A Congressional watchdog is urging corporate defined benefit plans be required to make better disclosures when they offer lump sums payouts.
The General Accountability Office is asking the Department of Labor, the IRS and the Pension Benefit Guarantee Corporation to order plans that are considering lump sum offers to tell participants the relative value of the payments, the role and level of protections provided by PBGC, and the positive and negative ramifications of accepting the distributions.
In a report issued Thursday, GAO said it examined 11 information packets that sponsors sent to participants offering a lump sum window and found disclosure weaknesses in all of them.
GAO found lapses by companies regarding how the value of the lump sum compared to the value of the lifetime monthly benefit provided by the plan.
The agency also faulted the disclosures for not clearly indicating the interest rate or mortality assumptions used.
“Participants potentially face a reduction in their retirement assets when they accept a lump sum offer. In addition, some participants may not continue to save their lump sum payment for retirement but instead may spend some or all of it,” GAO wrote in the report.
Workers could end up with less money for retirement by taking a lump sum since the payout may be less than what it would cost to replace the original benefit. This is because 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.
GAO said the benefit for companies to offer lump sums is the move reduces their pension costs through a smaller number of workers on the plan and lower administration expenses.
“Lump sum windows also offer sponsors an opportunity to reduce oversized plan liabilities, such as in cases where the pension plan is large relative to the size of the plan sponsor’s business,” the researchers noted.
The full report can be viewed at 1.usa.gov/1MVwFz2.