Benefits and Compensation

GAO Urges DB Sponsors to Add Information for Participants Considering Lump-Sum Offers

Packets being given to retirees and separated, vested employees considering taking an immediate lump-sum distribution from their former employer’s defined benefit retirement plan rather than continuing lifetime income benefits routinely lack some key information needed to make an informed decision, or were unclear, according to the U.S. Government Accountability Office in a recent study.

With this in mind, the agency called on the U.S. Department of Labor to require plan sponsors to notify DOL when they implement so-called lump-sum windows for such offers, a step not currently required but also proposed for reporting to it in September 2014 by the U.S. Pension Benefit Guaranty Corp. GAO also recommended clarified guidance for what information plan sponsors should provide when offering to transfer their pensions to an annuities provider, which could lead to the need for DB plan sponsors to revise their lump-sum offer information packets.

The GAO study, released in January, was commissioned by the U.S. House of Representatives’ Ways and Means Committee in the face of increasing numbers of sweeping lump-sum offers being made by large corporations attempting to shed expensive long-term pension benefit obligations. Frequently, retirees or separated employees take up the offers to cash out but then face a potential reduction in their long-term retirement assets because of differences in the retail insurers’ calculation of their benefit, or due to investment challenges after the they take control of their retirement assets.

Focus of GAO Report

The report on GAO’s study focuses on the:

  1. prevalence of lump-sum offers and sponsors’ incentives to use them;
  2. implications for participants; and
  3. extent to which selected lump-sum materials given to those considering the option contain key information.

The agency identified 22 plan sponsors that had offered lump-sum windows in 2012, involving approximately 498,000 participants and resulting in payouts totaling more than $9.25 billion. Most of the distributions went to former employees who were not yet retired, but some went to retirees already receiving pension benefits. A number of large corporations have since announced multibillion-dollar pension transfer or buyout offers, with the most recent in early 2015 including Kimberly-Clark Corp., seeking to reduce its pension liabilities by $2.5 billion by shifting them to an insurer and Alcatel-Lucent announcing it has expanded a lump-sum offer to 32,000 more participants.

Plan sponsors are “afforded enhanced financial incentives” to make such offers by tax laws and regulations issued by IRS that govern interest rates and mortality tables used to calculate lump sums, GAO said.

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