U.S. Senator Patty Murray, D-Washington, the ranking minority member of the Senate Health, Education, Labor and Pensions (HELP) Committee, has introduced the Information Needed for Financial Options Risk Mitigation Act.
Given the short title “INFORM Act,” the bill would require pension plan sponsors to provide plan participants and retirees with what Murray calls “critical information” when offering defined benefit (DB) lump-sum buyouts.
“No one should ever have to make a decision that could seriously affect their plans to securely retire without being given all the information they need to understand the consequences,” Murray says in a statement published alongside the legislation.
Technically, the bill requires that “a plan sponsor of a pension plan that amends the plan to provide a period of time during which certain participants or beneficiaries who are receiving or will receive lifetime annuity payments into a lump sum under section 401(a)(9)(A)(i) of the Internal Revenue Code of 1986 shall provide notice to each participant or beneficiary offered such lump-sum amount, in paper form and mailed to the last known address of the participant or beneficiary, not later than 90 days prior to the first day on which the participant or beneficiary may make an election with respect to such lump sum.” The bill further requires notice be similarly sent to the U.S. Secretary of Labor “not later than 30 days prior to the first day on which participants and beneficiaries may make an election with respect to such lump sum.”
The text of the bill spells out a fairly extensive set of requirements plan sponsors would need to include in their lump-sum notices. For example, the notices would have to include a summary of available benefit options, “including the estimated monthly benefit that the participant or beneficiary would receive at normal retirement age (if not already in pay status).” The notices would have to enumerate “whether there is a subsidized early retirement option, the monthly benefit amount if payments begin immediately and the lump-sum amount available if the participant or beneficiary takes the option.”
Also required is an explanation of how the lump sum was calculated—including the interest rate, mortality assumptions and whether any additional plan benefits were included in the lump sum, such as early retirement subsidies. Further, the bill requires that plan sponsors calculate and share with participants the “relative value of the lump sum option compared to the plan’s lifetime annuity, in comparable terms.”
Other requirements are that plan sponsors clarify “whether it would be possible to replicate the plan’s stream of payments by purchasing a comparable retail annuity using the lump sum,” as well as detail the “potential ramifications of accepting the lump sum, including possible benefits, investment risks, longevity risks, loss of protections guaranteed by the Pension Benefit Guaranty Corporation [PBGC], loss of protection from creditors, loss of spousal protections and other protections under this act that would be lost.”
Various other points of information are required by the text of the INFORM Act, such as explanation of the general tax rules related to accepting a lump sum and a statement that financial advisers “may not be required to act in the best interest of participants and beneficiaries with respect to determining whether to take the option.”
As Murray emphasizes, the filing of the INFORM Act comes one year after the Trump administration made its own policy changes in this domain. Back in March 2019, the Trump administration announced it would not pursue a proposal made by the Internal Revenue Service (IRS) under President Barack Obama that would have prohibited certain lump-sum buyouts, for example buyouts entered into after the pension annuity income stream has already commenced.
In announcing it would not pursue the project to limit lump-sum buyouts, the Trump administration said at the time that the policy change would give more flexibility to both employers and employees. Critics, including Murray, said the Trump administration’s actions in truth “gave employers the green-light to offload pension liabilities and transfer risk to retirees through buyouts.”