401(k) Plans: Other Countries' Experiences Offer Lessons in Policies and Oversight of Spend-down Options
Highlights
What GAO Found
The six countries GAO reviewed can offer U.S. regulators lessons on how to expand access to a mix of spend-down options for 401(k) participants that meet various retirement needs. Five of the six countries generally ensure that participants can choose among three main plan options: a lump sum payment, a programmed withdrawal of participants' savings, or an annuity. In the last several decades, all the countries took steps to increase participant access to multiple spend-down options, with some first conducting reviews of participants' retirement needs that resulted in policy changes, as shown below. In the United States, 401(k) plans typically offer only lump sums, leaving some participants at risk of outliving their savings. The U.S. Departments of Labor (DOL) and the Treasury (Treasury) have begun to explore the possibility of expanding options for participants, but have not yet helped plan sponsors address key challenges to offering a mix of options through their plan.
Countries reviewed used various strategies to increase participants' knowledge and understanding of spend-down options, which may be useful to DOL in its ongoing efforts. Strategies used by other countries include (1) communicating spend-down options to participants in an understandable and timely manner, and (2) helping participants see how their savings would translate into a stream of income in retirement by providing them with projections of retirement income in their annual benefit statements. Currently, 401(k) participants have difficulty predicting how long their savings will last because most benefit statements do not focus on the stream of income it can generate. DOL is currently considering including income projections in statements, which may help participants better understand what their balance could provide on a monthly basis once they retire.
Regulators in the countries GAO reviewed employed several approaches to overseeing the spend-down phase aimed at helping participants sustain an income throughout retirement. For example, most of the countries used withdrawal rules and restrictions for lump sums and programmed withdrawals to help protect participants from outliving their savings. With respect to annuities, DOL continues to consider current regulatory barriers that may prevent 401(k) plan sponsors from offering annuities, which do not exist in other countries. Looking at what other countries require may help DOL in its efforts.
Why GAO Did This Study
American workers are primarily saving for retirement through their 401(k) plans and will likely need assistance making complicated decisions about how to spend their money throughout retirement. Other countries with defined contribution (DC) systems are also dealing with this spend-down challenge. To identify lessons for the U.S. from the experiences of other countries, GAO examined selected countries' (1) approaches to offering retirement spend-down options; (2) strategies to help participants make sound decisions; and (3) approaches to regulating and overseeing options. An initial review of countries with established DC systems indicated that some countries including the six GAO selected--Australia, Canada, Chile, Singapore, Switzerland, and the United Kingdom--have developed innovative spend-down policies that have the potential to yield useful lessons for the U.S. experience. GAO reviewed reports on DC plans; and interviewed experts and government officials in the U.S. and selected countries.
Recommendations
GAO recommends that DOL and Treasury, as part of their ongoing efforts, consider other countries' approaches in helping 401(k) plan sponsors expand access to a mix of spend-down options for participants. GAO also recommends that DOL consider other countries' approaches in providing information about options and regulating the selection of annuities within DC plans. In response, DOL generally agreed with GAO's recommendations and will evaluate approaches.
For GAO-14-9 and interactive retirement materials, go to www.gao.gov/products/GAO-14-9.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of Labor | As DOL and Treasury continue their efforts to determine the actions needed to enhance the retirement security of 401(k) plan participants, DOL and Treasury should consider the approaches taken by other countries to formalize access to multiple spend-down options for U.S. plan participants that address varying retirement risks and needs. To the extent possible, lessons from other countries should be used to help DOL and Treasury ensure plan sponsors have information about their flexibilities and the ability to facilitate access to a mix of appropriate options for 401(k) plan participants. |
On July 2, 2014, The Department of the Treasury (Treasury) issued a final rule making it easier for 401(k) plan participants to purchase deeply deferred annuities, also known as qualified longevity annuity contracts. The final rule also represents an important step in a process, already taken in other countries, to move away from historical reliance on a single retirement option and instead offer access to a mix of retirement options. The final rule was informed in part by an evaluation of retirement options available to participants in the United States conducted jointly by Treasury and the Department of Labor. Treasury officials told us they also considered the experiences of the six countries we reviewed in finalizing the rule. The final rule revises Required Minimum Distribution rules stakeholders cited as a barrier to wider utilization of deeply deferred annuities. By removing this barrier, Treasury gives plan sponsors the ability to strengthen participant access to a mix of retirement options that can help retirees secure lifetime income.
