Pension Advance Transactions:

Questionable Business Practices Identified

GAO-14-420: Published: Jun 4, 2014. Publicly Released: Jul 7, 2014.

Multimedia:

  • GAO: Clip 1: Relationships among Pension Advance CompaniesVIDEO: Clip 1: Relationships among Pension Advance Companies
    GAO investigator phoned 19 pension advance companies, posing as a federal, military, or private-sector retiree receiving a pension, to request information about the companies and their pension advance products.
  • GAO: Clip 2: Credit Scores and Needs of Typical Potential Pension Advance CustomersVIDEO: Clip 2: Credit Scores and Needs of Typical Potential Pension Advance Customers
    GAO investigator phoned 19 pension advance companies, posing as a federal, military, or private-sector retiree receiving a pension, to request information about the companies and their pension advance products.
  • GAO: Clip 3: Comparing Pension Advances with Bank LoansVIDEO: Clip 3: Comparing Pension Advances with Bank Loans
    GAO investigator phoned 19 pension advance companies, posing as a federal, military, or private-sector retiree receiving a pension, to request information about the companies and their pension advance products.
  • GAO: Clip 4: Marketing Pension Advances to InvestorsVIDEO: Clip 4: Marketing Pension Advances to Investors
    GAO investigator phoned 19 pension advance companies, posing as a federal, military, or private-sector retiree receiving a pension, to request information about the companies and their pension advance products.
  • GAO: Clip 5: Differing Responses Regarding Whether a Pension Advance is a LoanVIDEO: Clip 5: Differing Responses Regarding Whether a Pension Advance is a Loan
    GAO investigator phoned 19 pension advance companies, posing as a federal, military, or private-sector retiree receiving a pension, to request information about the companies and their pension advance products.

Additional Materials:

Contact:

Stephen M. Lord
(202) 512-6722
lords@gao.gov

 

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What GAO Found

GAO identified at least 38 companies that offered individuals lump-sum payments or “advances” in exchange for receiving part or all of their pension payment streams. Eighteen of these companies were concentrated in one state, and 17 offered a range of other financial products in addition to pension advances. The 38 companies used multistep pension advance processes that included various other parties (illustrated below). At least 21 of the 38 companies were affiliated with each other in ways that were not apparent to consumers. All of the companies operated primarily as web-based companies, and some targeted financially vulnerable consumers with poor or bad credit nationwide.

Parties Involved in the Multistep Pension Advance Processes That GAO Reviewed

Parties Involved in the Multistep Pension Advance Processes That GAO Reviewed

GAO received offers from 6 out of 19 pension advance companies. These offers did not compare favorably with other financial products or offerings, such as loans and lump-sum options through pension plans. For example, the effective interest rates on pension advances offered to GAO during its undercover investigation typically ranged from approximately 27 percent to 46 percent, which were at times close to two to three times higher than the legal limits set by the related states on the interest rates assessed for various types of personal credit.

GAO identified questionable elements of pension advance transactions related to the disclosure of rates or fees, and certain unfavorable terms of agreements. The Bureau of Consumer Financial Protection (CFPB) and Federal Trade Commission (FTC) have oversight responsibility over certain acts and practices that may harm consumers. According to CFPB officials, CFPB's oversight has been limited to instances where products met certain characteristics. FTC officials stated that FTC has not taken any public enforcement actions because it has not received many complaints, among other reasons. Six other federal agencies have oversight over pensions and provide related education. These agencies provided limited consumer education regarding pension advance transactions, but almost all agreed that it would be beneficial. Consumers who are vulnerable to financial exploitation may lack the information needed to make sound decisions. CFPB facilitates coordinating federal financial education and could help ensure information reaches relevant pensioners.

Why GAO Did This Study

There have been recent concerns about companies attempting to take advantage of retirees using pension advances. GAO was asked to review business practices related to pension advances. This report (1) describes the number and characteristics of pension advance companies and marketing practices; (2) evaluates how pension advance terms compare with those of other products; and (3) evaluates the extent to which there is related federal oversight. GAO identified 38 pension advance companies and related marketing practices using company websites and nonpublic databases. GAO conducted a more-detailed nongeneralizable assessment of 19 of these companies selected based on factors such as marketing claims and presence of or lack of complaints. GAO used undercover investigative phone calls to identify additional marketing practices and to obtain pension advance offers. This information was compared with the terms of other financial products, such as personal loans. View videos of undercover investigative calls to selected pension advance companies. GAO also examined the role of selected federal agencies with oversight of consumer protection and pension issues.

What GAO Recommends

GAO recommends that CFPB and FTC review the pension advance practices identified in this report and exercise oversight or enforcement as appropriate. GAO also recommends that CFPB coordinate with relevant agencies to increase consumer education about pension advances. CFPB and FTC agreed with GAO's recommendations.

For more information, contact Stephen M. Lord at (202) 512-6722 or lords@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: In order to strengthen federal oversight or enforcement of pension advance products, the Director of CFPB should review pension advance practices, such as those highlighted in this report, and exercise oversight as appropriate.

    Agency Affected: Consumer Financial Protection Bureau

  2. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: In order to strengthen federal oversight or enforcement of pension advance products, the Chairwoman of FTC should review pension advance companies and the questionable practices that we highlight in this report, and exercise enforcement as appropriate.

    Agency Affected: Federal Trade Commission

  3. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: To help ensure that consumer-education materials on pension advances reach their target audiences, the Director of CFPB should, through the Financial Literacy and Education Commission, coordinate with the federal agencies that regularly communicate with pensioners--such as the Employee Benefits Security Administration, Department of the Treasury, Pension Benefit Guaranty Corporation, Office of Personnel Management, and Departments of Defense and Veterans Affairs--on the dissemination of existing consumer-education materials on pension advances.

    Agency Affected: Consumer Financial Protection Bureau

 

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