Would You Sell Your Future Pension For a Lump Sum of Cash? These Businesses Are Banking On It

Pink Piggy Bank On Top Of A Pile Of One Dollar Bills

You’ve heard of payday advances. But pension advances?

Believe it or not, businesses are popping up that allow retirees to do just that: “sell” a portion (or all) of their future retirement income in exchange for a lump sum of cash today.

The owners of these businesses admit that their service isn’t for everyone. But if you need to pay bills now, they say, then why not sell a portion of your pension for cash? More from Today:

Their pitch, aimed at military and government retirees with generous pension benefits and those with bad credit, is mighty appealing: cash now to pay today’s bills.

Of course, to get tomorrow’s money today, you have to sign over your future pension payments for a specified number of years.  

Mark Corbett runs the website Buy Your Pension, which helps facilitate pension sales. He told TODAY that a pension advance is not for everyone, but he believes it can be beneficial for some people.

“You should not sell your pension unless it saves you money,” he said. “For example, you are using it to pay off bills.”

Four years ago, Corbett got an advance on his private pension — selling a $237,000 nest egg for $89,000 — to pay off his mounting bills. He called it “a godsend” that reduced his stress and probably added years to his life.

But critics say pension advance services are dangerous and financially unwise. The Federal Trade Commission, Financial Industry Regulatory Authority and other consumer protection agencies are already cautioning people to be know the implications of selling your pension. Today writes:

“There are serious financial consequences down the road for taking the money in a lump sum now,” said Gerri Walsh, FINRA’s senior vice president of investor education. “You are getting less money than if you waited and got those monthly pension payments.”

Unlike a traditional loan, you can’t get out of the deal early. If you signed up for a six-year payout, the company gets your pension for a full six years.

“A pension advance is unlike any other type of financing, because you’re required to sign over part of your future income stream,” said Leah Frazier, an attorney for the FTC.

“You could find yourself in a situation down the road where you need money for your basic expenses, but you don’t have it because you took it as an advance.”

And remember: Getting a lump sum pension payment is likely to have some serious tax implications.

“It could push you into a higher tax bracket,” said Lisa Greene-Lewis, lead CPA at TurboTax. “I could see people doing this and getting shocked by the additional taxes they now have to pay.”

The Government Accountability Office (GOA) recently did some secret shopping at nearly 40 pension advance businesses. Based on their experiences, they released a report indicating that they’d found numerous “questionable business practices”.

Last month, Missouri banned pension advances for public employees. They are the only state thus far to do so.


Photo by: www.SeniorLiving.Org

Gen X Retirements At Risk? Not So Fast, Says EBRI


Even smart people can disagree with each other. Who knew?

A great example of that sentiment is playing out right now, as a handful of nationally renowned retirement research groups have found each other at odds with the other’s conclusions about the retirement security of the next few waves of retirees.

Retirement savings (or a lack there-of) have been getting a lot of press lately. The Federal Reserve recently released data that suggested 20 percent of people aged 55-64 had zero money saved for retirement. All in all, 31 percent of people surveyed said they had no retirement savings at all.

Two other recent studies make similarly striking claims—a 2013 Pew Charitable Trusts study found that newer retirees would have far less income during retirement than their baby boomer predecessors. Likewise, a 2012 study by the Center for Retirement Research (CRR) found nearly half of households in their 50’s were “at risk” for a rocky retirement.

But the Employee Benefit Research Institute doesn’t think the situation is so dire. In fact, the EBRI has gone so far as to rebuff the findings of those latter two studies. From ThinkAdvisor:

EBRI recently challenged a pair of studies that concluded Gen Xers’ retirement prospects were in worse shape than boomers’ prospects, pointing out also that the oldest Gen Xers are only 49, with many earnings years left before they reach traditional retirement age.

EBRI charges that some studies used flawed assumptions or bad methodologies to reach their conclusion that investors born between 1965 and 1974 had a smaller likelihood of saving enough for retirement than older investors born between 1948 and 1964.

