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Senate legislation requires expanded disclosure of lump sum payments

Capitol Hill has recently been abuzz with retirement-related legislative initiatives, including the Securing a Strong Retirement Act., which has already passed the House by a wide margin, and the Emergency and Retirement Savings Improvement Act.

The latest proposal to reappear is the Financial Options Risk Mitigation Act.

The bill, called the INFORM Act, was reintroduced last week by US Senators Patty Murray, D-Washington, and current chair of the Senate Health, Education, Labor and Pensions Committee; Tina Smith, D-Minnesota; and Tammy Baldwin, D-Wisconsin. First introduced by Senator Murray in 2020, the legislation would require pension plan sponsors to provide retirees and members with what they describe as “essential information” about the trade-offs involved when employers offer a retirement option. lump sum payment from a traditional defined benefit pension plan. plan that can be withdrawn in lieu of a life annuity option.

“No one’s retirement planning should be jeopardized because they did not have the information they needed before making an important decision about whether to exchange their lifetime pension payments for a one-time redemption,” Murray says. “After working for decades to earn their retirement, people deserve better information about how a lump sum buyout of their lifetime pension could jeopardize their financial future – and my sensible bill will ensure that they have this information so they can make an informed decision.”

The senators say lump-sum buyouts allow pension plans to make a one-time payment to retirees and members instead of the lifetime payments they would otherwise be entitled to. They suggest that pension plan sponsors typically offer lump sum payments to reduce their corporate liabilities, noting that buyouts transfer all risk from employers to retirees. Buyouts also leave people alone to manage the challenge of making those assets last as long as they are needed, the senators say.

The INFORM Act would require plan sponsors to send a notice to retirees and members 90 days before the period in which they must vote on the offer. This notice should provide a comparison of the benefits offered under the plan and the buyout offer, an explanation of how the lump sum was calculated, the ramifications of accepting a lump sum (such as loss of certain federal protections) and election period details .

The legislation would also require plan sponsors to disclose lump-sum payment windows to the US Department of Labor so it can gather information about practices.

Asked about the proposal, Joe McCarty, vice president of retirement and income solutions at Principal, said the company believes in the spirit of the proposal and that pension plan participants should still have the information they need to make such a difficult and personal decision. He agrees that it can be difficult to balance the need for information that is both comprehensive and easy to understand.

“The standard communication samples Principal provides to plan sponsors for their review already incorporate many of the elements included in the INFORM Act,” McCarty says. “It’s an overstatement to say that adding more material would create an undue burden, but it would certainly add to what is already a lot of information.”

There are already certain disclosure requirements in place when communicating with plan members to help them understand how different benefit options compare. The main difficulty in ensuring that such disclosures resonate with pension plan participants is the potential complexity of the calculations involved, McCarty says. Because of this complexity, members can greatly benefit from discussing retirement withdrawal decisions with a financial professional. Advisors can help consider other sources of retirement income and ask questions to help plan members assess their level of financial risk tolerance.

“At the end of the day, it’s not about increasing the burden on employers or providers. The focus should be on how to communicate with attendees,” McCarty says. “We spent a tremendous amount of time developing materials and were thoughtful in our approach to helping participants make this difficult decision. The challenge here lies in the complex topic which is difficult to address for each specific situation, but with mass communication.