WASHINGTON – In a welcome move by the Department of the Treasury and the IRS, the agencies released last week a notice to amend Treasury regulations to stop companies from offering lump-sum buyouts to retirees who are already receiving a monthly pension. 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.
“We are gratified that Treasury has moved to stop these lump-sum buyouts, which are truly among the most cynical and dangerous pension abuses we’ve seen,” said Norman Stein, senior policy advisor to the Pension Rights Center and a law professor at Drexel University. Earlier this year Stein authored a policy paper on lump-sum buyouts and annuity transfers (another form of so-called “de-risking” activities).
“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 Stein. “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. 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.”
Stein also noted that some retirees may be taken advantage of by unethical financial advisers who have an incentive to encourage them to choose the lump so they can financially profit from the resulting fees. And, by taking a lump sum, they lose any guaranteed benefit for their spouses, should they die first. In fact, he said, “offering a lump sum can be a form of corporate elder abuse.”
Since the first lump-sum buyout offers were made to retirees in de-risking transactions in 2012, the Pension Rights has strongly advocated that the Department of Treasury has the legal authority and the moral imperative to stop this practice.
“We are encouraged that the Department has come to a similar conclusion,” said Stein. “Treasury’s announcement is a wholly reasonable reading of the law that protects retirees, rather than those who seek to take advantage of them. We commend Treasury for its position.”
The new guidance will apply to plans going forward and not to employers that have amended their plans to make lump-sum buyout offers to retirees prior to July 9, 2015. For more information on lump sums, read Norman Stein’s policy paper on de-risking, check out our fact sheet, Should You Take a Your Pension as a Lump Sum?, and see our list of companies that have offered lump-sum buyouts. Read our testimony to the ERISA Advisory Council on protecting workers and retirees in lump-sum buyouts and other transactions.
# # #