Pension-plan participants often receive too little information when they’re offered a lump-sum payment that replaces their lifetime benefits, according to a report from the Government Accountability Office.
Sponsors, especially those with underfunded pensions, have been turning to lump-sum payments in greater numbers in the past few years, prompting Rep. Sander Levin, D-Michigan, ranking member of the House Committee of Ways and Means, and Rep. George Miller, D-California, who’s now retired, to ask the GAO to review the trend.
Consumer advocates say participants potentially face a reduction in their retirement assets when they accept a lump-sum offer. Also, participants who assume management of their lump-sum payment often face potential investment challenges. And some participants may not continue to save their lump-sum payment for retirement but instead may spend some or all of it.
Also read: Surge in lump-sum payouts projected
The GAO said its own data showed 22 sponsors offered lump-sum windows to separated employees or to retired employees in 2012, but the report also cited estimates from private consulting firms suggesting nearly 200 companies offered them during that year. The instances studied by the GAO resulted in payouts totaling more than $9.25 billion.
Beyond that, little data exists on lump-sum buyouts, said the report. The Department of Labor has not required sponsors to report details of the offerings, though a proposed rule from the Pension Benefit Guaranty Corp. would change that.
The GAO was able to review the information packets 11 sponsors offered to as many as 248,000 participants in 2012.
While all of the packets included legally required information, the GAO also found they all “lacked important information that could have helped participants.”
The IRS, which sets the interest rate and mortality table which sponsors use to calculate the legal minimum of the lump-sum payment, mandates sponsors provide specific information to participants when they offer the buyouts.
Notices on the tax implications of a lump-sum, rollover options, and a statement comparing the relative value of the lump-sum to the original value of the monthly pension benefit are all required.
But the GAO found that that information, even when fully provided as required, “may not be sufficient to enable participants to make an informed decision.”
Only two of the reviewed packets fully explained how the lump-sum had been generated.
And only two of the packets addressed the fact that PBGC protections would be waived if the lump-sum were accepted.
Most of the participants who accepted lump-sum payouts told the GAO that they did so for fear their employer would not be able to honor future pension obligations. Most of the participants who rejected a lump-sum offer said they did so because they felt the value was “unfair or not to their benefit.”
The report suggested rising PBGC premiums, advantageous interest rates, and the fact that new, longer mortality assumptions will likely not be applied to lump-sum calculations until 2016 could encourage sponsors’ interest in offering lump-sum payouts.
Beyond recommending that DOL improve oversight by requiring plan sponsors to notify the agency when they offer lump-sum windows, the GOA said the Treasury Department should reassess regulations governing relative value statements, as well as the interest rates and mortality tables used in calculating lump sums.
The agencies involved generally agreed with the GAO's recommendations, it said.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
