And only 25 percent of all plans have adopted an in-plan annuity option to help participants create a predictable income stream in retirement, according to GAO's survey of 11 record keepers that represented 40 percent of all 401(k) plan assets and about one quarter of all plans at the end of 2014.

Stakeholders told the GAO that existing attempts by the U.S. Department of Labor and U.S. Department of Treasury to offer guidance facilitating wider adoption of formal drawdown strategies and in-plan annuities have so far failed to provide adequate assurances that sponsors can implement the options without increasing their fiduciary liability exposure.

Only one-quarter of large plans have an annuity option in place, while 54 percent of midsize plans and 22 percent of small plans do. The report speculates that the relatively larger percentage in-plan annuity offerings among midsized and smaller plans can be explained by the fact that insurance companies often provide recordkeeping services to those segments.

For all plan sizes, 14 percent of sponsors offer a fixed immediate annuity, and 10 percent offer a guaranteed minimum withdrawal benefit through a variable annuity. Stakeholders told GAO that the fixed immediate annuity is the most "straightforward" annuity option, and that their simplicity helps sponsors and plan advisors compare products. Other record keepers said more plans are likely to adopt a fixed annuity option because participants have an easier time understanding them.

Small and midsize plans are much more likely to adopt a guaranteed minimum withdrawal benefit annuity than are large plans.

Guaranteed minimum withdrawal benefits are hybrid insurance products that guarantee an income stream while allowing participants to remain invested in equity and bond markets after retirement. Some stakeholders said they can be difficult for sponsors and participants to understand, though acknowledged their unique benefits relative to immediate annuities.

Less than 1 percent of all plans reviewed by the GAO offer a deferred annuity, despite guidance from the Treasury Department in 2014 that said plan assets invested in qualified longevity annuity contracts, or QLAQs, are not subject to required minimum distribution regulations.

Legal risk deterring annuity adoption

Industry trade associations and other stakeholders told GAO that concern over legal liability is the greatest barrier to wider in-plan annuity adoption.

GAO surveyed 54 plan sponsors, 39 of which do not offer participants annuities. Of those not offering annuities, 26 sponsors cited potential liability as influencing the decision to not offer guaranteed income products.

The 2008 safe harbor promulgated by the Labor Department regarding sponsors' fiduciary obligations when selecting an annuity provider has failed to allay many sponsors' liability fears, GAO's report found.

Stakeholders said that the safe harbor, which requires sponsors to assess an insurer's ability to meet future obligations, as well as consider the cost and benefits of an annuity, is "not helpful," according to the report.

"Assessing the future financial health of an insurer can be a difficult task for a plan sponsor, and many plan sponsors responding to our survey indicated they would be more likely to offer an annuity if the benefits of the safe harbor were more readily attainable," the report said.

The Director of the Federal Insurance Office told GAO investigators that sponsors should be able to rely on ratings agency assessments of insurers to qualify for the safe harbor.

The sponsors that don't offer annuities overwhelmingly said they would be more likely to if a safe harbor included a list of insurance companies that would qualify as a prudent selection, a minimum rating an annuity provider must carry to qualify as a prudent selection, or documentation from providers asserting that criteria have been met by the sponsors in the selection process.

GAO's report draws a clear conclusion on the existing annuity selection safe harbor: "it does not provide sufficiently detailed criteria that plan sponsors feel they can use to obtain the liability protection it offers."

One Labor Department official told the GAO that the Employee Retirement Income Security Act's standard of prudence for plan sponsors requires they exercise some judgment in selecting an annuity provider, and that that standard precludes regulators from developing a "simple and easily verifiable checklist," according to the report.

GAO's report explores other barriers to wider annuity adoption, including the difficulty transferring annuitized assets if a sponsor changes a service provider, the cost of integrating plan recordkeeping systems with insurers' annuity platforms, potential conflicts service providers have when they also have a retail annuity business, and the lack of adequate education and advisory services to some plan participants.

Recommendations to DOL

The report recommends seven actions the Labor Department can take to facilitate wider annuity and savings withdrawal options.

One calls for clarifying the existing annuity selection safe harbor, and another calls for regulators to provide plan fiduciaries legal relief when they offer an adequate mix of annuity options and formal withdrawal strategies.

GAO also suggests record keepers include annuities from multiple providers on their platforms. Also, plan design should be encouraged to allow partial annuitization of assets, and participants should have access to an advisor expert in retirement income strategies.

And the GAO recommends regulators create a default lifetime income withdrawal option based on existing required minimum distribution regulations.

DOL in disagreement
 

In its response to the recommendations provided in the report, the Labor Department took issue with the report's core recommendations.

The agency said clarifying the annuity selection safe harbor to the extent recommended by GAO might "erode consumer protections by degrading the oversight of fiduciaries making such sections," according to the report.

The DOL suggests sponsors outsource the annuity selection process to a 3(38) fiduciary advisor.

But GAO said that service may not be available or affordable to the bulk of 401(k) plan sponsors. One plan consultant told GAO that they don't offer annuity selection services because the costs and liability risks of doing so are "prohibitive."