Private Pensions: Participants Need Better Information When Offered Lump Sums That Replace Their Lifetime Benefits
Highlights
What GAO Found
Little public data are available to assess the extent to which sponsors of defined benefit plans are offering participants immediate lump sums to replace their lifetime annuities, but certain laws and regulations provide incentives for use of this practice. Although the U.S. Department of Labor (DOL) has primary responsibility for overseeing pension sponsors' reporting requirements, it does not require sponsors to report such lump sum offers, making oversight difficult. Pension experts generally agree that there has been a recent increase in these types of offers. By reviewing the limited public information that is available, GAO identified 22 plan sponsors who had offered lump sum windows in 2012, involving approximately 498,000 participants and resulting in lump sum payouts totaling more than $9.25 billion. Most of these payouts went to participants who had separated from employment and were not yet retired, but some went to retirees already receiving pension benefits. Sponsors are currently afforded enhanced financial incentives to make these offers by certain laws and regulations issued by the U.S. Department of the Treasury (specifically the Internal Revenue Service) governing the interest rates and mortality tables used to calculate lump sums.
Participants potentially face a reduction in their retirement assets when they accept a lump sum offer. The amount of the lump sum payment may be less than what it would cost in the retail market to replace the plan's benefit because the 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. Participants who assume management of their lump sum payment gain control of their assets but also face potential investment challenges. 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 reviewed 11 packets of informational materials provided by sponsors offering lump sums to as many as 248,000 participants and found that the packets consistently lacked key information needed to make an informed decision or were otherwise unclear. Using various sources, including financial advisors, federal agency publications, laws, and regulations, GAO identified eight key types of information that participants need to have a sound understanding of a lump sum offer. While GAO did not review the packets for compliance or legal adequacy, most packets provided a substantial amount of this key information. However, all of the packets GAO reviewed lacked at least some key information. For example, the relative value notices were often unclear about how the value of the lump sum compared to the value of the lifetime monthly benefit provided by the plan. Similarly, many packets did not clearly indicate the interest rate or mortality assumptions used, limiting participants' ability to assess how the lump sum payment was calculated. Further, few of the packets informed participants about the benefit protections they would keep by staying in their employer's plan—full or partial protections provided by the Pension Benefit Guaranty Corporation, the agency that insures defined benefit pensions when a sponsor defaults. This omission is notable because many participants GAO interviewed cited fear of sponsor default as an important factor in choosing the lump sum.
Why GAO Did This Study
Since 2012, a number of large pension plan sponsors have given selected participants a limited-time option of receiving their retirement benefits in the form of a lump sum. Although sponsors' decisions to make certain lump sum “window” offers may be permissible by law, questions have been raised about participants' understanding of the financial tradeoffs associated with their choice. GAO was asked to review critical issues associated with these types of offers.
This report focuses on 1) the prevalence of lump sum offers and sponsors' incentives to use them, 2) the implications for participants, and 3) the extent to which selected lump sum materials provided to participants include key information. To conduct this work, GAO identified sponsors offering lump sum windows and used social media to identify participants given offers. GAO reviewed 11 informational packets acquired through interviews with selected plan sponsors and participants. GAO also analyzed lump sum calculations and interviewed federal officials and pension experts.
Recommendations
GAO recommends that DOL improve oversight by requiring plan sponsors to notify the agency when they implement lump sum windows, and coordinate with Treasury to clarify guidance on the information sponsors provide to participants. Further, Treasury should reassess regulations governing relative value statements, as well as the interest rates and mortality tables used in calculating lump sums. Agencies generally agreed with GAO's recommendations.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of Labor | To ensure that federal regulators have better information about lump sum windows and to better ensure that participants have ready access to key information they need to make a decision when presented with a lump sum offer, the Department of Labor should require plan sponsors to notify DOL at the time they implement a lump sum window offer, including the number and category of participants being extended the offer (e.g., separated vested; retiree) as well as examples of the materials provided to them. |
The Department of Labor (DOL) agreed that this type of information may be helpful in determining the extent to which lump sum window offers are made, as well as the types of disclosures the participants receive. The SECURE 2.0 Act, passed in December 2022, requires notification and reporting similar to our recommendation. Specifically, the Act requires a plan administrator that amends a plan to provide a lump sum window to furnish a notice: (1) to each participant or beneficiary no later than 90 days before the participant may make the election; and (2) to the Secretary and PBGC no later than 30 days before the participant may make the election. In addition to the initial notice, the plan sponsor must also provide a post-offer report to the Secretary and PBGC no later than 90 days after the close of the window with the number of people who accepted the lump sum and such other information the Secretary requires. DOL is implementing the lump sum notice and reporting in the Act.