“Calculating retirement income adequacy is very complex, and it’s important to use reasonable assumptions and current data if you want credible results,” Jack VanDerhei, EBRI research director and author of the report, said in a statement.

More on the “flawed assumptions” used in the Pew and CRR studies:

EBRI took issue with a 2013 study by Pew Charitable Trusts that found the median replacement rate for Gen Xers who retire at 65 would be 32 percentage points lower than early boomers’ and nine points lower than later boomers’.

However, that finding “explicitly ignores future contributions,” EBRI argued. “EBRI’s analysis concludes that ignoring decades of potential future contributions (as the Pew study does) exaggerates the percentage of Gen X workers simulated to run short of money in retirement by roughly 10 to 12 percentage points among all but the lowest-income group,” according to the report.

An earlier study, conducted in 2012 by the Center for Retirement Research (CRR) at Boston College, found 44% of households in their 50s were “at risk,” compared with 55% of those in their 40s and 62% of those in their 30s.

In that report, CRR failed to consider the effect of automatic enrollment and escalation features, which were widely adopted following the Pension Protection Act of 2006. Gen X is the first generation to have a full working career in a defined contribution environment, EBRI noted.

EBRI says all its recent research points to very different conclusions than other studies: Generation Xers are facing approximately the same retirement prospects as the Boomers’.

EBRI concludes that 60 percent of Generation X won’t run out of money in retirement.

Is the Retirement Savings Crisis Too “Hyped”? These Researchers Think So.


A seemingly routine Capitol Hill hearing got very interesting very fast late last month. The hearing was held by the Ways and Means Social Security Subcommittee and focused on the state of retirement savings in the U.S.

Why was it so interesting? Two of the witnesses, Sylvester J. Schieber and Andrew G. Biggs, insisted that the retirement savings “crisis” in the U.S. is over-hyped. (They were referencing, among other things, the recent government statistics claiming that 20 percent of Americans aged 55-64 had zero retirement savings).

An outpouring of criticism followed, led by Christian Weller, who wrote:

Launched by Chairman Sam Johnson (R-TX), the hearing announcement made reference to retirement income being underreported, implying that families are better off than the data show. Moreover, the witness list included crisis deniers, such as the American Enterprise Institute’s Andrew Biggs, making claims that the number of households inadequately prepared for retirement is largely overstated. Some testimony turned to calls for Social Security benefit cuts. Because, after all, cutting Social Security would theoretically inflict little harm if families are already well prepared for retirement. In reality, families would suffer tremendously from Social Security cuts. Why? Because as a long-standing body of economic research has repeatedly shown, there is indeed a growing crisis.

Schieber and Biggs (who, by the way, are no slouches–you can read their bios at the bottom of this post) quickly took to the blogosphere to explain their position.

First, they tackled why they disputed the government data, released last week, that suggested one in five Americans nearing retirement had no money at all saved for retirement. From Sheiber and Biggs (S + B):

These [Social Security Administration] publications rely on data from the Current Population Survey, which omits the vast majority of income that seniors receive from IRA and 401(k) accounts and thus makes seniors appear significantly poorer and less prepared for retirement than they actually are.

IRS tax data, which include all forms of pension withdrawals, show that true incomes for middle class retirees receiving Social Security benefits are substantially higher than is believed. The fact that these faulty SSA statistics were cited by the Social Security Subcommittee’s ranking member, apparently without knowledge of the limitations of these data, is evidence that even policymakers’ understanding of retirement security can be improved.

What about National Retirement Research Index’s findings that 6 in 10 Americans are at risk of an insecure retirement? S + B write:

With due respect to the NRRI’s authors, we have already detailed how the NRRI sets a higher bar for retirement income adequacy than most financial advisors and how it ignores the ways that family size and structure play into retirement saving patterns. In addition, the NRRI projects current workers’ future incomes using a one-size-fits-all pattern that ignores the dispersion in earnings that takes place from middle age onward.

