Missouri bars pension advances for public workers

Show Me State's action follows heightened regulatory scrutiny

Jul 9, 2014 @ 12:01 pm

By Darla Mercado

+ Zoom
(iStock)

Missouri's governor Jay Nixon on Tuesday signed a law that made it the first state to bar pension advances — a practice wherein retirees are offered a lump sum in exchange for signing over all or part of their income stream — for public workers.

“This practice is bad for consumers. It preys on a vulnerable population, and it's bad for retirement security in general,” Missouri's Treasurer Clint Zweifel, who championed House Bill 1217, said in an interview.

Indeed, the Government Accountability Office on Monday released a study that found that exploitative business practices abound in the world of pension advance transactions. The GAO identified at least 38 companies — at least 21 of which are related to each other in ways that aren't apparent to consumers — that operate in this space, noting that “some targeted financially vulnerable consumers with poor or bad credit nationwide.”

The GAO received pension advance offers from six out of 19 pension advance companies, and the deals were unfavorable compared to other financial products, including loans and lump-sum options through a pension plan. For instance, the investigation revealed that the effective interest rate on pension advances ranged from 27% to 46% — two to three times higher than the legal usury rates set by states.

At the same time, investors who were snapping up the pension streams were earning attractive yields that were as high as 7% — which is still beating most fixed-income investments that are on the market these days.

Mr. Zweifel called for an outright ban of the pension advance business for public employees after observing that some of these companies were trying to do business in Missouri. Effectively, there was an underworld of pension advance firms that were advertising their services on Craigslist in the state, he said.

“They were operating under the radar in many ways,” Mr. Zweifel said. “[The pension advances] weren't loans, but they weren't a security. State securities regulators couldn't regulate them, and at the same time they're not regulated by the banking laws.”

Though the Show Me State is the first to outright bar these pension advances, Vermont was the first to regulate the practice, enacting a law in April that will treat these advances in a way that's similar to lending.

Last year, federal legislators placed a sharp focus on pension advances following a series of reports that involved retirees selling off portions of future pension income for lump sums. The Senate Committee on Health, Education, Labor and Pensions in May 2013 pushed state attorneys general to turn up information on these practices.

Further, last year the Securities and Exchange Commission warned retirees of the consequences of selling either their pension or a structured settlement to an investor in exchange for a lump sum.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

Women's retirement needs and the opportunity they present for advisers

Assistant managing editor Lorie Konish speaks with contributing editor Mary Beth Franklin about the unique planning considerations for women as they prepare for income needs later in life.

Latest news & opinion

Will Jeffrey Gundlach's Trump-like approach on Twitter work in financial services?

The DoubleLine CEO's attacks on Wall Street Journal reporters is igniting a discussion on what's fair game on social media.

Fidelity wins arb case against wine mogul but earns a rebuke from Finra

In the case of investor Peter Deutsch, Fidelity doesn't have to pay any compensation, but regulator said firm put its interests ahead of his.

Plaintiffs win in Tibble vs. Edison 401(k) fee case

After a decade of activity around the lawsuit, including a hearing before the U.S. Supreme Court, judge rules a prudent fiduciary would have invested in institutional shares.

Advisers get more breathing room to make Form ADV changes

RIAs can enter '0' in some new parts of the document before their annual filing next year.

Since banking scandal, Wells Fargo advisers with more than $19.2 billion leave firm

Despite a trying year, the firm has said it will sweeten signing bonuses for veteran advisers.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print