security trust funds' 
Board of Trustees. The Board of Trustees, Federal Old-Age and 
Survivors Insurance and Federal Disability Insurance Trust Funds, The 
2011 Annual Report of the Board of Trustees of the Federal Old-Age and 
Survivors Insurance and Federal Disability Insurance Trust Funds, 
(Washington, D.C., May 13, 2011). 

[11] The Social Security Administration estimates that over the next 
several years, and over the long term, trust fund income, excluding 
trust fund interest, is projected to be less than trust fund expenses, 
absent any changes. The Tax Relief, Unemployment Insurance 
Reauthorization, and Job Creation Act of 2010 temporarily reduced 
employees' share of the Federal Insurance Contributions Act (FICA) tax 
from 6.2 to 4.2 percent of covered wages for calendar year 2011. To 
avoid harming Social Security's solvency, however, the act directs the 
Treasury to transfer from the general fund to the Old-Age and 
Survivors Insurance and Federal Disability Insurance Trust Funds an 
amount equal to 2.0 percent of covered wages. Pub. L. No. 111-312 § 
601, 124 Stat. 3296, 3309-10. 

[12] An annuity is an insurance agreement or contract that comes in a 
number of different forms and can (1) help individuals accumulate 
money for retirement through tax-deferred savings, (2) provide them 
with monthly income that can be guaranteed to last for as long as they 
live, or (3) do both. 

[13] Not all plans, however, accept rollovers from other plans. 

[14] From 1990 to 2008, the number of active participants in private 
sector DB plans fell by 27.6 percent from about 26 million to about 19 
million. From 1990 to 2008, the number of active participants in DC 
plans increased by 90.3 percent from about 35 million to about 67 
million. 

[15] The 95 percent confidence intervals for these estimates are $983 
to $1,061 and $7,796 to $8,304, respectively, according to SSA. 

[16] According to the Insured Retirement Institute, very few life 
insurance companies offer true inflation-protected annuities for sale 
in the United States. 

[17] According to the American Academy of Actuaries, without pooling 
longevity risk, through an immediate annuity for example, a retiree 
would need to accumulate substantially more in savings to ensure not 
outliving his or her assets. 

[18] Annuity providers may offer term-certain options or death benefit 
options for an additional cost. 

[19] See, for example, Jonathan Skinner, "Are You Sure You're Saving 
Enough for Retirement," Journal of Economic Perspectives, 21(3) 
(Summer 2007): 59-80; Congressional Budget Office, Baby Boomers' 
Retirement Prospects: An Overview (November 2003). 

[20] Due to the long-term fiscal challenges facing Social Security, 
options for reform may result in lower benefits and reduced 
replacement rates from Social Security. As a result, reforms to the 
Social Security system may increase the need for retirement income 
from other sources such as private pensions. See GAO, Social Security 
Reform: Answers to Key Questions, [hyperlink, 
http://www.gao.gov/products/GAO-05-193SP] (Washington, D.C.: May 2005). 

[21] 29 U.S.C. § 1001 note. 

[22] Under ERISA, a fiduciary is anyone, such as a sponsor, trustee, 
investment adviser, or other service provider, to the extent they 
exercise any discretionary authority or control over plan management 
or any authority or control over the management or disposition of plan 
assets, or who renders investment advice respecting plan money or 
property for a fee or other compensation, or has discretionary 
authority or responsibility for plan administration. 29 U.S.C. § 
1002(21)(A). 

[23] IRAs are subject to an exclusive benefit requirement and the 
prohibited transaction rules in Code section 4975 (as interpreted by 
Labor). Under the exclusive benefit requirement contributions made to 
pension plans must be maintained for the exclusive benefit of 
participants and their beneficiaries. Further, some IRAs, including 
those in Savings Incentive Match Plans for Employees of Small 
Employers (SIMPLE), are DC plans subject to various ERISA rules for 
plan sponsors. Thus, IRS and, to a limited extent, Labor have 
oversight responsibilities for certain types of IRAs. IRS has 
responsibility for tax rules governing how to establish and maintain 
IRAs, while Labor has sole responsibility for oversight of fiduciary 
standards for employer-sponsored IRAs, and has issued guidance to 
employers related to payroll-deduction IRAs regarding when such an 
arrangement would be a pension plan subject to Labor's jurisdiction. 
29 C.F.R. § 2510.3-2(d) and 29 C.F.R. § 2509.99-1. Except for 
rulemaking authority regarding the tax code's prohibited transaction 
provisions, which apply to IRAs, Labor does not have jurisdiction to 
oversee payroll-deduction IRA programs that are operated within the 
conditions of their guidance. Also, more households own traditional 
IRAs than employer-sponsored IRAs. Labor and IRS also work together to 
oversee IRA prohibited transactions; generally, Labor has interpretive 
jurisdiction and IRS has certain enforcement authority. See GAO, 
Individual Retirement Accounts: Government Actions Could Encourage 
More Employers to Offer IRAs to Employees, GAO-08-590 (Washington, 
D.C.: June 4, 2008). 

