The Bible says Jacob's brother sold his birthright for a mess of stew. Today, warn financial watchdogs, America's pensioners are in danger of accepting what can sometimes be a comparably smelly deal: "Sell us your pension benefits," say advertisements, "and we'll give you one big lump sum now, up front."
For somebody who's facing doctor bills or has missed a mortgage payment, a lump sum can be tempting. Partly for that reason, pensioners in growing numbers are accepting such offers, say financial regulators. But not all offers are legal, and some contain hidden costs.
Earlier this month, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) issued a joint investor-alert cautioning pensioners to think twice before accepting cash-up-front deals.
In it, Gerri Walsh, FINRA's senior vice president for investor education, said: "Consumers should know that a series of potential pitfalls may greet anyone who is considering selling their rights to an income stream. And any investor who is tempted by the high yield offered by buying the rights to another person's income stream should know that yield comes with high fees and considerable risks." Her second caution refers the practice of bundling up purchased pensions into portfolios that are then re-sold to consumers as investments.
Asked by ABC News why FINRA chose now to issue its alert, Walsh says, "FINRA observes trends—we look around the corner." FINRA viewed with concern pensioners' sale of future benefits.
Two reasons, says Walsh, explain the increased activity. First, she says, people want and sometimes need the value bound up in future benefits. The economic recovery, she notes, has not progressed a quickly for some as for others. More people are tapping into their 401(k)s. The same holds true for pensions.
Second, investors are confronting what she calls "a sustained low-interest environment" that leaves them hungry for higher returns. Some investment products based on portfolios of pensions promise, she says, yields of 5 percent to 7 percent.
Walsh tells ABC News that it isn't always a mistake for pensioners to sell their benefits. But they need to comparison shop (many companies on the Internet offer to buy pensions) and need to make sure they understand the terms of whatever deal they accept.
Typically, the lump sum offered by the buyer is substantially less than the seller would receive over time, if he or she opted not to sell. "We encourage individuals to determine what that discount value is," says Walsh.
In California and some other states, that discount must be disclosed prominently to the seller. Too many consumers, says Walsh, just look at the end result—the lump sum—but not the cost. How, for example, does the cost compare with what a consumer would have to pay for a loan from their bank the same lump amount?
Make sure, she warns, that you'd dealing with a reputable company: Check them out; see how they're rated by, say, the Better Business Bureau. Look at online message and rating boards for consumer experiences with the company.
Stuart Rossman, director of litigation for the National Consumer Law Center (NCLC), says current or retired military often are targeted by pension buyers. Why? A report by the Center, "In Harm's Way—At Home: Consumer Scams and the Direct Targeting of America's Military and Veterans" explains veterans' pension payments, coming straight from the U.S. government, are rock-solid and absolutely predictable.
The only problem, from the buyer's perspective, is that veterans' pensions enjoy what Rossman calls "features that may be unique." By law, he says, a military pension cannot be assigned to a third party.
Inventive buyers, Rossman tells ABC News, have used a variety of ways to try to get around that prohibition. The buyer, for example, may require that the benefits be paid "into an account established in the veteran's name but controlled by the company." The company, which may also have demanded and been given durable power of attorney by the veteran, then can withdraw the funds—even if the pensioner later tries to stop the withdrawals.
Whether the pensioner is military or civilian, the buyer may require the seller, at his or her own expense, to take out a life insurance policy with the buyer as beneficiary, so that if the seller dies prematurely, the buyer still gets the value of the pension. The insurance cost further reduces the size of the lump the pensioner gets.