An investigation by the U.S. Government Accountability Office (GAO) recently identified questionable practices of companies that offer retirees pension advances.
As part of its investigation, the GAO identified at least 38
companies that offered individuals lump-sum payments or advances in exchange
for receiving part or all of their pension payment streams. These companies
used multistep pension advance processes that included various other parties.
The GAO investigation report says at least 21 of the 38 companies were
affiliated with each other in ways that were not apparent to consumers.
Findings also show that all of the companies operated primarily as web-based
companies, and that some targeted financially vulnerable consumers with poor or
bad credit nationwide.
According to the report, the GAO received offers from six
out of 19 pension advance companies. These offers did not compare favorably
with other financial products or offerings, such as loans and 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.
As a result of its findings, the GAO recommends that the
Bureau of Consumer Financial Protection, as well as the Federal Trade
Commission, review the pension advance practices identified in the report and
exercise oversight as needed. The Federal Trade Commission reports it has not
taken any public enforcement actions due in part to not receiving many
complaints related to this topic. The Bureau of Consumer Financial Protection
says its oversight has been limited to instances where the products met certain
characteristics.
The GAO also notes that consumers who are vulnerable to
financial exploitation may lack the information needed to make sound decisions
when it comes to pension advance transactions. The report recommends that since
the Bureau of Consumer Financial Protection facilitates coordinating federal
financial education, it could help ensure that information reaches relevant
pensioners.
The report documenting the results of the GAO investigation:
Describes
the number and characteristics of pension advance companies and marketing
practices;
Evaluates
how pension advance terms compare with those of other products; and
Evaluates
the extent to which there is related federal oversight.
Report highlights, as well as the full version, can be found here.
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Therefore, the DOL is planning to ask covered service
providers (CSPs) to provide plan fiduciaries with a guide when the 408(b)(2) provider
fee disclosures are not contained in a single document or exceed a certain
number of pages, said Craig Hoffman, general counsel at the American Society of
Pension Professionals & Actuaries (ASPPA). Hoffman made his comments during
an ASPPA webcast Tuesday titled “An Update on DOL Fee Disclosure.”
So far, the DOL has not been clear about how many documents
or pages would trigger the need for a guide, Hoffman said. ASPPA has asked the
DOL to provide guidance about this, along with parameters for font size and
margin width, he said. “Some folks have a summary document with appendixes.
When do you stop counting pages?” Hoffman noted. “The DOL is talking about
reopening the comment period on the regulation. We would like them to do so.”
The DOL’s proposal would ask CSPs to provide the guide as a
separate document at the same time it releases the 408(b)(2) fee information so
fiduciaries will take notice of it. ASPPA is concerned that if plan fiduciaries
are already receiving multiple 408(b)(2) documents, an additional guide
document might be burdensome to them rather than helpful, Hoffman said.
The DOL says the guide would ask CSPs to provide a “roadmap
[identifying] the document and page [number] or other sufficiently specific
locator, such as a section, that enables the responsible plan fiduciary to
quickly and easily find the [information].” The roadmap can also provide
specific links to the information on a Web page. “The guide would serve as a
tool to accompany the disclosure documents to assist the plan fiduciary find
the salient information,” Hoffman said. Many ASPPA members are already using a
roadmap or table of contents along with their 408(b)(2) data.
As proposed, Hoffman said, the guide would ask for the
following information: a description of the services provided, whether the CSP
is a 3(21) fiduciary or registered investment adviser (RIA), information about both
direct and indirect compensation expected as well as any additional
compensation paid to other parties, what compensation will be due upon
termination of the contract, recordkeeping fees and information about investments.
Although the DOL had considered requiring CSPs to provide a
summary of the key disclosure data points, it backed away from this idea because
CSPs are concerned about the costs, and the DOL fears fiduciaries would only
take notice of the summary, Hoffman said.
The new guide regulation would become effective one year after it is published
in the Federal Register. However, “providers might not have the technology in
place to facilitate pulling this information together,” Hoffman said. “I have
spoken with folks at some big bundled providers, and they are not so sure a
year will be enough time to put systems in place.”
Additionally, “the 408(b)(2) rule only requires a CSP to
issue new information when a contract is changed, and since most contracts or
arrangements are evergreen and ongoing without changes, in my personal opinion
I think it is a waste of time and effort to issue a guide for the 408(b)(2)
disclosures that were issued two years ago, by the July 1, 2012, deadline,”
Hoffman said. “The guides should only be given on a forward basis—when a new
contract or change is made.”
The DOL also plans to interview 70 to 100 plan fiduciaries
from small retirement plans (those with fewer than 100 participants) through
eight to 10 focus group sessions to find out how the 408(b)(2) disclosures are
affecting them, Hoffman said. The DOL will ask the fiduciaries whether they
were able to find the costs of the services provided to them and how that
information affected their decisions with regard to running the plan. The DOL
will also ask if their CSPs provided a guide to finding the information,
whether they think a guide would be helpful and how much they would be willing
to pay for such a guide, Hoffman said.
“It seems to me that if you are going to do focus groups to
determine if there is a need, it is probably better to do those focus groups
before you put out a regulation,” Hoffman said. “This is why the DOL has said
it is considering reopening the comment period on the guide once the focus
group comments are in.”
Hoffman also discussed how the DOL is enforcing 408(b)(2).
The DOL is charging any CSP that fails to disclose its fees a 15% excise tax on
all of the fees paid under the contract and terminating its contract. In the
past 18 months, some regional DOL offices have established a Service Provider
Enforcement Project to investigate whether fiduciaries are receiving the fee
information, understand it and can determine if the fees are reasonable. This
information is being furnished to the Employee Benefits Security Administration
(EBSA). The DOL is also looking into excessive fee cases and has increased its
audits and examinations into service providers, Hoffman added.
As for disclosing fee information to participants through
the 404(a)(5) regulation, the DOL requires ERISA [Employee Retirement Income
Security Act] plan administrators to ensure the disclosures are made to
participants every year even if they have no account balance and have never
contributed to the plan. They must issue the information using “measures reasonably
calculated to ensure actual receipt of the material,” the DOL says. They may
also issue the information electronically if the electronic system is an
integral part of their job. However, if the participant requests the
information be delivered via paper, the administrator must comply. The
administrator may furnish the information as a separate document, in the
summary plan description or in a participant benefit statement.
The DOL has also determined that while a brokerage window is
not a designated investment alternative (DIA), 404(a)(5) applies in that
providers must disclose brokerage fees to participants every quarter, Hoffman
said. “And while it is difficult for a plan administrator to provide fee
listings on every investment available in the window, the DOL is telling
participants to ask their providers about the fees.”
“The DOL has also said that the DIA must be a manageable number of investments
and that plans must monitor what people are picking in the window,” Hoffman said.
“We told the DOL that few plans have the technology to cost effectively monitor
participant investments through a brokerage window and that this needs economic
analysis and public comment.” As a result, the DOL asked a number of plans this
past April to provide it with information on brokerage window usage, and,
hopefully, the DOL will change this requirement, he said.