This assumption erroneously reduces the “replacement rates” that low earners will receive from Social Security. The NRRI also predicts that traditional defined benefit pension plans will continue to contract, but assumes that future retirees will have no larger IRA or 401(k)s accumulations than those of people who retired prior to 2010. Together, these factors substantially – but erroneously, in our view – increase the share of workers considered to be “at risk” of an insecure retirement.

So who are these people anyway?

Sylvester J. Schieber:

Sylvester J. Schieber is Chairman of the Social Security Advisory Board (SSAB) and a private consultant on retirement and health issues. He retired from Watson Wyatt Worldwide in September 2006 where had served as Vice President/U.S. Director of Benefit Consulting and Director of Research and Information. He holds a Ph.D. in economics from the University of Notre Dame in 1974. He has served on the Board of Directors of the Pension Research Council at the Wharton School, University of Pennsylvania since 1985. Dr. Schieber was a member of the 1994-1996 Social Security Advisory Council. In January 1998 he was appointed to a six-year term on the Social Security Advisory Board.

Andrew Biggs:

Andrew G. Biggs is a resident scholar at the American Enterprise Institute (AEI), where he studies Social Security reform, state and local government pensions, and public sector pay and benefits.

Before joining AEI, Biggs was the principal deputy commissioner of the Social Security Administration (SSA), where he oversaw SSA’s policy research efforts. In 2005, as an associate director of the White House National Economic Council, he worked on Social Security reform. In 2001, he joined the staff of the President’s Commission to Strengthen Social Security.

You can read their entire blog post here.

You can also read the initial blog post, “Yes, There Is A Retirement Crisis”.

It’s a fascinating discussion, although at this moment, it seems to be two men standing alone against a world of data.


Federal Reserve: One In Five People Nearing Retirement Have No Retirement Savings

4882451716_79e3857261_oThe Federal Reserve released its Report on the Economic Well-Being of U.S. Households last week, and one statistic stood out starkly from the rest: 19 percent of people between the ages of 55 and 64 have no retirement savings and don’t have a pension lined up.

The Federal Reserve surveyed 4,100 people last year and retirement savings were one of the major topics. The report shed light on the dire state of retirement savings in the United States.

Across all age groups, 31 percent said they had zero retirement savings. When asked how they planned to get by after retirement, 45 percent said they would have to rely on social security. Eighteen percent plan to get a part-time job during “retirement”, and 25 percent of respondents said they “don’t know” how they will pay the bills during retirement.

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Source: The Federal Reserve

Pension360 has previously covered how income inequality rears its head when retirement approaches, and this report provided further evidence: 54% of people with incomes under $25,000 reported having zero retirement savings and no pension. Meanwhile, only 90% of those earning $100,000 or more had either retirement savings or a pension, or both.

As 24/7 Wall St. points out, these trends could have a broader affect on the economy. What’s certain, however, is that retirement is no longer a certainty for many people:

This is no simple report to ignore, and this can affect the future of many things in America. It can affect Social Security, it can affect the financial markets via contributions and withdrawals of retirement funds, and it can affect the future workforce demographics in that older workers may simply not be removing themselves from the workforce, making it impossible for younger workers to graduate or move up.

Another retirement scare is a tale you have heard, but this quantifies it. The Fed showed that although the long-term shift from defined-benefit to defined-contribution (from pension to 401(K) and IRA) plans places significant responsibilities on individuals to plan for their own retirement, only about one-fourth appear to be actively doing so.

The researched that conducted the survey noted that the lack of retirement savings is due partially to poor planning. But many of those surveyed said they “simply have few or no financial resources available for retirement”.

Photo by RambergMediaImages via Flickr CC License

With Lawmakers In Recess and Elections On Horizon, Pennsylvania’s Pension Debate is Heating Up


Pennsylvania Gov. Tom Corbett has spent the first week of August touring the state as part of his re-election campaign, and he’s using the opportunity to hammer home Pennsylvania’s need to lower the costs of its retirement system, and tout his policy ideas on the subject.

