For retirees in need of money, a cash advance on their pension may seem like an attractive option. But such arrangements often compare poorly to other financial options, according to a new study from the Government Accountability Office (GAO).
The GAO found that the effective interest rates on lump-sum advances provided by pension advance companies that it investigated were significantly higher than for other financial products such as loans or direct payouts from the pension plan itself. GAO investigators found that the effective rates cited for such products were often two to three times higher than the maximum allowed under relevant state usury laws.
Investigators posed as consumers
The GAO looked at 38 companies offering private cash advances on pensions in return for part or all of the future proceeds from a pension plan. Undercover investigators contacted 19 of the companies to inquire about terms for obtaining a pension cash advance, but were able to obtain quotes from only six. Others declined to provide quotes.
Investigators obtained a total of 99 offers from those six companies for lump-sum pension advances. Of these, 97 had effective interest rates ranging from 27 to 46 percent, according to GAO analysis, while the other two had rates of 83 and 90 percent. By comparison, the effective usury rates for the states involved (where offers were provided to investigators posing as fictitious residents) were 12 to 24 percent.
Lump-sum payouts lower than required minimums
Investigators also compared the amount of the lump sum payouts offered with those that would be required for direct payouts from a pension fund itself and found the vast majority of the 99 offers ranged between 44 and 55 percent of the minimum amount required under the Employee Retirement Income Security Act of 1974 and IRS regulations.
The GAO said its investigation also identified questionable practices related to the disclosure of rates and fees, and to certain unfavorable terms of pension advance agreements.
Bad credit consumers targeted
The study found such products were often marketed to retirees with poor credit ratings, with scores often below 500, and who would have difficulty obtaining financing through other means.
Of the 38 companies involved, at least 21 were found to be affiliated with each other in ways that were not immediately apparent to consumers, and at least 30 were found to have at least some sort of business relationship or affiliation with each other.
The companies examined in the study were not identified by name.
As a result of the study, the GAO is recommending that the chair of the Federal Trade Commission and director of the Consumer Financial Protection Bureau review the practices of pension advance companies and their practices with an eye toward strengthening federal oversight of such products