Senate Legislation Calls for Expanded Lump-Sum Payment Disclosures

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.

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.”