Government Reviewing Plan Sponsor Disclosure To Early Retirees

May 5, 2000 ( - Several federal agencies are reviewing whether plan sponsors provide early retirees with adequate information when faced with a choice between annuities and lump sum payouts, according to BNA Daily Labor Report.

The informational reviews by the US Treasury, the Labor Department, and the Internal Revenue Service were prompted by concerns that Senator Tom Harkin (D-Iowa) raised in a letter in January.

Warning shots

If he has his way, the agencies will issue stern warnings to plan sponsors. Failing to provide adequate information could disqualify plans for income tax purposes and/or result in personal liabilities for plan fiduciaries, according to Harkin.

The senator raised concerns that employers fail to inform early retirees of benefit losses if they don?t take annuities instead of lump sum payouts. His letter went to Treasury Secretary Lawrence H. Summers and Labor Secretary Alexis M. Herman. In it, Harkin requested more vigorous enforcement of ERISA disclosure rules.

Herman then voiced concerns in February to the Senate Appropriations Subcommittee on Labor, Health, Human Services and Education that defined benefit plan participants were choosing lump sums over potentially more valuable subsidized early retirement benefits paid as annuities.

Harkin?s take

Annuity options studied by Harkin in one case were 80 percent more valuable to an early retiree than the alternative lump sum. “For someone to be employed by a company for 10 or 20 years and then lose a large share of their pension because an employer buries the fact that a lump sum payment does not include early retirement benefits is outrageous,” Harkin said.

Of course, an annuity will end when the participant or the surviving spouse passes away, while the remainder of a lump sum payment will transfer to the estate.

In response to Harkin?s letter, Treasury Acting Assistant Secretary Jonathan Talisman noted the need for agencies to ascertain what disclosure practices plan administrators follow, and how those compare to “best practices.”

– Ann Bidou