<nobr>Sep 14, 2010</nobr>

ERIC Urges Agencies to Focus Lifetime Income Effort on Education, Genuine Safe Harbor, and Avoid Mandate of Annuities

ERIC News Release
For Immediate Release: September 14, 2010

Washington, D.C. -- Allison Klausner, Assistant General Counsel (Benefits) for Honeywell International Inc., testified today on behalf of The ERISA Industry Committee (ERIC) before the Departments of Labor and Treasury joint hearing on issues regarding lifetime-income options for participants and beneficiaries in retirement plans.

Klausner, commending the Agencies for addressing issues associated with the distribution of defined contribution plan assets, urged them to embark on an educational initiative to help employees and retirees understand the potential benefits and risks of investing in annuity contracts, as well as address employers' fiduciary concerns.

Klausner explained that over the past decade there has been a significant movement away from defined benefit (DB) arrangements to defined contribution (DC) plans, resulting in employees having greater responsibility for their retirement planning decisions. She noted that most participants choose lump-sum distributions rather than annuities or installments, subjecting themselves to the risk of overspending or outliving their retirement savings.

"Without a doubt, a growing body of research suggests that employees (our future retirees) would be well advised to address these risks by including one or more annuity contracts in their investment portfolio. The mismatch between the academic research and employee behavior may be attributable to employees' lack of information and understanding. Many employees don't understand what annuities are, how they might be helpful, or what they are paying for in choosing an annuity," Klausner said.

Klausner warned, however, that, "[m]ajor employers would like to help employees but are concerned that any assistance that they provide will expose them to fiduciary liability under ERISA -- that no good deed will go unpunished." She urged that the Department of Labor clarify that employers can aid employees in choosing a distribution option without subjecting themselves to fiduciary liability and litigation.

Klausner also charged that the proposed safe harbor was inadequate and that DOL should establish a "genuine safe harbor" under the regulation regarding the selection of annuity providers to make benefit distributions from DC plans. Klausner said that, while DOL has characterized its regulation as a safe harbor, it is "laced with critical but vague terms that require subjective judgments." She suggested that a genuine safe harbor be based on objective and uniformly applicable criteria, such as approval by an independent fiduciary that meets criteria specified by the DOL or the issuer's receipt of a given rating by one or more rating agencies approved by the DOL.

Addressing whether DC plans should be required to offer in-plan lifetime distribution options, Klausner said that, "[e]xperience has shown that offering in-plan annuity distribution options is not attractive to employees and just doesn't work."

Klausner pointed to the vast majority of DB plan participants who elect a lump-sum option even though an annuity is the default option, saying that "[t]his DB experience indicates quite persuasively that requiring DC plans to offer annuity distribution options would be a pointless and costly exercise and, for many employers, yet another disincentive to offering a plan."

"By contrast," she said, "it remains appropriate to permit the distribution of DC plan assets be in the form of a lump sum and, to the extent retirees choose to have their benefits paid in the form of annuity, to permit the retirees to roll their lump sum into a vehicle outside the employer-sponsored plan that supports a lifetime stream of income."

A link to ERIC's testimony appears below.

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For more information:
Ted Godbout
Director, Communications
The ERISA Industry Committee
1400 L Street, NW, Suite 350
Washington, DC 20005
Phone: 202-789-1400
tgodbout@eric.org
www.eric.org

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The ERISA Industry Committee (ERIC) is a non-profit association committed to representing the advancement of the employee retirement, health, and compensation plans of America's largest employers. ERIC's members provide benchmark retirement, health care coverage, compensation, and other economic security benefits directly to tens of millions of active and retired workers and their families. ERIC has a strong interest in proposals affecting its members' ability to deliver those benefits, their cost and their effectiveness, as well as the role of those benefits in the American economy.

Text Files:

ERIC Testimony
Websites:

ERIC May 2010 Submission to DOL Request for Information

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