Lump sum pension offers: Don’t count on your employer for advice

If you are due a pension from a former employer, there is a good chance you were or soon will be offered a lump-sum payment in exchange for giving up that guaranteed monthly check for life.

Should you take it? Probably not, but making a smart decision depends on a complex set of assumptions about future interest rates, possible rates of market returns and your longevity. It is a tough analysis unless you have an actuarial background.

Unfortunately, employers are not providing enough information.

That is the conclusion of a recent review by the U.S. Government Accountability Office of 11 lump-sum-offer information packets provided to beneficiaries by pension plan sponsors.

The key failings included unclear comparisons of the lump sum’s value compared with the value of lifetime pension payouts. Also lacking were many of the explanations of mortality factors and interest rates used to calculate the lump sums.

Even more worrisome was missing information about the insurance guarantees that probably would be available to participants from the Pension Benefit Guarantee Corp in the event of a sponsor default.

That is a major problem because fear of pension failure is one of the biggest factors driving participants to accept lump-sum offers. Having PBGC insurance is like having your bank deposits guaranteed by the Federal Deposit Insurance Corp; if a plan fails, most workers receive 100 percent of the benefits they have earned up to that point. “I call PBGC the FDIC of pensions,” says Steve Vernon, an actuary and consulting research scholar at the Stanford Center on Longevity. “It’s a credible guarantee, so long as your monthly benefit is below the PBGC maximum, as it for the vast majority of workers.” (The maximum guaranteed PBGC benefit for a 65-year-old retiree in a single-employer plan this year is increased $60,136.)

Twenty-two percent of sponsors say they are “very likely” to make lump-sum offers to former, vested workers this year, up from 14 percent in 2014, according to a study by Aon Hewitt, the employee benefit consulting firm.

But better information alone is not likely to lead to better decisions, says Norman Stein, a professor at the Thomas R. Kline School of Law at Drexel University and an expert on pension law. Stein notes that the decision usually is made on pure emotion. And lump sum offers often are made to retirees well into their eighties – a time of life when cognitive issues can get in the way of good financial decisions. “Some of these decisions are being made by people with diminished mental capacity,” he says.  “I call it a form of elder financial abuse.” – some of these offers are being made to people80/85. by time they are at 85, ⅓ have mental impairment.

Or, as Steve Vernon puts it in a blog post today at CBS MoneyWatch:

Unless you’re an actuary, this information might as well be describing the mathematics behind the theory of relativity or quantum mechanics. Most people simply don’t understand the implications of the assumptions the plan sponsor uses to calculate the lump-sum payment.

Steve should know; he is an actuary and consulting research scholar at the Stanford Center on Longevity.

Read more about the GAO findings in my column today at Reuters. Also check out Vernon’s free guide to lump sums.

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