Options to Encourage the Preservation of Pension and Retirement Savings: Phase 3

In Phase 3, we asked our expert panelists to review the summary of results from the preceding questionnaire (Phase 2.) In addition, we asked them to discuss other actions (policy or otherwise) that could encourage retiring participants to preserve their pension and retirement saving plan assets. Originally, we asked the panelists to respond to three questions about actions that could encourage the preservation of pension and retirement savings plan assets. Based on feedback about the length of and time commitment needed to respond to the phase II questionnaire, we narrowed the focus and gave panelists the option of only responding to question one. Some respondents provided answers for all three of the questions and others only responded to question one. We emailed these questions to the 22 experts who responded to the Phase 2 questionnaire and received 10 responses. Listed below are the responses received from these 10 experts.

For each of the options below please discuss what actions (policy or otherwise), if any, could encourage more retirees to preserve their pension and retirement savings plan assets. Please discuss some of the potential tradeoffs, such as the effect on plan coverage, plan compliance, and effectiveness for preserving pension and retirement savings plan assets, of the options identified.

1. Options to encourage retiring participants to preserve their pension assets at retirement by deferring the receipt of benefits (i.e., leaving assets in an account balance), or rolling over assets directly to an IRA at retirement.

"Participants need investment advice, both for managing assets during the accumulation phase, but also in anticipation of and during their retirement. Investment advice provided through the workplace (in association with the employer's pension plan - both defined contribution and defined benefit) is essential to achieve this goal. It is imperative that financial services firms that provide investment management or administrative services to plans be permitted to offer such advice to participants (who would be free to take or not take such advice). Participants' 401(k) balances at retirement are often the largest source of retirement income they have (other than the equity in their homes), and they often need professional advice. It would be helpful if they have access to professional advice during their accumulation phase so that they have established a relationship with a professional advisor (whether or not through their employer plan) by the time they reach retirement age and need to make critical decisions regarding what to do with their retirement account balances."

"Increase withholding above 20 percent (would suggest that it be based on the employee's marginal tax bracket)"

"Increase the 10 percent penalty tax (perhaps a gradual phase down as employee approaches retirement age)"

"Options to encourage leaving assets in an account balance or rolling them directly to an IRA would most probably involve some sort of mandate or default provision. In other words, participants would not be allowed to take the money out in a lump sum when they separate from service. Rather, they would be permitted to leave the money in the plan, directly roll to an IRA, take money in an annuity or periodic payments (if eligible). If none of these options were chosen, the plan sponsor would default the money either into the plan or into a default IRA or annuity. Of course, if the plans were to hold the money or provide periodic payments, we are still left with the basic policy issue of individuals outliving their retirement assets. No option that doesn't include annuitization will address this basis issue."

"The emphasis of our initiative to encourage annuitization and preservation of retirement savings should NOT be directed at motivating retirees to defer the receipt of benefits (i.e. leaving assets in a retirement plan account) or rolling these assets directly to an IRA at retirement. These are the actions most retirees currently take with respect to their retirement plan balances. What the emphasis of any initiative should be is to find ways to assure that options that assure that participants don't outlive their savings and provide guaranteed lifetime income are made available under qualified plans and become a minimum qualification standard. Since 401(k) and other types of defined contribution plans are no longer supplemental retirement arrangements, but rather are typically the primary source of retirement income, it is imperative that tax subsidies supporting these plans not be available unless the plan satisfies the requirement that they make available a distribution option that is designed to assure guaranteed lifetime income to retirees. Further and significantly, participants must be educated and informed through out their working lives about the risks of outliving their assets and the need to access and select distribution choices that address this risk at least for an amount that will provide for their daily living needs after retirement."

"Prohibiting lump-sums either outright or by tax penalty certainly would encourage retirement account preservation.

"Simplifying the ERISA administrative rules probably would make (some) employers less inclined to encourage employees to close out their accounts by taking a lump-sum withdrawal or through an IRA rollover at termination or retirement."

"I believe that it's the smaller accounts that get liquidated. Intuitively, the larger the account balance the more likelihood of preservation, especially where the employee has no other substantial pension options."

"If the employer's plan investment options are not unattractive and the fee structure unreasonable, retention is more likely assuming the participant understands the significance and effect of fees on their account."

"Mandates can be effective in procuring change but as they are arbitrary in application they can be unfair. For instance, 80% of participants may benefit from having a guaranteed lifetime stream of income; however 20% may not benefit given their individual circumstances (e.g. other sources of income, health status, lost economic opportunities). Mandates also may be politically difficult to pass."

"Make it mandatory to rollover 401(k)s and cash balance plans into 401(k)s at the next employer, or into IRAs. This might reduce 401(k) participation; it might also increase loans from 401(k)s and IRAs. Firms with cash balance plans may become less attractive to mobile workers."