[24] See [hyperlink, http://www.gao.gov/products/GAO-10-632R], 14-15 
for details. 

[25] However, our selection of experts did not provide a statistically 
representative sample of all financial experts. 

[26] Under Social Security, retiree benefits are reduced for retirees 
who start drawing benefits before their full retirement age and 
increased for those who delay the start of benefits up to age 70. 

[27] We did not have access to any personal identification information 
for selected households; they remain anonymous. 

[28] Life expectancy has risen over time. A male who reached age 65 in 
1960 could expect to live another 13 years, while a man who reached 
age 65 in 2010 could expect to live another 19 years, according to the 
Social Security Board of Trustees. Females have experienced similar 
gains. A female who reached age 65 in 1960 could expect to live 
another 17 years, while a female who reached age 65 in 2010 could 
expect to live another 21 years. Trustees Report (2011), cohort life 
table p. 91. 

[29] While the traditionally recommended drawdown strategy is to draw 
only the income from investments, experts we spoke to recommended that 
retirees draw from both income and principal and seek a return on 
their investments irrespective of the income yield. 

[30] These drawdown probabilities depend upon the assumptions 
underlying the CRS simulation model. Janemarie Mulvey and Patrick 
Purcell, Converting Retirement Savings into Income: Annuities and 
Periodic Withdrawals, (Congressional Research Service: 2009). 

[31] The experts we spoke to recommended that retirees hold more than 
the two asset classes used in the CRS retirement model. In addition, 
CRS excluded the effect of investment fees and taxes in its analysis. 
According to the Investment Company Institute and the investment 
research firm, Lipper, mutual fund fees incurred by investors averaged 
about 1.0 percent for stock mutual funds and 0.7 percent for bond 
funds in 2009. See Investment Company Fact Book: A Review of Trends 
and Activity in the Investment Company Industry, 51st ed., Investment 
Company Institute (2011). As we have previously reported, fees are one 
of many factors to consider when choosing among investment options, 
such as in DC plans and IRAs, because fees can significantly decrease 
retirement assets. Even a small fee deducted from one's assets 
annually could represent a large amount of money years later had it 
remained in the account to be reinvested. See, for example, GAO, 
Retirement Savings: Better Information and Sponsor Guidance Could 
Improve Oversight and Reduce Fees for Participants, GAO-09-641 
(Washington, D.C.: Sept. 4, 2009). 

[32] The scenario is based on GAO analysis and Moshe A. Milevsky and 
Alexandra C. Macqueen, Pensionize Your Nest Egg: How to Use Product 
Allocation to Create a Guaranteed Income For Life (Ontario, Calif.: 
John Wiley & Sons Canada, Ltd., 2010), 34-47. 

[33] SSA officials noted that beneficiaries who are eligible for more 
than one type of benefit may have other ways to boost inflation- 
adjusted lifetime retirement income. For example, under certain 
circumstances a beneficiary could claim a spousal benefit at their 
full retirement age on their lower-earning spouse's earnings record 
and defer receipt of his or her own retirement benefit past full 
retirement age in order to earn an increased benefit up to age 70. 

[34] An estimated 49 percent of state and local government workers 
with a DB had a lump sum option available in 2007. See U.S. Department 
of Labor, National Compensation Survey: Retirement Benefits in State 
and Local Governments in the United States, 2007, Summary 08-03 (May 
2008). The 95 percent confidence interval for this estimate is 44.7 to 
53.3 percent. 

[35] Based on BLS Consumer Price Index data for all urban consumers 
(CPI-U). 

