Lump-sum pension offers often lack information

If you are due a pension from a former employer, there is a good chance you were or soon will be offered a lump-sum payment in exchange for giving up that guaranteed monthly check for life.

Should you take it? Probably not, but making a smart decision depends on a complex set of assumptions about future interest rates, possible rates of market returns and your longevity.

Unfortunately, employers are not providing enough information.

That is the conclusion of a recent review by the U.S. Government Accountability Office of 11 lump-sum-offer information packets provided to beneficiaries by pension plan sponsors.

The key failings included unclear comparisons of the lump sum's value compared with the value of lifetime pension payouts. Also lacking were many of the explanations of mortality factors and interest rates used to calculate the lump sums.

Even more worrisome was missing information about the insurance guarantees that probably would be available to participants from the Pension Benefit Guarantee Corp. in the event of a sponsor default. That is a major problem because fear of pension failure is one of the biggest factors driving participants to accept lump-sum offers.

The GAO urged the U.S. Department of Labor to tighten reporting requirements on lump-sum offers and to work with other federal agencies to clarify the guidance sponsors should be providing.

But better information alone is not likely to lead to better decisions.

Beneficiaries often make up their minds based on emotional factors like fear of a pension plan default or the appeal of getting a large pile of cash up front, says Steve Vernon, a consulting research scholar at the Stanford Center on Longevity.

In most cases, beneficiaries will come out ahead by sticking with a monthly check from a pension, but you should evaluate the lump-sum offer against such factors as your likely life expectancy and other sources of guaranteed income (Social Security or a spouse's pension).

Vernon has a basic way to think about a lump-sum decision.

"These big corporations want to transfer mortality and interest risk to you because they don't want it.