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| Department of Labor | To ensure that federal regulators have better information about lump sum windows and to better ensure that participants have ready access to key information they need to make a decision when presented with a lump sum offer, the Department of Labor should coordinate with the Internal Revenue Service and the Pension Benefit Guaranty Corporation (PBGC) to clarify the guidance regarding the information sponsors should provide to participants when extending lump sum window offers and place the guidance on the agency's website. Guidance should include clear and understandable presentations of information, such as the relative value of the lump sum, the role and level of protections provided by PBGC, and the positive and negative ramifications of accepting the lump sum. Such guidance could also include promising practices for information materials from plan sponsors which are particularly effective in facilitating informed participant decision-making. |
The Department of Labor (DOL) agreed with this recommendation, noting it is important to coordinate with the Treasury Department/IRS and PBGC to clarify the guidance regarding the information sponsors and other plan fiduciaries should provide to participants and beneficiaries when extending lump sum window offers. In 2016, the agency noted that the manner of publishing that guidance would be part of that coordination process. In addition, the agency noted that the 2015 ERISA Advisory Council announced that one of its projects concerns how to give participants effective notices and disclosures concerning lump sum window offers, including possible development of model participant notices. The 2015 Council developed recommendations and model notices on lump sum window offers in "pension risk transfer transactions," and suggested that DOL make the Model Notices available on its web site to plan sponsors and participant advocates and that plan sponsors use the Model Notices when engaging in risk transfer transactions. DOL posted the Model Notices and Disclosures for Pension Risk Transfers on its web page. Similar to other model communications developed by the 2015 Council, the agency believes the model notice could be further enhanced if subjected to broader public input from, for example, plan sponsors, participant advocates, communications experts, and academics. The SECURE 2.0 Act, passed in December 2022, requires notification and reporting similar to our recommendation for guidance. Specifically, the Act requires a plan administrator that amends a plan to provide a lump sum window to notify each participant or beneficiary, and the Secretary and PBGC before the participant may make the election. The plan sponsor must also provide a post-offer report to the Secretary and PBGC with the number of people who accepted the lump sum and such other information the Secretary requires. The notice to the Secretary and PBGC and post-offer report must be made publicly available. DOL is already implementing the lump sum notice and reporting in the Act. In August 2023, the Department issued a request for information to inform rulemaking regarding the notice. In particular, the Department asks commenters for input on the model notice developed by the 2015 ERISA Advisory Council. In addition, the model notice includes discussion of tax consequences and references IRS guidance, which should spur additional coordination consistent with our recommendation. In September 2024, DOL said it is reviewing and analyzing commenters' views on the SECURE 2.0 Act requirements on lump sums. We will continue to monitor for the release of final rulemaking.
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| Department of the Treasury | To provide participants with useful information and to provide for lump sums that are based on up-to-date assumptions, Treasury should review its regulations governing the information contained in relative value statements to ensure these statements provide a meaningful comparison of all benefit options, especially in instances where the loss of certain additional plan benefits may not be disclosed. |
Treasury generally agreed with this recommendation but did not provide specific comments on plans to address it. As of July 2023, Treasury has not implemented this recommendation.
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| Department of the Treasury | To provide participants with useful information and to provide for lump sums that are based on up-to-date assumptions, Treasury should review the applicability and appropriateness of allowing sponsors to select a "lookback" interest rate for use in calculating lump sums associated with a lump sum window that can serve to advantage the interests of the sponsor. |
Treasury generally agreed with this recommendation but did not provide specific comments on plans to address it. As of July 2023, Treasury has not implemented this recommendation.
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| Department of the Treasury | To provide participants with useful information and to provide for lump sums that are based on up-to-date assumptions, Treasury should establish a process and a timeline for periodically updating the mortality tables used to determine minimum required lump sums-- including a means for monitoring when experts' views may indicate that mortality tables may have become outdated, and for taking expedited action if warranted. |
Treasury generally agreed with this recommendation but did not provide specific comments on plans to address it. As of July 2023, Treasury has not implemented this recommendation.
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