The U.S. Government Accountability Office (GAO) talks about annuities in a new report on retirement income planning.

The GAO analyzed proposals for improving income planning literacy and promoting access to annuities through defined contribution plans at the request of Sen. Herb Kohl, D-Wis., chairman of the Senate Special Committee on Aging and other members of Congress.

Kohl and other lawmakers asked the GAO to look at how consumers are adjusting retirement planning in response to the decline in employer-sponsored defined benefit pension plans.

The GAO also analyzed proposals for adjusting tax policy to deal with the issues facing individuals in retirement.

“As life expectancy increases, the risk that retirees will outlive their assets is a growing challenge,” GAO officials say.

The shift from defined benefit pension plans to defined contribution plans “increases the responsibility for workers and retirees to make difficult decisions and manage their pension and other financial assets so that they have income throughout retirement,” officials say. “[To] help people make these often difficult choices, policy options proposed by various groups concerning income throughout retirement include encouraging the availability of annuities in DC plans and promoting financial literacy.”

Financial experts the GAO interviewed typically recommended that retirees systematically draw down savings and convert a portion of savings into an income annuity to cover necessary expenses, or opt for the annuity provided by an employer-sponsored defined benefit pension plan rather than a lump-sum withdrawal, officials say.

“Certain proposed policies seek to increase access to annuities in DC plans, which may be able to provide them at lower cost for some individuals,” GAO officials say.

However, “some pension plan sponsors are reluctant to offer annuities for fear that their choice of annuity provider could make them vulnerable to litigation should problems occur,” officials say.

Dirk Kempthorne, president of the American Council of Life Insurers (ACLI), Washington, says in a statement that the GAO report validates the role annuities can play in helping people secure a “paycheck for life.”

The GAO report “makes clear that annuities represent an opportunity for lifetime retirement income to supplement Social Security,” Kempthorne says.

The ACLI also supports efforts to increase individuals’ financial literacy, such as a proposal for requiring retirement plans to give each participant an estimate of the lifetime annuity income the participant’s assets could generate, Kempthorne says.

The GAO on Annuities

An excerpt from the report:

An immediate annuity can help to protect a retiree against the risk of underperforming investments, the risk of outliving one’s assets (longevity risk) and, when an inflationadjusted annuity is purchased, the risk of inflation diminishing one’s purchasing power.16 Researchers have concluded that annuities have important benefits. For example, according to one association of actuaries, it is more efficient to pool the risk of outliving one’s assets than to self-insure by accumulating enough assets to provide enough income in case one lives to a very old age.17 Annuities provide income at a rate that can help retirees avoid overspending their assets and provide a floor of guaranteed income to prevent unnecessarily spending too little for fear of outliving assets, according to one association. Annuities can also relieve retirees of some of the burden of managing their investments at older ages when their capacity to do so may diminish, which may also make them susceptible to fraudulent sales. On the other hand, annuities may be inappropriate or expensive for people who have predictably shorter-thannormal life expectancies. Likewise, funds used to purchase immediate annuities are no longer available to cover large unplanned expenses. Also, immediate annuities that provide for bequests have higher costs.18


16According to the Insured Retirement Institute, very few life insurance companies offer true inflation-protected annuities for sale in the United States.

17According to the American Academy of Actuaries, without pooling longevity risk, through an immediate annuity for example, a retiree would need to accumulate substantially more in savings to ensure not outliving his or her assets.

18Annuity providers may offer term-certain options or death benefit options for an additional cost.

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