The IRS and U.S. Treasury Department have banned lump-sum pension buyouts, like the ones offered to GM and Ford retired employees, starting July 9, 2015, according to a notice from the two agencies.
The new prohibition applies to potential future offers, not to offers that have already been accepted, and only applies to those retired employees who are already receiving benefits. Offers can still be made to working employees.
The move is a welcome change, according to the Pension Rights Center, which called the lump-sum buyouts “one of the most cynical and dangerous pension abuses we’ve seen.”
The buyouts are often part of the negotiations when a company is reorganizing financially as a means of "de-risking" the pensions plans, says U.S. Sen. Ron Wyden of Oregon, chairman of the Senate Finance Committee, who has been pushing for this change since the offers were first being made in 2012. Employers undertake de-risking transactions to mitigate future pension funding risk.
Forty-four million workers and retirees have defined benefit plans that could be jeopardized by these transactions, Wyden said in a letter to the Department of Treasury and others.
In addition, the Pension Rights Center “has been critical of these transactions, which erase the federal private pension protections of ERISA, turn guaranteed lifetime retirement income into a one-time chunk of money that can easily be outlived, and often result in a significant loss of retirement wealth for elderly Americans,” the center said.
“The offer of a lump sum can create considerable confusion and anxiety for older Americans, who are often not in a position to appreciate the risks they face and the losses they might suffer,” says Norman Stein, senior policy advisor to the Pension Rights Center and a law professor at Drexel University.
“Retirees who choose a lump sum have to invest the money at the same time they are drawing it down, which is even harder than investing money before retirement,” he adds. “They will have to pay new fees, which will reduce their account balance, and fluctuations in the markets can destroy their investment portfolio with no time to make up the losses.”