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Pension advocate backs IRS rule banning annuity conversions to lump sums

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A new IRS and Treasury Department ban on employers offering pension plan participants currently receiving monthly annuity benefits the option to convert their benefit to a cash lump sum was needed to protect retirees, a consumer advocacy group says.

Federal regulators said last week that employers will not be “permitted to replace any joint and survivor, single life, or other annuity currently being paid with a lump sum payment or other accelerated form of distribution.” The ban generally went into effect July 9, though in certain situations, such as when an employer notified participants of the offer prior to July 9, the conversions still can place.

The Washington-based Pension Rights Center said it was “gratified” that regulators are ending the practice.

“The offer of a lump sum can create considerable confusion and anxiety for older Americans, who are often not in a position to appreciate the risks they face and the losses they might suffer,” Norman Stein a senior policy advisor at the Pension Rights Center and a professor at Drexel University School of Law in Philadelphia said Monday in a statement.

“Retirees who choose a lump sum have to invest the money at the same time they are drawing it down, which is even harder than investing money before retirement. They will have to pay new fees, which will reduce their account balance, and fluctuations in the markets can destroy their investment portfolio with no time to make up the losses,” he added.

Experts say to date, only a small percentage — less than 5% of employers, including Archer Daniels Midland Co., Ford Motor Co. and NCR Corp. — have given plan participants currently receiving benefits the option to convert their monthly annuity to a cash lump sum. Typically, such offers have been made to former employees who have earned an annuity but are too young to start receiving the benefit.

The key reason that such offers have not been extended to retirees collecting benefits is the fear of adverse selection in which retirees in poor health would be more likely to accept than those in good health, experts said.