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Central Pension Fund The Dangers of Lump Sum Pensions Highlighted The U.S. Secretary of Labor has announced that the Department of Labor, the Treasury Department and the Internal Revenue Service have initiated a joint effort to educate retirees on the dangers of selecting a lump sum payment of their accrued benefit at the time of retirement instead of electing to receive their benefit as a lifetime annuity. Lifetime annuities pay an equal monthly benefit for as long as the retiree lives and, if desired, permit a continuing monthly payment thereafter to the retiree’s surviving spouse. This joint initiative by the federal government is the result of a Congressional inquiry from Senator Thomas Harkin of Iowa who charged that a growing number of employers are failing to disclose to retirees the value of a lump sum payment compared with that of a lifetime annuity. Senator Harkin further asserted that a number of employers hide the fact that the lump sum payment option is far less valuable than the annuity option. This failure by employers to adequately warn employees about the relative disadvantages of lump sum payments results in retirees forfeiting a very large share of the value of their pension without ever understanding the consequences of their choice. Senator Harkin charged that “The employer’s motive seems clear: they can save millions of dollars when an employee elects to take a lump sum.” The danger to retirees of being shortchanged by lump sum distributions has grown rapidly in recent years as traditional defined benefit pension plans--like the Central Pension Fund of the IUOE--have increasingly been replaced by 401(k) plans and, more recently, “cash balance” plans. Both of these types of plans offer lump sums. Unfortunately, the offer of a lump sum is often an irresistible temptation, both at the time of retirement, and earlier if the plan permits employees to take a lump sum when they are just changing jobs, not retiring. Statistics show that all to often lump sums taken prior to retirement are spent long before reaching retirement, and lump sums taken at retirement run out long before death, leaving retirees destitute. Senator Harkin has asked the Department of Labor as well as the Department of Treasury and the IRS to issue warnings to employers that it is their obligation to clearly and adequately inform employees of the relative values of the payment options they are offered, so that workers don’t find out--too late--that they have been shortchanged by what looked like a big cash payment. Secretary of Labor Herman has assured Congress of her commitment to an education campaign to properly educate employees on the consequences of their choices. This dialogue in Washington once again emphasizes the value of the traditional pension plans provided to IUOE members throughout the United States and Canada that pay benefits to participants in the form of safe and secure lifetime annuities. Originally
published in the International Operating Engineer |