One idea that Corbett has frequently proposed is shifting some state workers from their defined-benefit plans into 401(k)-style plans. Nearly every state burdened with pension obligations has considered this policy option. Many have even implemented it. From PennLive:

Only Alaska and Michigan have shifted new hires into 401(k)-style programs, but nearly a dozen states have crafted hybrid programs featuring smaller lifetime pension plans along with a 401(k)-style plan, and some states, such as Florida, are giving new employees the option of going entirely into a 401(k)-style plan, our pal Deb Erdley at The Tribune-Review reports.

Corbett’s repeated harping on the pension issue has gotten him, to some extent, what he wanted back in June: a debate. Even if state lawmakers remain on vacation, many experts have been weighing in on the issue.

Richard Johnson, director of the Washington-based Urban Institute’s Program on Retirement Policy, makes this note on the switch from DB to DC:

“These defined-benefit plans work very well if you’re going to stay for 30-35 years, but they require a pretty large employee contribution, and they don’t work very well for the shorter-term worker,” Johnson tells the newspaper.

Stephen Herzenberg of the Keystone Research Center points to the experiences of other states as an argument against switching to a 401(k)-style plan:

In fact, when Florida created this choice, its traditional pension was overfunded. In a decade-plus since, the investment returns of Florida’s traditional pension have been 10 percent higher than the return on individual accounts. Over the 30 years that typical retirement contributions grow, this difference would become a one-third gap in savings available for retirement.

Alaska and Michigan did shift all new hires into 401(k)-style plans but the switch did not, in fact, work. Pension debt in both states grew.

Rhode Island did save some money but only because of deep cuts in traditional pensions, including for current retirees. The state then wasted some savings on a “hybrid plan” for new employees that included 401(k)-type accounts with low returns and high fees.

Guaranteed pensions need sound management and can get in trouble if politicians fail to make required contributions. But long term, there’s no beating the high returns of professional managers and the low costs of pooled pension assets. That’s why Pennsylvania’s current pension design is the best deal, long term, for taxpayers and retirees.

Nathan A. Benefield, Vice President of Policy Analysis at the Commonwealth Foundation, took issue with that critique:

Herzenberg claims that reforms moving state workers to a 401(k)-style retirement plan in other states have “failed” because their traditional, non-401(k) pension funds lost value during the most recent recession. Huh?

Every state¹s pension fund lost value when the stock market fell, including Pennsylvania’s, which went from being fully funded to today having more than $50 billion (and growing) in unfunded liabilities. That’s about $10,000 per household in the state.

Now here’s the rub. States like Michigan and Alaska would have lost more from their pension funds had they not started to convert new employees into a 401(k). In fact, without reform, Michigan’s unfunded liability would be upwards of $4.3 billion more.

Thankfully, because lawmakers in the Wolverine state acted early, they saved taxpayers those additional costs. Pennsylvania would have also had substantial savings had we followed Michigan’s lead.

Corbett has tried desperately to make pension reform a campaign issue. It has worked. He’s gotten the media, thought leaders and everyday citizens talking about Pennsylvania’s retirement system and the policy options to address the issues Corbett foresees.

That’s healthy for the state—but make no mistake, it’s probably just as healthy for Corbett’s election chances.

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Credit: Wikipedia

He’s been gaining ground on challenger Tom Wolf in recent weeks.

Study: For Low-Income Workers, Retirement Not In The Cards


Defined-benefit pensions are becoming rare in the private sector, and many public-sector new hires are increasingly being enrolled in 401(k)s instead of traditional pensions.

Combine that with the fact that many lower-paid workers don’t have access to retirement plans at all, and these trends paint a grim picture: seventy million baby boomers are nearing retirement, and many of them aren’t financially ready.