[36] Annuity quote was obtained on April 1, 2011, from Income 
Solutions, Hueler Investment Services, Inc., and Vanguard. The 
insurance company offering the annuity is American General Life 
Companies. The premium for this annuity would be $95,500 of qualified 
retirement funds and the transaction fee is 2 percent of the premium. 
The rate also assumes that both the male and female spouse turned 66 
on March 31, 2011, the annuity commencement date was June 1, 2011, the 
purchasers were residents of Florida, upon death of one spouse the 
surviving spouse continues to collect 100 percent of the income, and 
the surviving spouse is the sole beneficiary of the income. The 
inflation adjustment is based on the BLS Consumer Price Index for all 
urban consumers (CPI-U). 

[37] The annuity would provide $4,262 in the first year, and a 4 
percent annual drawdown strategy would provide $3,820. The annual 
amount provided by the annuity does not equal the product of 12 
monthly payments due to rounding. 

[38] The value of income annuities is backed by state guaranty 
associations, as defined by state laws. The value of annuities is 
generally protected for at least $100,000 in each state. For a 
description of the regulation of annuities, see GAO, Retirement 
Income: Challenges for Ensuring Income throughout Retirement, GAO-10-
632R (Washington, D.C.: Apr. 28, 2010), 15-16. 

[39] Benefits received at age 62 are reduced by 25 percent of the 
amount that would be provided at a full retirement age of 66 and 
benefits received at age 70 are increased by 32 percent from the same 
full retirement age. For example, if starting to receive benefits at 
age 62 would provide $1,000 per month, then receiving benefits at a 
full retirement age of 66 would provide $1,333 per month and age 70 
would provide $1,760 per month with additional increases for 
inflation. Additional months of work may also result in still higher 
benefits. 

[40] Additional work and cost-of-living adjustments may also 
contribute to higher benefits, but for purposes of this example we 
assume that neither applies. 

[41] Reduced Social Security retired worker benefits are typically 
first available the month after an eligible worker's 62ND birthday. 
Relatively few people born early in a month qualify as having been at 
62 throughout the first month of their Social Security retirement. 

[42] An estimated 19.5 percent of beneficiaries began receiving 
benefits on or after reaching their full retirement age. 

[43] Delaying the start of benefits results in receiving benefits for 
fewer months, but provides an increased level of monthly benefits no 
matter how long the recipient lives. Recipients had an opportunity to 
repay the benefits they had received without interest and receive a 
higher benefit recalculated based on a later start date, but the SSA 
closed this option as the application withdrawal must occur within 12 
months of the first month of entitlement. See Social Security 
Administration, Amendments to Regulations Regarding Withdrawal of 
Applications and Voluntary Suspension of Benefits, 75 Fed. Reg. 76,256 
(Dec. 8, 2010). 

[44] Pub. L. No. 98-21 § 201(a), 202(w)(6), 97 Stat. 65 (1983). 

[45] Data from SSA's Office of the Chief Actuary indicate that the 
percentage of those who waited until full retirement age or later 
varied from 22.8 percent for those born in 1935 to 18.1 percent for 
those born in 1939, and 19.5 percent for those born in 1943. According 
to the experts we consulted, if recipients have poor health and a less 
than average life expectancy, taking benefits earlier nonetheless may 
be warranted. In addition, a few experts noted that delaying benefits 
may not be appropriate if recipients place a high value on having 
money now, rather than later. If delaying benefits requires increased 
borrowing to make ends meet, it may be better to take benefits early. 

[46] Pub. L. No. 106-182 (codified at 42 U.S.C. § 1305 note). Up to a 
specified amount--the retirement earnings test--Social Security 
retired worker beneficiaries can earn wages and salary without a 
reduction in benefits before full retirement age. The earnings test 
rose to $14,160 for recipients age 62 through the year before full 
retirement age in 2009 and remained at that level in 2010. Every $2 of 
earnings over this limit results in a $1 reduction in Social Security 
benefits; however, early beneficiaries generally recoup the amounts 
withheld because of the earnings test in the form of higher 
recalculated benefits after they reach full retirement age. A higher 
earnings limit--$37,680--applies in the year full retirement age is 
attained, but only for the months before reaching full retirement age. 
Beginning at full retirement age, earnings tests no longer apply. For 
additional information, see GAO, Retirement Decisions: Federal 
Policies Offer Mixed Signals about When to Retire, GAO-07-753 
(Washington, D.C.: July 11, 2007), 17, 30. 

