Participant confusion about annuities, the varying prices and fine print that accompany existing products, and plan executives' worries about legal issues and fiduciary responsibility are impediments to offering lifetime income options in defined contribution plans, responses to the Labor Department show.

Some 700 companies, organizations and individuals responded to the DOL's request to answer 39 questions on how retirement plans can best help participants go from accumulating assets while they're working to guarding against outliving their assets after they retire.

For many major players in the defined contribution business, more government guidance and/or regulation is a remedy for their uncertainty. “We support prudent regulation,” Bertram L. Scott, an executive vp at TIAA-CREF, in Charlotte, N.C., said in an interview. “You have to have clarity.”

There's no guarantee, however, that the DOL will propose regulations, and there's no timetable for the department to act, a Labor Department spokeswoman said. “We wanted to find out what was going on in the marketplace,” she said. “There's no preconceived notion.”

The Labor Department's request for comments was spurred by the movement away from defined benefit plans in favor of defined contribution plans, the DOL said Feb. 2 in the Federal Register.

In addition, “many traditional defined benefit plans have converted to lump-sum-based hybrid plans, such as cash balance or pension equity plans, and many others have simply added lump-sum options,” the DOL said. The result is a “trend away from annuities toward lump-sum distributions,” placing greater planning responsibility on employees.

The number of lifetime income options offered by defined contribution plans is modest. A review of Towers Watson & Co.'s database of more than 1,400 large employers reveals only 20% to 25% offer the option, William B. Gulliver, managing director of North American retirement business in Stamford, Conn., said in formal comments to the DOL.

He also cited the firm's 2007 survey of 5,000 employees and retirees, which found that 10% of those covered by a defined contribution plan “expected or actually received some portion of their benefit as an annuity.”

Reasons for such a response could include lack of participant understanding, poor sponsor communication, mistrust of annuities and expectation of higher returns in other investments, he said.

“Our work with plan sponsors indicates a strong interest to offer lifetime options,” Mr. Gulliver said. However, “concerns and barriers that currently exist...have prevented plan sponsors from doing more in this area.”

TIAA-CREF, Towers Watson, the Spark Institute Inc., the American Council of Life Insurers, AARP, the Defined Contribution Institutional Investment Assn., the American Society of Pension Professionals and Actuaries and ING Group were among the respondents. Fiduciary responsibility was a concern of many, including a discussion of distinguishing participant education vs. investment advice.

“There are substantial regulatory constraints under ERISA, federal securities laws and state insurance laws that make it challenging for plan sponsors and providers to communicate effectively in "plain English' to participants about lifetime income solutions,” argued Larry H. Goldbrum, general counsel for the Simsbury, Conn.-based Spark Institute, in his organization's filing with the DOL. “Plan sponsors are also concerned about crossing the line from providing participant education to providing advice and becoming an investment fiduciary.”

Mr. Goldbrum's organization wants the Labor Department to provide guidance “specifically stating that providing information about lifetime income options, available both inside and outside of the plan, is not investment advice,” he said. Without that, he warned, plan sponsors “will most likely be unwilling to provide” any information that would cause them to add fiduciary responsibility.

ACLI expressed the same concerns. “A number of factors, including the current economic situation and lengthening life spans, have made it more important than ever to encourage employers to provide information about guaranteed lifetime income options and to educate their participants,” according to commentary filed by several executives for the Washington-based ACLI, including Walter Welsh, executive vp-taxes and retirement security.

However, “plan sponsors are concerned that providing participants with information outlining the advantages of guaranteed lifetime income options could cross the line” between education and advice, ACLI said.

“There are concerns that the investment education rules do not cover situations in which the plan sponsor provides information regarding the benefits and features of the plan's lifetime income options,” ACLI's comments said. ACLI wants this information to be treated as education—in the same manner that discussions about diversification, asset allocation and risk tolerance are treated by regulators as education.

One issue provoking extensive debate was a plan sponsor's responsibility for offering a lifetime income distribution option. Should plans be required to offer a choice, the DOL asked. Should a lifetime-income product be a default distribution option? Respondents' comments reflected subtle differences in supporting choices, requirements and mandates.

TIAA-CREF supports a requirement that defined contribution plans offer participants guaranteed lifetime income annuities “during the accumulation phase and as a distribution option at retirement,” Larry M. Chadwick, vp for government relations public policy, said in written comments to the DOL.

However, “we do not believe mandating annuitization or defaulting participants into a lifetime income option is an effective means of encouraging the use of annuities in retirement,” he added. “Participants should not be required to annuitize their entire retirement accumulation. All participants should have access to partial annuitization options.”

AARP endorses including a lifetime income option choice in defined contribution plans. Although requiring such a choice “would increase administrative costs, we believe that the cost increase would be small,” David Certner, legislative counsel and legislative policy director in Washington, said in the association's formal comments. “The disadvantages of a requirement would be outweighed by the advantages of making annuity and other lifetime income options more widely available.”

AARP suggests exploring defaulting a portion of a participant's account into a lifetime-income product on a trial basis. This “default trial lifetime income” option would give participants 24 months to decide if they like the annuity. If not, they can “take a lump sum after the trial period or...purchase an alternative product,” Mr. Certner wrote.

Although some insurers are examining this idea, “certain design and pricing issues still need to be worked out,” and such a product may require changes in ERISA rules, Mr. Certner added.

The Defined Contribution Institutional Investment Assn. believes using defaults in connection to lifetime income products “is critical, if not essential, to creating retirement income adequacy,” said Lew Minsky, Jupiter, Fla.-based executive director, in written comments. Although DCIIA wants government agencies to encourage the use of such options, it opposes a formal requirement.

And if a sponsor uses a default for a lifetime income product, it must give participants an escape clause. Participants should “have the opportunity to opt out of the default without penalty, both before the default action occurs as well as for some administratively reasonable period of time after it occurs,” Mr. Minsky wrote.

Lifetime income distribution options shouldn't be mandatory, but could be encouraged, according to ASPPA's response to the Labor Department. The Arlington, Va.-based ASPPA cited “administrative cost and complexity,” especially for small defined contribution plans, as roadblocks.

“The retirement income needs of participants are unique to each person so a blanket solution is unlikely to meet the needs of all participants,” said ASPPA's filing, signed by Executive Director Brian Graff and six other association executives. “Many of the retirement income products available today do not offer the flexibility of transferring to another investment without penalty, so defaulted participants would be at risk of being stuck in an unsuitable investment.”

The DOL could reconsider such a mandate if new products and new regulations made lifetime income options “less expensive, easier to administer and more flexible,” the association said.

ING supports defined contribution plans having “one or more” lifetime income distribution options, but it “would stop short of requiring their use,” said Robert G. Leary, CEO of ING U.S., and Catherine H. Smith, CEO of ING U.S. Retirement Service, in their formal comments to the DOL.

They cited feedback from clients and participants reflecting “a very strong preference for preserving choice and control over plan design and benefit distribution matters.” For many plan sponsors, they added, “the burdens of the fiduciary liability and additional administration associated with lifetime income options would be unwelcome.”

Robert Steyer is a reporter at Pensions & Investments, a sister publication of Business Insurance.