The administration of ERISA is divided among three federal agencies: the  Department of Labor (DOL), the Department of the Treasury (specifically  the Internal Revenue Service ), and the Pension Benefit Guaranty  Corporation (PBGC). Little Is Known about the Extent of Lump Sum Windows, though Cost-Saving Incentives May Be Encouraging Sponsor Use

Data are lacking about the prevalence of lump sum windows, as there are  no requirements that sponsors report when they use this practice. The offers we identified included offers made to separated  vested participants not yet receiving benefits, as well as offers targeted to  retirees who were already receiving benefit payments. These include changing federal laws and regulations governing  the interest rates and mortality tables used to calculate lump sums, and  those affecting PBGC premium rates. Nevertheless, pension experts generally agree that sponsors’ use of lump  sum windows has become more frequent in recent years. time, these 22 cases alone involved offers to approximately 498,000  participants. Ability to Choose a “Lookback” Rate  One longstanding IRS rule that can sometimes provide a significant  financial incentive for offering a lump sum window is the provision that  permits plan sponsors to select the interest rate used for lump sum  calculations from up to 17 months prior to the month of the lump sum  offer. Differences between Retail and Plan Annuities

Using the lump sum to purchase a retail annuity could result in  significantly less annuity income than what would have been provided by  the plan because different factors are at play for sponsors converting  pension annuities to lump sums than for insurance companies selling   Insurers in the retail market use  lifetime annuities on the retail market.different interest rate assumptions and mortality tables than those used  by plan sponsors to calculate minimum required lump sums, and also  include other factors such as profit margins in their pricing. Using Lump Sums for Immediate Expenditures May Have Benefits but also Consequences for Retirement

One of the most critical decisions that participants must make with their  lump sums is whether they will continue to manage their lump sum  payments as part of their retirement planning goals. Participants Need Information in Eight Key Areas to Make an Informed Decision

Based on a review of publications by federal agencies, the ERISA  Advisory Council, financial advisors, investment firms, financial services  firms, and participant advocacy groups, as well as relevant federal laws  and regulations, we identified eight key areas of information that  participants need to weigh their options and determine what is in their  best interest when faced with a lump sum window offer (see table 1). Materials Provided by Sponsors Lacked Key Information That Could Have Helped Participants

In our review and analysis of 11 packets of information that sponsors— representing about 248,000 participant offers—provided to participants  regarding a lump sum window offer, we found that all of the packets  lacked important information that could have helped participants. Key Factor #2: Lump Sum Calculation

With respect to the lump sum calculation, we found that the information in  only 2 of the 11 packets fully explained how the lump sum had been  generated, providing sufficient information to facilitate an understanding  of the interest rate, mortality table, and benefit used by the sponsor. The  remaining 9 packets lacked some key information used in calculating the  lump sum amount, such as the interest rates or mortality assumptions. GAO did not consider the inclusion of these interest rates sufficient for participants’  purposes in assessing the lump sum offer. In addition, in many (5 of 11) of the packets, the relative value statements  compared the lump sum payment amount to the value of an immediate  annuity starting at the same time as the lump sum payment would occur,  but not the value of the deferred annuity available when the participant  reached full retirement age, often at age 65. could lose some or all of their benefits. Specifically, most participants accepting the lump sum offer were  motivated by fear that retaining their annuity would hurt their prospects for  a secure retirement (10 of 15), either because the pension plan would  default on its promise (10 of 15) or because the plan sponsor would not   In contrast, many  manage the pension benefits responsibly (6 of 15).participants who chose to reject the lump sum offer indicated that their  retirement might be more secure if they retained their annuity. DOL agreed with the second recommendation on coordinating with  Treasury (including IRS) and PBGC to clarify guidance regarding  information sponsors should provide to participants when extending a  lump sum window offer. Appendix I: Objectives, Scope, and Methodology

Our objectives were to examine 1) the extent to which sponsors of  defined benefit plans are transferring risk through the use of lump sum  windows, and the incentives for sponsors to take such actions, 2) the  implications for participants who accept a lump sum payment, and 3) the  extent to which sponsors’ lump sum window informational materials  enable participants to make an informed decision. Prior to  identifying these actions, we asked relevant federal agency officials and  pension experts what sources of information were available and we were  told such sources were limited. As noted earlier, this review was an information review and did not  constitute a compliance or legal review.
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.

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.

What GAO Recommends

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.