[46] Or they may not yet have been eligible to commence benefits. 

[48] GAO conducted a similar analysis for the 1992 to 2000 period. See 
GAO, Private Pensions: Participants Need Information on Risks They 
Face in Managing Pension Assets at and during Retirement, [hyperlink, 
http://www.gao.gov/products/GAO-03-810] (Washington, D.C.: July 29, 
2003), 16. Other studies we located on the disposition of pensions 
were anecdotal or focused on workers who left one job to go to another 
or were based on data from few plans. Figure 6 estimates are based on 
1,336 observations. We identified 208 respondents who indicated they 
had a full or partial lump sum option and 247 who indicated they did 
not have such an option. These results were based in part on data 
compiled for Alan L. Gustman, Thomas L. Steinmeier, and Nahid 
Tabatabai, Pensions in the Health and Retirement Study (Cambridge, 
Mass.: Harvard University Press, 2010). Lump sum payments may become 
somewhat less attractive as provisions in the Pension Protection Act 
of 2006 require that the minimum lump sum payments be calculated based 
on corporate bond rates as opposed to U.S. Treasury security interest 
rates. As corporate bond rates are typically higher than Treasury 
interest rates for similar maturities, a smaller lump sum is needed to 
cover the expected future benefits. The lump sum present value of an 
annuity benefit is lower if interest rates are high. Pub. L. No. 109-
280 (codified at 26 U.S.C. § 430(h)(2)(D)). 

[49] This is based on SSA analysis of Census Bureau CPS March 
Supplement survey data for 2008. The 95 percent confidence interval 
for this estimate is from 40.1 percent to 41.3 percent. This estimate 
does not include all withdrawals from a pension, such as lump sum 
distributions. 

[50] Some researchers recommend gradually annuitizing during 
retirement rather than at retirement. See for example, Wolfram J. 
Horneff, Raimond H. Maurer, Olivia S. Mitchell, and Michael Z. Stamos, 
"Variable payout annuities and dynamic portfolio choice in 
retirement," Journal of Pension Economics and Finance, vol. 9 (2010): 
163-183. 

[51] According to the Insured Retirement Institute, in 2008, less than 
1 percent of the amount of deferred annuities sold was converted to 
lifetime retirement income. 

[52] Another $5.6 billion of fixed immediate annuities were structured 
settlements--contracts to provide a stream of income in lieu of a lump 
sum settlement, in civil court settlements, for example. 

[53] This estimate is based on an annuity quote from Income Solutions 
through Vanguard's portal March 3, 2011. Such annuities would provide 
no adjustment for inflation and no term certain feature. 

[54] Jack VanDerhei, Sarah Holden, and Luis Alonso, 401(k) Plan Asset 
Allocation, Account Balances, and Loan Activity in 2009, Issue Brief 
No. 350, EBRI (November 2010). These data come from 401(k) 
recordkeeping organizations for 20.7 million 401(k) participants 
compiled jointly by EBRI and the Investment Company Institute. These 
data may not definitively indicate the trends for all 401(k) account 
holders, as the universe of data providers varies from year to year 
and may not be statistically representative of all 401(k) account 
holders. HRS data compiled by Gustman, et al. provide evidence of 
household equity allocations including those in IRAs, DC plans, and 
assets outside retirement accounts. Gustman, et al. found that an 
estimated 34.6 percent of households with a member approaching 
retirement (turning age 53 to 58 in 2006) held no assets in stocks. On 
average, the middle 10 percent of households (from the 45th to the 
55th percentile by wealth) held an estimated $49,363 in stocks, 
representing 58.7 percent of their financial assets. Alan L. Gustman, 
Thomas L. Steinmeier, and Nahid Tabatabai, "What the Stock Market 
Decline Means for the Financial Security and Retirement Choices of the 
Near-Retirement Population," Journal of Economic Perspectives, 24(1) 
(2010): 161-182. 