"Create an entity (e.g. MUPPS) to accept rollovers. It would be difficult politically to create such a centralized public or quasi-public entity that would tightly control rollovers."

"Increase substantially, the penalty for withdrawal of IRA and 401(k) assets. Individuals might decide to pay higher penalties anyway and thereby lose even greater portions of their assets. This might also reduce participation in 401(k)s/IRAs and/or increase loan activity."

"Encourage employers to provide inflation-indexed investments and education on the effects of inflation to plan participants and those approaching retirement. This would be an added cost for employers and add another investment option to what may be a list of many. Research has shown that as the number of investment options increases, employee 401(k) participation decreases."

"Prohibit cash outs of benefits over a minimum dollar amount unless rolled over. This may reduce 401(k) participation and/or increase loan activity."

"Rollovers of lump-sum retirement benefits into another retirement vehicle should be automatic. This could reduce pension participation and/or increase loan activity. Also, it might present compliance problems because it would mean the establishment and identification of the receiving retirement vehicle."

"Prohibit loans on pensions. This might reduce 401(k) plan participation."

"Require highly diversified pension/IRA investment options. Many participants who value control over their investment decisions and are less risk averse might not participate in a pension. "

"Require minimum levels of inflation protection for benefits. This might too expensive option for most employers and employees and therefore might reduce pension sponsorship and participation. "

"Help develop and promote low-cost annuitization options. Unless there is sufficient demand and profit opportunity, it will be difficult to get the financial services and insurance industries interested in such options."

"Establish a mechanism for DB plan portability. There are significant barriers (administrative and otherwise) to such portability across firms unless there are industry specific multiemployer pooling arrangements. The administrative and compliance problems are likely to be substantial."

"Find lost pensions by establishing a national registry to deal with lost pensions and pensioners. There might be compliance problems with such a registry; enforcement might be difficult."

"Prohibit annuity payments from pensions before age 55. This could meet stiff resistance from early retirees who want their annuities and are willing to pay a penalty to be able to retire between 50 and 55."

"Comprehensive education and information campaigns by employers, government and relevant organizations on preservation techniques and their merits. This could be costly and in the case of employers would have to meet regulatory requirements."

"One thing that might help would be a requirement that plans directly transfer assets to another plan or IRA, but plans would complain about this and some financial institutions might not like setting up small accounts to see them closed the next day. I suppose you could also require plans to hold onto assets unless the participant directs a rollover-transfer. Again, though, plans won't like this and neither will institutions that set up IRAs only to see them used as conduits to the participant's pockets."

"A longer period than 60 days for a rollover might also help--moreover, if a participant gets a distribution, less 20% tax, the participant should be able to reduce his tax liability by that 20% if he agrees to pay the tax into an IRA--there would be some design complexities in creating a set of rules that permit this, but it would probably result in some additional savings in IRAs."

"Perhaps the penalty tax should not apply if at least 75% of a distribution is directly transferred over into an IRA that cannot be invaded until age 59.5."

"A tax benefit that I would advocate would be an exclusion from income of, say,. 50% of distributions from an IRA or qualified plan after age 59 for participants whose income falls below certain thresholds."

"A similar idea might be to sell government retirement bonds--inflation adjusted bonds that would pay only after a participant turns age 59. Again, the return on such bonds could be excluded from income for individuals below a certain income level."

"Once participants reach retirement ages, we believe that the key is drawing down pension assets responsibly. This entails careful planning more so than deferring receipt of income."

"From [this groups] experience working with retirees, we know that one on the most misunderstood concepts in retirement planning is life expectancy. Even among the few people who have a reasonable awareness of how long they might live in during retirement (most underestimate), many misunderstand the concept. If a person has a 22 year life expectancy that means that there is a fifty-fifty chance he or she will live beyond that time period. Too many people do not plan for the good news of longevity -- living beyond their expected lifetime and may exhaust their savings. Creative, interactive computer models that could help explain this concept would be a welcome addition to the financial planning tool kit for retirees."

"Spousal consent: Require all qualified private retirement plans including IRAs (placing the burden on the sponsoring financial institution) to obtain acknowledged and notarized spousal consent when married participants elect any distribution other than a QJSA. Any additional expense and/or administrative burden to the overall system would be offset by increased retirement security. This provision would have a negligible effect on overall participant coverage."

"Stream-of-payments option: Require all private retirement plans to provide a stream-of-payments distribution option (for the joint lives of married couples) directly or through a low/no-cost government-sponsored program. Note that this is not an annuity; rather, it manages a payout schedule based on the minimum required distribution mortality tables or their pre-age 70 1/2 equivalent. Any additional expense or administrative burden to the overall system would be offset by increased retirement security. This provision would have a negligible effect on overall participant coverage."

