GAO Finds Lump-Sum Information Materials Deficient

The Government Accountability Office (GAO) says it reviewed 11 packets of informational materials provided by defined benefit (DB) plan sponsors offering lump sums to as many as 248,000 participants, finding that all lacked at least some key information needed to make an informed decision or were otherwise unclear.

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, 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.

In addition, according to GAO, 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 if the plan sponsor defaults. GAO says this omission is notable because many participants it interviewed cited fear of sponsor default as an important factor in choosing the lump sum.

GAO noted that 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. In addition, participants who take a lump-sum payment face potential investment challenges, and some may not continue to save their assets for retirement but instead spend some or all of the lump sum.

The GAO recommends that the Department of Labor (DOL) improve oversight by requiring DB plan sponsors to notify the agency when they implement lump-sum windows, and coordinate with Treasury to clarify guidance about the information plan sponsors provide to participants. In addition, GAO suggested the Department of Treasury should reassess regulations governing relative value statements, as well as the interest rates and mortality tables used in calculating lump sums.

The full GAO report may be downloaded from here.