[55] Depending on when during the year they made withdrawals from 
stock funds, these transactions may have been fortuitous or 
detrimental to their returns. These figures reflect net flows of funds 
into and out of mutual funds, and do not reflect the change in 
valuation due to changes in market prices. From the end of fiscal year 
2007 to the end of fiscal year 2008 the total net assets of retail 
money market funds, excluding government accounts, increased by $39 
billion. 

[56] Karen E. Smith, Mauricio Soto, and Rudolph G. Penner, "How 
Seniors Change their Asset Holdings During Retirement," Retirement 
Policy Discussion Paper 09-06, The Urban Institute (October 2009). 
This study focused on HRS data for the 1998 through 2006 period for 
people age 60 and older in 2006. 

[57] James M. Poterba, Steven F. Venti, and David A. Wise, "The 
Drawdown of Personal Retirement Assets," National Bureau of Economic 
Research Working Paper Series #16675 (January 2011), [hyperlink, 
http://www.nber.org/papers/w16675] (accessed Feb. 1, 2011). 

[58] The 95 percent confidence interval for this estimate is 6.2 
percent to 8.5 percent. Adjusting for inflation using the CPI-U, 
$15,000 in 1998 represents $19,807 in 2008 dollars. Net financial 
assets here include the value of IRAs, but exclude the value of 
pensions, expected Social Security benefits, and nonfinancial wealth 
such as home equity. 

[59] See Richard W. Johnson, Gordon B.T. Mermim, and Cori E. Uccello, 
"When the Nest Egg Cracks: Financial Consequences of Health Problems, 
Marital Status Changes, and Job Layoffs at Older Ages," The Urban 
Institute (Washington D.C., January 2006). In 2009 an estimated 44.3 
percent of long-term care expenditures were borne by the Medicaid 
program, according to the National Health Expenditure data from the 
Centers for Medicare and Medicaid Services, Office of the Actuary. 
Confidence intervals for this estimate were not available. 

[60] EBRI estimates that a large proportion of the workers' retirement 
savings deficit is attributable to the need to fund nursing home and 
home health care expenses. These costs increase the present value of 
needed additional retirement savings by $25,317 for married couples, 
$32,433 for single males, and $46,425 for single females in 2010 
dollars. See EBRI, Retirement Savings Shortfalls for Today's Workers, 
Notes, 31(10) (October 2010), 2. The coverage of long-term care 
insurance policies varies widely, but on average policyholders aged 70 
and over paid an average of $3,026 in premiums in 2007. 

[61] This measure of poverty is based on money income including cash 
public assistance, but does not take into account noncash benefits 
received. The 90 percent confidence intervals for these estimates are 
3.3 million to 3.6 million, 8.7 percent to 9.1 percent, and 14.0 
percent to 14.6 percent, respectively. Other age groups had higher 
poverty rates. For example, an estimated 20.7 percent of those under 
age 25 and 9.4 percent of those approaching retirement age (age 60 to 
64) had incomes below the poverty level. The 90 percent confidence 
intervals for these estimates are 20.2 to 21.2 percent for those under 
18, 20.1 to 21.3 percent for those age 18 to 24, and 8.9 percent to 
9.9 percent for those age 60 to 64. 

[62] These estimates are based on U.S. Census Bureau's American 
Community Survey reports of income for the previous year during the 
2005-2009 period. 

[63] 75 Fed. Reg. 5,253 (Feb. 2, 2010). Additional measures were 
proposed to increase the use of annuities. For example, a few 
respondents proposed that plan participants be required to annuitize a 
portion of their DC plan assets under certain circumstances; others 
recommended that federal income taxes on income from annuities be 
reduced. 

[64] In addition, annuities offered in pension plans must offer gender-
neutral prices.Arizona Governing Committee v. Norris, 463 U.S. 1073 
(1983). By contrast, annuities offered in the retail market, including 
IRAs that are not employer-sponsored, are not subject to the same 
rule, and these annuities reflect gender-distinct pricing. Women may 
find more favorable single-life annuity rates through pension plans, 
but men may find more favorable prices through the retail market. 
Annuity prices vary and are affected by such factors as interest 
rates, mortality rates, and administrative costs. 

[65] Under ERISA, a fiduciary is anyone, such as a sponsor, trustee, 
investment adviser, or other service provider, to the extent they 
exercise any discretionary authority or control over plan management 
or any authority or control over the management or disposition of plan 
assets, or who renders investment advice respecting plan money or 
property for a fee or other compensation, or has discretionary 
authority or responsibility for plan administration. 29 U.S.C. § 
1002(21)(A). 

