Towers Watson Embraces Voluntary Lifetime Income Options in Defined Contribution Plans

NEW YORK, May 20 /PRNewswire-FirstCall/ -- The U.S. legislative and regulatory framework should facilitate and encourage offering lifetime income options for participants in defined contribution (DC) plans, such as 401(k)s, but the creation of related mandates should be avoided, according to Towers Watson (NYSE, Nasdaq: TW), a global professional services company.

In February, the Employee Benefits Security Administration (a division of the Labor Department) and the Internal Revenue Service (a division of the Treasury Department) issued a request for information seeking comments on the use of annuities and other lifetime income arrangements in corporate retirement plans. The request for information is part of the two federal agencies' efforts to promote retirement security for American workers.

In a seven-page comment letter, William B. Gulliver, managing director of Towers Watson's North American Retirement Business, said the company supports the use of lifetime income options in DC plans, but given their cost and complexity, offering these arrangements should be a plan sponsor design decision as it has been historically. Additionally, if a plan sponsor decides to offer a lifetime income option, there should be no requirement that the option be used as the default distribution option in DC plans with automatic enrollment features. The plan sponsor, however, should have the freedom to make a lifetime income option the default distribution if it so chooses, noted Gulliver.

In response to several questions about retirement plan participants' demand for lifetime income options, Gulliver commented that while roughly one out of four employers with DC plans currently offer a lifetime income arrangement, interest among plan participants is low. He cited several potential reasons for plan participants' low interest in annuities, including a lack of understanding of how these products work, counterparty risk, participants' desire for flexibility and pricing, the availability of other retirement income including Social Security, and the lack of effective communication.

"We believe that education is essential in helping participants to make the choice that is right for them regarding distribution options. Annuities are complex financial instruments that have embedded investment, credit and other risks, and participants are often not well equipped to understand and evaluate them. We also believe that the government could play a role in the education process by establishing model notices to explain the general trade-offs between annuities and lump sums, while employers can assist with communication by describing particular options that are available under their retirement plans," commented Gulliver.

"The exposure of retirees to the risk of outliving their retirement savings is significant and increasing in importance. In fact, this is one of the primary disadvantages of DC plans as compared to defined benefit plans. Lifetime options have a lot to offer and can be an integral part of a retiree's asset distribution strategy; however, the purchase of life annuities should be facilitated through employers -- and not required," concluded Gulliver.

Among the other key comments Towers Watson included in its formal response:

• A plethora of insurance products are now available in both the institutional and retail markets to provide lifetime payments in retirement, although the value proposition is not obvious in the institutional marketplace.
• Towers Watson does not believe that disclosing the income stream that can be provided from an account balance should be mandated. Instead, the firm supports renewing efforts to enhance retirees' and early retirees' understanding of annuity options, as well as the creation of pilot programs to test the effectiveness of income-stream communications.
• The biggest perceived regulatory and legal risk related to offering lifetime income options is potential fiduciary liability. Towers Watson believes that specific and definitive ways in which the sponsor can fulfill its fiduciary obligations should be provided by the DOL.

Copies of the complete response by Towers Watson can be found at http://www.towerswatson.com/retirement-income-options.

About Towers Watson

Towers Watson (NYSE, Nasdaq: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at towerswatson.com.

SOURCE Towers Watson