In fact, recent data show that although high-income workers are saving for retirement at higher rates than ever, low-income workers are saving less—if they’re saving at all.

From the Associated Press:

Because retirement savings are ever more closely tied to income, the widening gulf between the rich and those with less promises to continue — and perhaps worsen — after workers reach retirement age. That is likely to put pressure on government services and lead even more Americans to work well into what is supposed to be their golden years.

Incomes for the highest-earning 1 percent of Americans soared 31 percent from 2009 through 2012, after adjusting for inflation, according to data compiled by Emmanuel Saez, an economist at University of California, Berkeley. For everyone else, it inched up an average of 0.4 percent.

Researchers at the liberal Economic Policy Institute say households in the top fifth of income saw median retirement savings increase from $45,539 in 1989 to $160,000 in 2010 in inflation-adjusted dollars. For households in the bottom fifth, median retirement savings were down from $8,433 in 1989 to $8,000 in 2010, adjusted for inflation. The calculations did not include households without retirement savings.

Employment Benefit Research Institute research director Jack VanDerhei found that in households where annual income is less than $25,000, nine in 10 saved less than $10,000, up slightly from 2009. For households with six-figure incomes, 42 percent saved at least $250,000, up from 34 percent five years earlier.

Experts say that about half of private-sector workers aren’t enrolled in a retirement plan at their job. According to the Employee Benefit Research Institute, only 13 percent of private-sector workers are enrolled in defined benefit plans.

In 1985, 33 percent of workers were enrolled in such plans.

These trends haven’t been lost on younger workers. Millennials are now starting to save early in their careers, according to a new report. From Bloomberg:

Concern that the future of the federal safety net for seniors is precarious and the ubiquity of 401(k)s are prompting those born from 1979 to 1996 to get an earlier start on saving than prior generations, according to a report from the Transamerica Center for Retirement Studies. Millennial workers began building nest eggs at a median age of 22, younger than both Generation X, which started at 27, and the baby boomers, who started at 35.

Though many millennial workers say they’re risk-averse and stock-shy as a result of the most severe recession in the post-World War II era, their deeds are telling a different story. That bodes well in the long run for a generation that may have to bear a greater share of retirement costs on its own, even if it means the economy will get a little less consumer spending in the short term.

Of millennials offered 401(k) or similar plans, 71 percent took part, contributing a median 8 percent of their salaries, the Transamerica report said. The survey polled those employed either full-time or part-time at for-profit companies.

That stands in stark contrast to surveys showing young adults are risk averse. In 2012, 22 percent of heads of households younger than 35 who owned mutual funds said they would only invest in financial instruments with no or below-average risk even if it meant getting a below-average return, based on a survey by ICI, the mutual-fund industry’s trade association.

Aside from seniors (65 years or older), the percent of millennials that own mutual funds is higher than any other age group.


Photo by 401(K) 2012 via Flickr CC License

Arizona Is State Most Reliant on Pension Income


Arizona pensioners receive higher benefits than the average pensioner in the U.S., and the state itself is more reliant economically on pension benefits than many states in the country, according to a new report.

From the Arizona Republic:

Traditional pensions help more than 140,000 Arizonans make ends meet in retirement by providing an average income of $1,923 a month, according to a study estimating that more than 24 million Americans receive such benefits.

The report by the National Institute on Retirement Security, which used 2012 data, suggests that Arizonans rely a bit more heavily on pensions than Americans generally. The average Arizona pension amounts to roughly $23,074 a year, compared with average yearly benefits of $19,678 across the nation.

In terms of overall pension income, economic output generated by pensions and associated tax revenue, Arizona ranks 20th among the states. It is 17th in another measure: the number of jobs supported from spending by retirees who have pensions.

In general, every $1 in pension benefits generates nearly $2 in economic output, according to the report. Retirees support the most jobs in restaurants/food services, health care and retailing.

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Credit: The National Institute on Retirement Security and the Arizona Republic. (Data is from 2012.)

