GAO Looks At Lump Sum Pension Payouts

By Arthur D. Postal
InsuranceNewsNet

WASHINGTON – The Government Accountability Office (GAO) is questioning whether pension plan beneficiaries are doing the right thing by taking lump sum payments in lieu of lifetime annuities. The office is asking government agencies to take steps designed to make beneficiaries more cautious about taking lump sum payments.

The GAO report indicated that there is not enough information about this issue to question how widespread the practice of taking lump sum payments is. However, it cautioned that by taking the lump sum, plan participants potentially face a reduction in their retirement assets. 

One problem the GAO identified is that certain laws and regulations provide incentives for this practice. The report said retirement plan sponsors currently are afforded enhanced financial incentives to make these offers through certain laws and regulations issued by the Internal Revenue Service governing the interest rates and mortality tables used to calculate lump sums.

The GAO found that the amount of the lump sum payment may be less than what it would cost in the retail market to replace the plan's benefit. This is because the mortality and interest rates used by retail market insurers are different from the rates used by sponsors, particularly when calculating lump sums for younger participants and women.

“Participants who assume management of their lump sum payment gain control of their assets but also face potential investment challenges,” the study found. In addition, the GAO said, “some participants may not continue to save their lump sum payment for retirement but instead may spend some or all of it.”

The GAO reviewed 11 information packets provided by sponsors offering lump sums to as many as 248,000 participants. The agency found that “the packets consistently lacked key information needed to make an informed decision or were otherwise unclear.”

To deal with it, the GAO made several recommendations in its study. The first is that the Department of Labor (DOL) improves its oversight by requiring plan sponsors to notify the agency when they implement lump sum windows.

The next recommendation is that the DOL coordinate with the Treasury Department to clarify guidance on the information sponsors provide to participants. In addition, the GAO recommended 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 report noted that both the DOL and Treasury generally agreed with the GAO’s recommendations.

Although the DOL has primary responsibility for overseeing pension sponsors’ reporting requirements, it does not require sponsors to report such lump sum offers, making oversight difficult, the report said.

Pension experts with whom the GAO consulted “generally agree” that there has been a recent increase in these types of offers, the GAO report said. The GAO said it identified 22 plan sponsors who had offered lump sum windows in 2012. These plans have approximately 498,000 participants, resulting in lump sum payouts totaling more than $9.25 billion.

The report said most of these payouts went to participants who had separated from employment and were not yet retired, but some went to retirees already receiving pension benefits.

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].

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