[66] 29 C.F.R. § 2550.404a-4. Prior to the Pension Protection Act of 
2006, DC plans were held to the standard of DB plans which is to 
select the safest available annuity, unless under the circumstances it 
would be in the interest of the participants and beneficiaries to do 
otherwise. This was regarded as a more stringent standard. (29 C.F.R. 
§ 2509.95-1.) Pub. L. No. 109-280 § 625, 120 Stat. 780. 

[67] Although experts said that Executive Life Insurance Company had 
high ratings from certain rating agencies--A.M. Best, Moody's, and 
Standard & Poor's--prior to its insolvency, we reported that 44,000 
retirees with Executive Life had received only 70 percent of their 
promised monthly annuity payments for almost 13 months after 
California regulators seized control of the company. GAO, Private 
Pensions: Protections for Retirees' Insurance Annuities Can Be 
Strengthened¸ [hyperlink, http://www.gao.gov/products/GAO/HRD-93-29] 
(Washington, D.C.: Mar. 31, 1993). According to data from the National 
Organization of Life and Health Insurance Guaranty Associations, from 
1987 to 2008, at least 64 multistate liquidations of life insurers 
have involved state guaranty associations. 

[68] This value represents the present value of an annuity, which is 
the amount that would be sufficient, if invested at a given interest 
rate, to fund the expected future stream of annuity payments. The 
periodic payment is less than the annuity's present value. 

[69] In 2009, NAIC amended its model act to provide an increase in the 
coverage cap for annuities from $100,000 to $250,000. 

[70] For more information, see, for example, GAO, Social Security 
Reform: Implications of Private Annuities for Individual Accounts, 
[hyperlink, http://www.gao.gov/products/GAO/HEHS-99-160] (Washington, 
D.C.: July 30, 1999). 

[71] 29 U.S.C. § 1055. 

[72] Another approach would allow retirees an option to purchase 
private sector annuities through a program facilitated by the federal 
government. Retirees would have a one-time opportunity during their 
first year of retirement to purchase a basic life annuity, up to 
$100,000. The federal government would provide record-keeping, 
marketing, distribution, and other administrative services and pay out 
annuity benefits with Social Security benefits. The Aspen Institute, 
Savings for Life: A Pathway to Financial Security for All Americans, 
(New York, N.Y., 2007). 

[73] One respondent recommended that a revised safe harbor accompany 
the requirement that sponsors offer annuities as an option and help to 
reduce fiduciary risks for sponsors. 

[74] Certain respondents mentioned trial annuities, which might allow 
for flexibility. One proposal developed prior to the RFI would 
encourage sponsors to offer default trial annuities featuring a 2-year 
trial period, during which the retiree would receive monthly income 
unless the retiree opted out and made an affirmative decision to take 
a lump sum distribution. William Gale, J. Mark Iwry, David John, and 
Lina Walker, Increasing Annuitization in 401(k) Plans with Automatic 
Trial Income, The Retirement Security Project (Washington, D.C., 2008). 

[75] According to SEC officials, while products and their restrictions 
vary, surrender charges on retail variable annuities often apply 
during a surrender period of 6 to 8 years. For example, the surrender 
charge could decrease from approximately 7 percent of the investment 
amount to zero over the period by 1 percent per year. 

[76] These products may be known in the marketplace as "longevity 
insurance," since the payoff mostly goes to those who surpass their 
life expectancy at retirement. More generically, it should be noted 
that any arrangement that provides guaranteed income for life is a 
form of longevity insurance, that is, protection against some of the 
financial risks of living a long life. 

[77] This is due to a combination of factors: the long deferral period 
substantially reduces the present value of the eventual payouts; in 
the case of a "pure" deferred annuity with no death benefit, the long 
deferral period increases the chance that no payouts will be necessary 
at all, because of mortality prior to the commencement of benefits; 
and the higher mortality rates at advanced ages mean that payments 
would last for fewer years on average. 

[78] American Academy of Actuaries' response to the RFI. Available at 
[hyperlink, http://www.dol.gov/ebsa/regs/cmt-1210-AB33.html]. 

