Senate Legislation Calls for Expanded Lump-Sum Payment Disclosures

The bill’s cosponsors say workers need better information about how the choice of a lump-sum buyout of their lifetime pension could undermine their financial future.


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

The latest proposal to reemerge is the Information Needed for Financial Options Risk Mitigation Act.

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The bill, referred to as the INFORM Act, was reintroduced last week by U.S. Senators Patty Murray, D-Washington, and current chair of the Senate Committee on Health, Education, Labor and Pensions; 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 participants with what they describe as “critical information” about the trade-offs involved when employers offer a lump-sum payment option from a traditional defined benefit pension plan that can be drawn in place of a lifetime annuity option.

“No one’s retirement planning should be put at risk because they didn’t have the information they needed before making a big decision about whether to trade their lifetime pension payments for a one-time buyout,” Murray says. “After working for decades to earn a retirement, people deserve to have better information about how a lump-sum buyout of their lifetime pension could undermine their financial future—and my commonsense bill will make sure they have that 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 participants in lieu of the lifetime payments to which they would otherwise be entitled. They suggest pension plan sponsors typically offer lump-sum payments to reduce their corporate liabilities, noting that the buyouts transfer all risk from employers to retirees. Buyouts also leave people on their own to manage the challenge of making these 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 participants 90 days before the period in which they must decide on the offer. That notice must provide a comparison of 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 the loss of certain federal protections) and details about the election period.

The legislation would also require plan sponsors to disclose lump-sum payment windows to the U.S. Department of Labor so that it can collect information on the practices.

Asked for comment on the proposal, Joe McCarty, retirement and income solutions vice president at Principal, says the firm believes in the spirit of the proposal and that pension plan participants should always have the necessary information to help make such a difficult and personal decision. He agrees that it can be challenging to balance the need to have disclosures that are both comprehensive but also easy to understand.

“The standard communication samples Principal provides to plan sponsors for their review already incorporate many of the items included in the INFORM Act,” McCarty says. “It is a stretch to say adding additional items would create an undue burden, but it would definitely add to what is already a lot of information.”

There are already some disclosure requirements in place when communicating with plan participants to help them understand how different benefit options compare. The core difficulty in making sure such disclosures resonate with pension plan participants is the potential complexity of the calculations involved, McCarty says. Because of this complexity, participants can benefit greatly from discussions about retirement withdrawal decisions with a financial professional. Advisers can help factor in other sources of retirement income and pose questions to help the participants consider their financial risk comfort level.

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

Employers Wary of 401(k) Costs Can Find the Right Retirement Plan

An adviser, retirement plan consultant or recordkeeper can help to find the best solution for employees.

Companies grappling with worker shortages resulting from the pandemic may be able to help resolve this struggle by offering workplace benefits that account for the future, including retirement plans.

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“In this market, it’s going to really require thinking directly about what your benefits are, beyond just what’s traditionally served with health care,” explains Jessica Baehr, head of group retirement at Equitable. “This is a way for [plan sponsors] to differentiate in the marketplace, beyond just wages.”

With falling unemployment and increased job growth, 67% of small business owners are currently experiencing a staffing shortage, according to a March 2022 survey from the National Federation of Independent Businesses. Additionally, Lincoln Financial Group’s Small Business Owner Survey shows that 80% of small business owners view employee benefits as a top priority due to the effects of the  pandemic, 93% have reevaluated their strategy and plan to make due to COVID-19 and 28% of owners have bolstered benefits to attract and retain talent. According to the survey, 30% of small businesses are adding life insurance and 27% are adding a retirement matching contribution, financial wellness program and/or retirement account. Other considered additions include accident, critical illness, vision, dental and other insurance benefits.

As labor markets have undergone wrenching shifts stemming from the pandemic, some employers have increased wages, but businesses are also faced with the challenges of rising inflation and supply chain disruptions.

This comes amid workers’ increased focused on securing retirement benefits and financial wellness resources.

“People are struggling with the concern that they’re not going to have the resources they need to live the life they envision for themselves [in retirement],” Baehr says. “This is where being able to not only offer competitive [retirement benefits], but also to come to the table with other ways that small businesses can demonstrate they’re investing in their employees, is a core differentiator to really attract talent.”

Working with a retirement plan adviser, retirement plan consultant or recordkeeper can help the plan sponsor understand what retirement benefit arrangement is best for employees, owners and the company bottom line, she says.

“Working with an adviser can really help them to understand what their options are, and what makes the most sense,” Baehr explains. 

Small businesses often don’t offer retirement benefits because of the cost and the administrative burden, according to Baehr. She advises small businesses to examine all the options available, and says that there are some that can provide the flexibility needed to offer a retirement plan without passing costs on to customers or reducing headcount.

According to the Lincoln survey, 51% of small businesses report weighing the costs and benefits that a plan would provide as a primary consideration, while 28% cite administrative concerns. Baehr notes that administrative costs for retirement plans have decreased thanks to new entrants to the provider market, however. The survey also found that 72% of respondents said that multiple employer plans, including pooled employer plans, are appealing. 

Plan sponsors can shop for many options, including SIMPLE 401(k) plans, simplified employee pension individual retirement accounts and profit-sharing plans, Baehr says. They should start by examining the needs of the company’s employees and the resources that could be brought to bear, which is a challenge for small businesses because many don’t have a dedicated or large in-house HR department, she explains.

With many types of retirement offerings available, there exists a match for almost every plan sponsor’s needs that will satisfy employees’ desire for a plan, according to Baehr.

She also says that profit-sharing arrangements offer greater flexibility and may be preferable for some small businesses, because they are based on company performance.

“An annual profit share gives some flexibility, but it also enables [plan sponsors] to reward employees when things are going well,” Baehr says. “Another opportunity is that you can reduce the cost by offering match that doesn’t vest for a few years out, [which is] another way to not only invest in employees’ long-term financial security, but also create some retention opportunities.”

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