"Unfavorable tax treatment for certain post-retirement distributions: Apply excise taxes to post-retirement distributions from any source that exceed the required minimum distribution or its pre-age 70 1/2 equivalent by more than 5 percent for reasons other than death, total and permanent disability, terminal illness, unavoidable medical expenses and avoidance of eviction or foreclosure. Additional administrative impact on existing IRS procedures would be negligible. This provision would have a negligible effect on overall participant coverage."

"Reduce available pre-retirement distribution options: Eliminate the possibility of non-emergency, pre-retirement distributions from qualified plans (including plan loans) and IRAs. Restrict pre-retirement distributions to situations involving death, total and permanent disability, terminal illness, unavoidable medical expenses and avoidance of eviction or foreclosure. Proof would be required to show that loans were applied for and denied from at least [X number of] sources, prior to making the request of the plan or taking the distribution from the IRA. Rules would be permissive (not mandatory), so it would only add to administrative burden for those containing the provision. Plans opting not to include the provision would have no pre-retirement distribution provisions, excepting rollover to an IRA on termination of employment. For moneys in an IRA, financial institutions and the IRS (through the normal tax return procedures) would manage administration of the new rules. Any additional expense to the overall system would be offset by increased retirement security. This provision would have a negligible effect on overall participant coverage."

2. Options to assist retirees in managing their assets personally with the objective of providing an income stream to help them balance income and expenditures.

"In order to achieve such a policy objective, it is important to provide incentives to both participants to choose an annuitization distribution option (to ensure they don't outlive their retirement assets) and to employers to offer annuitization options in retirement plans. Providing participants with tax incentives when choosing an annuity option when making distributions from their pension plan (both defined contribution and defined benefit) would certainly help participants make the right policy decisions with respect to their retirement accounts. It is equally important to provide incentives to employer to offer annuitization options in pension plans and remove administrative burdens associated with offering annuities in plans. Employer incentives could include tax incentives as well as other changes to current laws and regulations that impose burdens on annuity options (including spousal consent and fiduciary concerns by offering a single annuity option)."

"Assist them in purchasing long term care insurance (without it there is virtually nothing that will assure them a balance of income and expenditures if they have catastrophic nursing home costs)"

"Provide them with illustrations similar to the minimum distribution payouts but calculate "maximum" based on some algorithm instead (ideally this would take into account db and Social Security amounts also).

"Same as above but do the calculations on a real, as opposed to nominal, basis"

"Legislate permission for the plan fiduciary to provide retirement planning (preferably at reduced costs) without running afoul of ERISA.

"Mandate annuity option availability in DC plans."

"Education is never enough by itself. We cannot expect participants to become investment professionals. Even with the best education a large number simply will not understand their investment options, asset allocation and rebalancing of portfolios, etc. Ultimately employer directed DC plans are very probably a better model than the current employee directed norm. But the road to there is blocked today because of the fiduciary liability issue and perhaps the apparent attractiveness of managing your own money."

"For many retirees Social Security will be the foundation of their retirement security. For the last several years, all American workers have received annual statements from SSA illustrating benefits projected to retirement. To help reinforce the need for other retirement savings, it might be helpful to add a short question to the statement that would encourage workers to think about how much additional income they might expect to obtain from pension plans and personal savings."

"Several recent legislative proposals have included requirements to provide annual benefit statement for participants in defined contribution plans. We believe that it would be helpful to allow the timing of such statements to occur within several months of the date a participant would receive their Social Security's statement. Our experience in doing so suggest that this can reinforce the need to plan for the long term."

"Another hard to understand retirement planning concept is inflation. Through our publications, [we] works hard to help retirees understand that having income steams that have the potential to increase during retirement can address this risk to retirement security. We also offer products designed to increase in payout value such as an annuity based on inflation linked bonds."

3. What other options, if any, should be considered to help retiring participants preserve their pension and retirement savings plan assets at retirement?

"More educational efforts regarding financial literacy and the risk of outliving your savings in retirement. We need more emphasis in our educations system on financial literacy, savings and investing."

"Move back initial receipt date of minimum distribution payments"

"Have the minimum distribution requirements set in terms of real, as opposed to nominal, amounts"

"One of the innovative proposals contained in the pension reform legislation that Representatives Rob Portman and Ben Cardin introduced on April 11, 2003 would respond to concerns about health care coverage for retirees. Section 1401 of The Pension Preservation and Savings Expansion Act of 2003 would allow retirees to pay for medical insurance premiums with before tax distributions from their pension plans. The modest dollar amount would gradually increase to reach $2,000 in 2008 and it could only be used to pay for employer-sponsored health insurance for retirees. Health insurance is an ongoing expense that retirees face through out the years in retirement and we believe that the structure of this provision addresses two important public policy concerns. It helps seniors afford health care costs while encouraging lifetime distributions."