[79] Besides the use of private sector annuities, longevity insurance 
could also be provided through approaches such as increasing Social 
Security benefits for beneficiaries who reach an advanced age. For 
more information, see GAO, Social Security: Options to Protect 
Benefits for Vulnerable Groups When Addressing Program Solvency, 
[hyperlink, http://www.gao.gov/products/GAO-10-101R] (Washington, 
D.C.: Dec. 7, 2009). 

[80] The Code generally requires distributions of tax-deferred funds 
to begin no later than the calendar year after the taxpayer turns 70½. 
Under Treasury regulations, those distributions would be calculated 
based on the entire interest, which includes both the account balance, 
and the value of the longevity insurance (with these rules applied 
separately to insurance bought under a plan and to insurance bought 
under all of the participant's aggregated IRAs). To take minimum 
distributions based on the entire interest including the longevity 
insurance, the taxpayer could draw down the remainder of his or her 
401(k) balance or, in the case of IRAs, make withdrawals from other 
IRA assets. However, respondents have noted that this approach 
presents practical difficulties, such as the risk of the other funds 
being insufficient to meet the minimum distribution requirements 
before the longevity annuity begins, especially if too large a portion 
of the total account has been used to purchase the longevity 
insurance. A taxpayer with an insufficient remaining balance would 
have to accelerate payments from the longevity insurance and, while 
the contract could be written to permit such an acceleration, that 
feature would increase the cost of the longevity insurance. 26 C.F.R. 
§ 1.417(a)(3)-1. 

[81] At least one type of DC plan, known as a money purchase plan, is 
required to offer a QJSA. Other DC plans such as 401(k) plans may be 
exempt if they satisfy certain criteria. 

[82] 26 C.F.R. § 1.401(a)(20); 1.417(a)(3)-1. 

[83] GAO, Retirement Security: Women Face Challenges in Ensuring 
Financial Security in Retirement, [hyperlink, 
http://www.gao.gov/products/GAO-08-105] (Washington, D.C.: Oct. 11, 
2007). 

[84] GAO, Financial Literacy: The Federal Government's Role in 
Empowering Americans to Make Sound Financial Choices, [hyperlink, 
http://www.gao.gov/products/GAO-11-504T] (Washington, D.C.: Apr. 12, 
2011). 

[85] In 2003, Congress created the multiagency Financial Literacy and 
Education Commission, which was charged with, among other things, 
developing a national strategy to promote financial literacy and 
education, coordinating federal efforts, and identifying areas of 
overlap and duplication. Pub. L. No. 108-159, Title V, 117 Stat. 1952, 
2003 (codified at 20 U.S.C. §§ 9701-08). 

[86] Based on interviews with selected federal entities, as well as 
our review of the FLEC's Web site and the 2010 study by the RAND 
Corporation of federal financial and economic literacy education 
programs. FLEC's Web site is available at [hyperlink, 
http://www.MyMoney.gov]. For the RAND study, see Angela Hung et al., 
Federal Financial and Economic Literacy Education Programs, 2009, RAND 
Corporation (2010). Another resource for retail investors, including 
retirees, is the SEC Web site, [hyperlink, http://www.investor.gov]. 

[87] GAO, Highlights of a GAO Forum: The Federal Government's Role in 
Improving Financial Literacy, [hyperlink, 
http://www.gao.gov/products/GAO-05-93SP] (Washington, D.C.: Nov., 15, 
2004). 

[88] William Gale and Ruth Levine, Financial Literacy: What Works? How 
Could It Be More Effective?, (October 2010). John Turner and Hazel 
Witte, Retirement Planning Software and Post-Retirement Risks, Society 
of Actuaries and Actuarial Foundation (December 2009); John Turner, 
Why Don't People Annuitize? The Role of Advice Provided by Retirement 
Planning Software, Pension Research Council Working Paper (May 2010). 

[89] GAO, 401(K) Plans: Improved Regulation Could Better Protect 
Participants from Conflicts of Interest, [hyperlink, 
http://www.gao.gov/products/GAO-11-119] (Washington, D.C.: Jan. 28, 
2011). 

