If the Government Accountability Office (GAO) has its way, plan sponsors will have a new reporting obligation to the Department of Labor.
Specifically, GAO recommends that DOL improve oversight by requiring plan sponsors to notify the agency when they implement lump sum windows, and coordinate with Treasury to clarify guidance on the information sponsors provide to participants.
The GAO report notes that, since 2012, a number of large pension plan sponsors have given selected participants a limited-time option of receiving their retirement benefits in the form of a lump sum. While those decisions are permitted by law, GAO said that “questions have been raised about participants’ understanding of the financial tradeoffs associated with their choice.” Last fall, a couple of U.S. Senators also called for better disclosures on pension de-risking.
What GAO Found
GAO says it identified 22 plan sponsors who had offered lump sum windows in 2012, involving approximately 498,000 participants and resulting in lump sum payouts totaling more than $9.25 billion. 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.
GAO reviewed 11 packets of informational materials provided by sponsors offering lump sums to as many as 248,000 participants and found that the packets consistently lacked key information needed to make an informed decision or were otherwise unclear. Specifically, GAO identified eight key types of information that it said participants need to have a sound understanding of a lump sum offer, and noted that while most of the packets it reviewed provided a substantial amount of this key information, all lacked at least some key information.
For example, GAO said that the relative value notices were often unclear about how the value of the lump sum compared to the value of the lifetime monthly benefit provided by the plan, and that many packets did not clearly indicate the interest rate or mortality assumptions used, limiting participants' ability to assess how the lump sum payment was calculated.
Few of the packets informed participants about the benefit protections they would keep by staying in their employer's plan — full or partial protections provided by the Pension Benefit Guaranty Corporation, the agency that insures defined benefit pensions when a sponsor defaults. GAO said that this omission, in particular, was of concern because many participants GAO interviewed cited fear of sponsor default as an important factor in choosing the lump sum.
De-Risking Considerations
GAO acknowledged that plan sponsors are currently afforded “enhanced financial incentives” to make these offers by certain laws and regulations issued by the U.S. Department of the Treasury (specifically the Internal Revenue Service) governing the interest rates and mortality tables used to calculate lump sums. Indeed, the report said that “substantial financial advantages exist for plan sponsors considering implementing lump sum windows,” both in terms of reducing the size of the pension plan, and the potential reduced financial volatility for the sponsor’s cash flow, income statement, and balance sheet, as well as reduced administrative burden and costs.
The GAO report also noted that changing federal laws and regulations concerning interest rates, mortality tables, and PBGC premiums may be providing additional cost-saving incentives for more plan sponsors to offer lump sums to their plans’ participants in recent years, and that certain longstanding rules can also afford savings to sponsors by allowing them to offer lower lump sums by choosing an advantageous interest rate and excluding certain additional plan benefits, such as early retirement subsidies, when calculating lump sums.
On the other hand, GAO explained that participants potentially face a reduction in their retirement assets when they accept a lump sum offer, that the lump sum payment may be less than what it would cost in the retail market to replace the plan's benefit due to different mortality and interest rates used by retail market insurers, particularly when calculating lump sums for younger participants and women. They also noted that participants who assume management of their lump sum payment gain control of their assets but also face potential investment challenges, and that some may spend, rather than save some or all of the distribution.
Additionally, GAO advised that Treasury should reassess regulations governing relative value statements, as well as the interest rates and mortality tables used in calculating lump sums.
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