The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Maryland is representative of a common inquiry involving payments from defined benefit plans. The advisor asked:
“Some of my clients who participate in defined benefit plans have received mailings about ‘pension advances.’ What are they, and are they the same thing as the lump sum payments some corporations like Verizon have offered to retirees?”
Highlights of Recommendations
- You are wise to be on the alert regarding pension advances! They ARE NOT the same as the legitimate lump sum offers that certain firms that sponsor defined-benefit pension plans have offered directly to their retirees in recent years.
- Most importantly, a number of consumer protection agencies have recently issued warnings about the downside of pension advances:
- The Federal Trade Commission (FTC): Pension Advances: Not So Fast;
- The Consumer Financial Protection Bureau (CFPB): I was offered a pension advance. What is this? What should I look out for?;
- The Securities Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA): Pension or Settlement Income Streams—What You Need to Know Before Buying or Selling; and
- The Government Accountability Office: Pension Advance Transactions: Questionable Business Transaction Identified
- A pension advance is an up-front lump sum provided to a consumer by a firm other than the employer sponsoring the pension plan in exchange for a certain number and dollar amount of the consumer's future pension payments plus various fees. While they are based on pension benefits, they are generally distinct from the pensions themselves.
- The GAO report linked above identified questionable elements of pension advance transactions related to the disclosure of rates or fees, and certain unfavorable terms of agreements. These offers did not compare favorably with other financial products or offerings, such as 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% to 46%, 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.
Conclusion
Consumer protection agencies have identified pension advances as a highly suspicious business practice companies may be using to prey on retirees. Investors should be wary, and discuss any such offers with their financial and/or legal advisors before acting.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2014 Columbia Management Investment Advisers, LLC. Used with permission.
