Although additional information on making comparisons may be useful for some retirees, it could also increase administrative burdens—while still not truly simplifying what amounts to a very complicated decision. The challenge is finding better ways to let participants make informed choices without introducing more confusion to the process. The actual future value of various payment options will always depend to some extent on somewhat unpredictable factors, such as future health, lifespan and investment performance. This article discusses three possible approaches, along with their potential advantages and disadvantages.

Current Regulations

Under current IRS regulations, plan sponsors must provide plan participants with the "financial effect upon the particular participant's annuity of making [an election under the Plan]." Additional regulations in effect after 1988 require that participants must be provided with "sufficient additional information to explain the relative values of the optional forms of benefit available under the Plan (e.g., the extent to which optional forms are subsidized relative to the normal form of benefit or the interest rates used to calculate the optional forms)."

Many plan sponsors comply with these regulations by using election forms that show the actual annuity and lump sum amounts that would be paid to the participant at retirement. Given that the eventual dollar value of any "subsidy" varies considerably with the participant's health, longevity expectation, tax situation and investment acumen, some would argue that providing detailed descriptions of actual annuity options should be sufficient.

However, one could also argue that providing such amounts does not sufficiently "explain the relative values of the optional forms of benefit available," because ascertaining the value of annuities is very complicated. Without additional clarifying information, some employees may not fully appreciate the value of different annuity forms.

Is a Lump Sum Comparison the Answer?

One approach for simplifying comparisons between annuity amounts and lump sum payments is communicating the approximate cost of buying various annuity options from an insurance company. This approach certainly provides additional information, but may not be as helpful in the decision-making process as some would imagine.

For example, assume that a 60-year-old retiree has the following options:

Life Annuity: $700/month payable over the retiree's life

J&S Annuity: $560/month payable for the retiree's life and that of the spouse

Lump Sum: $60,000 in a single payment

Assume further that the employee is told that the value of the life annuity is $80,000 and the value of the joint and survivor (J&S) annuity is $90,000. There are several factors—most of them unknown to the employer—that could prompt the employee to choose one option over another. For example:

• If the employee is in poor health, she probably should choose the J&S annuity or lump sum, rather than the life annuity.
• If the employee's spouse is in poor health, the J&S annuity might be a poor choice—even though it has the most face "value."
• If the employee is a knowledgeable and skillful investor, the lump sum may be the best choice—even though it has the lowest "value."
• If the employee is a poor investor, or lacks the discipline to draw down investments over time, perhaps the lump sum should be avoided—even if this option has the highest "value" using some standardized valuation basis.
• If the employee plans to continue working, the lump sum may be the best choice, since it can be rolled over into a tax-deferred vehicle, whereas either annuity would generally be taxed. This may be true even if the lump sum is less than the "value" of either of the annuities.

Is a Payout Comparison the Answer?

A second approach would be to tell retirees how long their lump sum payment is likely to last if it's rolled over into an IRA, with annual payments from the IRA equal to those provided by the annuity. For example, using the above illustration again, the plan sponsor would provide a "relative value" communication:

Lump Sum Invested at	6%	8%	10%
Number of payment years @ $700/month	10	12	14

By comparison, the life expectancy for a 60-year-old male under a standard mortality table is 20 years and the life expectancy for a 60-year-old female under the same table is 25 years. This appears to have an advantage over the first approach in that it provides participants with a better sense of some of the variables involved in the decision.

Is Software the Answer?

As employees become more comfortable with new technology, modeling software may become the best way to answer retirement-option questions. Using software tools (or even paper worksheets), employees can select the parameters most suited to their unique situations. In fact, these tools could be designed independently of any specific plan provisions, and could allow participants to mix and match benefits from a variety of different sources. This could be especially helpful if both the husband and the wife are retiring from different plans at the same time.

Making Informed Choices

Choosing from a variety of different options is inherently an apples-to-oranges comparison, but consumers routinely choose from dissimilar options every day, when they decide to lease rather than buy their car, or choose one form of insurance over another.

Employees who are uncomfortable choosing their retirement options alone should consult with a financial professional, such as an accountant, banker or investment professional. Many plan sponsors already strongly encourage employees to talk with an outside professional advisor before choosing a benefit option. Having the plan sponsor advise employees, or even be required to provide extraneous information that could bias an employee toward one option, could get employers into trouble if a decision turns out to be "wrong" because the employee lives 15 years past actuarial predictions or her investments fall flat.

Employers need to provide employees with a clear statement of exactly what the plan provides—often determined in accordance with complex laws and regulations—and any other relevant information that can help employees make their own informed decisions. But the decision itself should then belong to the employee and his independent advisors.