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| Department of the Treasury | As DOL and Treasury continue their efforts to determine the actions needed to enhance the retirement security of 401(k) plan participants, DOL and Treasury should consider the approaches taken by other countries to formalize access to multiple spend-down options for U.S. plan participants that address varying retirement risks and needs. To the extent possible, lessons from other countries should be used to help DOL and Treasury ensure plan sponsors have information about their flexibilities and the ability to facilitate access to a mix of appropriate options for 401(k) plan participants. |
On July 2, 2014, The Department of the Treasury (Treasury) issued a final rule making it easier for 401(k) plan participants to purchase deeply deferred annuities, also known as qualified longevity annuity contracts. The final rule also represents an important step in a process, already taken in other countries, to move away from historical reliance on a single retirement option and instead offer access to a mix of retirement options. The final rule was informed in part by an evaluation of retirement options available to participants in the United States conducted jointly by Treasury and the Department of Labor. Treasury officials told us they also considered the experiences of the six countries we reviewed in finalizing the rule. The final rule revises Required Minimum Distribution rules stakeholders cited as a barrier to wider utilization of deeply deferred annuities. By removing this barrier, Treasury gives plan sponsors the ability to strengthen participant access to a mix of retirement options that can help retirees secure lifetime income.
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| Department of Labor | As DOL considers changes to participant benefit statements and other disclosures, the Secretary of DOL should consider strategies other countries have employed to help participants make sound decisions, such as providing timely information at or before retirement about available spend-down options and projections of future retirement income. |
DOL agreed that participants should have timely information at or before retirement about available spend-down options and projections of future retirement income. DOL had previously published an Advance Notice of Proposed Rulemaking soliciting public input on ways to show projections of lifetime income in retirement plan benefit statements. DOL also consulted with the ERISA Advisory Council on ways it could assist DOL in this area. The Council developed and submitted to DOL tips, principals, and samples for plan sponsors to consider when communicating with participants. In December 2019, Congress enacted the Further Consolidated Appropriations Act, 2020 (P.L. 116-94), which requires the disclosure of projections of future retirement income in participant benefit statements, setting forth the annuity equivalent of the participant's or beneficiary's total benefits accrued. DOL is required to issue model lifetime income disclosures to plan participants. Accordingly, DOL is developing model lifetime income disclosures that project future retirement income to help participants better understand their lifetime income streams so they can make sound decisions.
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| Department of Labor | As DOL continues to review regulatory barriers to lifetime income options for 401(k) plan participants it should consider other countries' approaches to plans offering annuities, such as their reliance on existing solvency requirements and insurance industry standards to provide assurances rather than place responsibility on plan sponsors to make an assessment of an annuity provider's financial stability. As DOL considers the approaches of other countries and continues to work with the National Association of Insurance Commissioners, which facilitates interactions between insurance companies and state insurance regulators, DOL may wish to consult with the Federal Insurance Office, which coordinates federal efforts on prudential aspects of international insurance matters. |
DOL worked with the Federal Insurance Office to clarify its existing guidance on selecting annuity providers, however, it did not move forward on a 2017 project recommended by Treasury to jointly develop proposals on how to establish or certify one or more expert, independent fiduciaries to assess the long-term financial strength of annuity providers. As a result, DOL did not consider the approaches of other countries-such as their reliance on existing solvency requirements and insurance industry standards to assess annuity providers-as part of a project that could have resulted in the development of similar, independent assessments of annuity providers in the United States. Instead, DOL classified this project as a long-term action. In December 2019, Congress enacted the Further Consolidated Appropriations Act, 2020, establishing a statutory safe harbor under which to select annuity providers for 401(k) plans. Among other provisions, the safe harbor allows plan sponsors to fulfill their fiduciary responsibilities to plan participants by selecting annuity providers that meet existing operating requirements and solvency standards maintained by States. The statutory safe harbor removes a regulatory barrier that may have prevented or discouraged 401(k) plan sponsors from offering annuities to participants. Specifically, it replaced a regulatory safe harbor that required sponsors to assess the financial stability of annuity providers. Some U.S. retirement experts and plan service providers told us this requirement may have made plan sponsors hesitant to offer annuities. The provisions of the statutory safe harbor also bring the standards for selecting annuity providers more in line with those of other countries we reviewed and negates the need for further action by DOL: the agency does not need to remove liability from plan sponsors, as we recommended.
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