Higher pensions are economically beneficial to the state because retirees spend large portions of their checks on food, medicine, housing or even luxury items such as cars. Higher benefits, according to the report, leads to higher economic output.


Photo: “Entering Arizona on I-10 Westbound” by Wing-Chi Poon – Own work. Licensed under Creative Commons Attribution

Private Equity Sets Sights on 401(k)s


Private equity funds have been a staple of the investments of defined-benefit plans for decades. But as the prominence of defined-benefit plans diminish and defined-contribution plans rise in their place, private equity firms now have their eyes on another prize: 401(k)s.

So said several major private equity players who spoke as part of a panel discussion at the Fifth Annual Innovative Alternative Investment Strategies Conference on Thursday.

From Financial Advisor magazine:

[Red Rocks Capital co-founder Mark] Sunderhuse sees big opportunity for private equity in the defined contribution space. “Target-date plans will use private equity,” he said. “There’s a lot of work with consultants going on, and different types of products will fit different boxes. We’ve had conversations with a number of people in more mainstream mutual fund-type formats where they’ll use it [the Red Rocks fund]. Our product is primarily used in investment models where people want private equity exposure in way where they can manage the risk and be able to reallocate it and rebalance it.”

Kevin Albert, a partner at Pantheon, a global private equity investment company, said U.S. public pension plans on average have 10 percent of their assets in private equity. But defined benefit pension plans are becoming dinosaurs both in the U.S. and abroad.

“That has motivated the best firms in the private equity industry to raise capital from other sources, and the two biggest other sources are defined contribution plans and private affluent investors,” Albert said. “And that’s a good thing because 15 years ago it was hard to convince a top 10 private equity fund to raise a feeder fund or to participate in an offering that would go to individual investors. They saw it as less prestigious, and viewed it as more complicated from a regulatory perspective.

“Now you’re seeing firms like Carlyle, KKR and Blackstone at the vanguard of this,” he continued. “So I think we’re in the middle of an amazing revolution in the repackaging of private equity to make it attractive to defined contribution plans, which have different needs and desires than defined benefit plans did. So I think that will be a meaningful difference in this industry from five, 10, 15 years ago.”

The discussion came up when the panelists were asked to explain a few key trends they see playing out in private equity in the next five years.


Photo by 401kcalculator.org

Oklahoma moves forward with bill aiming to eliminate traditional pensions for state workers


Oklahoma’s landscape is dotted with abandoned frontier forts, Civil War battle sites and other relics of history.

Now you might be able to add another relic to that list: state sponsored defined-benefit pension plans, which could soon become a remnant of the past in Oklahoma.

The state’s House of Representatives passed a bill today that would shift newly hired state workers from the current defined-benefit system into a 401(k)-style defined-contribution plan.

Under the plan, employees would allocate at least 3% of their paychecks to the retirement plan, and the state would match those contributions up to 7%.

The bill doesn’t apply to teachers, firefighters or police officers, and would only cover state workers who are hired after November 1, 2015.

The Associated Press has more details:

The state worker salary bill would set aside 3 percent of the previous fiscal year’s payroll costs for salary adjustments each year and give the Office of Management Enterprise Services authority to set pay structures and determine if targeted adjustments are needed.

Its author, Rep. Leslie Osborn, R-Mustang, said it will provide initial raises to the state’s lowest-paid workers, including corrections, human services and public safety workers, at a cost of about $40 million.

State worker salaries are about 20 percent below comparable jobs in the competitive labor market. The measure would boost salaries to 90 percent of private-sector pay over four years.

Opponents of the measure are concerned that it shifts too much risk onto workers. The payout of a 401(k) plan is determined by the performance of its underlying investments, which means an economic downturn would severely decrease the value of retirees’ nest eggs.

The bill now moves to the Senate, where it is expected to pass.


Photo Credit: KatsRCool via Flickr Creative Commons License