[90] See, for example, Securities and Exchange Commission, Financial 
Industry Regulatory Authority, and the North American Securities 
Administrators Association, Investor Alert: Investment Products and 
Sales Practices Commonly Used to Defraud Seniors: Stories from the 
Front Line; and Protecting Senior Investors: Report of Examinations of 
Securities Firms Providing "Free Lunch" Sales Seminars, Sept. 2007. 
According to an NAIC official, as of May 2011, approximately 27 states 
have adopted a previous version and approximately 10 additional states 
have adopted a current version of the model regulation requiring 
insurance agents to ensure the suitability of annuities sold for the 
consumer at the time of the transaction. For more information, see 
GAO, Consumer Finance: Regulatory Coverage Generally Exists for 
Financial Planners, but Consumer Protection Issues Remain, [hyperlink, 
http://www.gao.gov/products/GAO-11-235] (Washington, D.C.: January 18, 
2011). 

[91] [hyperlink, http://www.gao.gov/products/GAO-03-810]. 

[92] 29 U.S.C. § 1025(a)(2)(B)(ii)(II) and (III). This requirement 
applies to DC plans that are participant-directed. 

[93] For example, according to one study of 620 near retirees at two 
large employers, levels of basic retirement knowledge increased after 
a retirement seminar, and roughly one-quarter of these individuals 
reported changes in how they intend to distribute pension benefits 
from their DB and DC plans. Robert Clark et al., Pension Plan 
Distributions: The Importance of Financial Literacy, Pension Research 
Council Working Paper (October 2010). 

[94] GAO, 401(K) Plans: Improved Regulation Could Better Protect 
Participants from Conflicts of Interest, [hyperlink, 
http://www.gao.gov/products/GAO-11-119] (Washington, D.C.: Jan. 28, 
2011). 

[95] For a discussion on "framing," see Jeffrey Brown et al., "Why 
Don't People Insure Late-Life Consumption? A Framing Explanation of 
the Under-Annuitization Puzzle," American Economic Review: Papers and 
Proceedings (98:2) 2008. 

[96] The Thrift Savings Plan is governed by a statute other than 
ERISA. For more information, see GAO, Federal Retirement Thrift 
Investment Board: Many Responsibilities and Investment Policies Set by 
Congress, GAO-07-611 (Washington, D.C.: June 21, 2007). 

[97] S. 267 and H.R. 677. 

[98] Additional assumptions or complexities exist. For example, it is 
unclear what, if any, assumptions or caveats would address the tax 
implications of the estimate, given that account balances are 
typically tax deferred. 

[99] This analysis uses Early Release data from the Health and 
Retirement Study, the March 2010 RAND HRS, sponsored by the National 
Institute on Aging (grant number NIA U01AG009740) and conducted by the 
University of Michigan. These data have not been cleaned and may 
contain errors that will be corrected in the Final Public Release 
version of the dataset. 

[100] Survey responses do not consistently match administrative 
sources of information. Researchers have noted, for example, that 
where respondents and their employers provided information about 
whether they had a DB, DC, or both types of pensions, less than half 
of respondents gave a response that matched information provided by 
their employer. See Alan L. Gustman, Thomas L. Steinmeier, and Nahid 
Tabatabai, Pensions in the Health and Retirement Study (Cambridge, 
Mass.: Harvard University Press, 2010), 125. 

[101] We did not access any personally identifiable information. 

[102] Monte Carlo analysis is a method of estimating the probable 
outcome of an event in which one or more of the variables affecting 
the outcome are random. This use of Monte Carlo simulations is to 
illustrate how the variability of investment rates of return can 
affect the balances in a retirement account. Monte Carlo estimation 
methods utilize not just the average value of a random variable, but 
also the distribution of values around the average. For example, rates 
of return in the stock market vary from year to year. The 
Congressional Research Service determined that the nominal rate of 
return on the Standard & Poor's 500 index of stocks averaged 10.3 
percent over the 1926 to 2007 period, but annual rates of return 
varied widely around this average, producing a standard deviation of 
20.0 percent. Likewise, while the nominal annual return on AAA-rated 
corporate bonds averaged 6.3 percent between 1926 and 2007, the 
standard deviation around this average was 7.0 percent. Monte Carlo 
simulation is a tool to take this variability into account in the 
analysis. 

[103] See [hyperlink, 
http://www.dol.gov/ebsa/publications/nearretirement.html]. 

[End of section] 

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