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Financial Planning > Behavioral Finance

Potential Pension Income Abuse Targeted by Sen. Harkin

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Lump sum or annuity? It’s a question that dogs lottery winners and parties to structured settlements, and it might now involve your client’s retirement plan.

Leslie Scism of The Wall Street Journal has been tracking the efforts of Sen. Tom Harkin, D-Iowa, chairman of the Health, Education, Labor and Pensions Committee to “take a closer look” at what Scism calls a burgeoning and controversial business in which veterans and other retirees sell some of their future pension income to investors, with an array of middlemen profiting from the transactions.

“The sale of pensions to investors in secondary markets is a worrisome new practice that deserves careful scrutiny,” Harkin (left) said, according to the paper. “In tough economic times, hard-working people are often forced to make difficult choices between immediate economic needs and their future retirement security.

“However, it is critically important that people forced to make these tough decisions have the information they need to make wise choices, and don’t fall victim to unscrupulous or illegal practices,” he said.

As with issues involving life settlements (and viatical settlements before them), legislators and regulators are increasingly concerned about the potential for the abuse of consumers by unscrupulous middlemen.

As the Journal detailed in a story earlier this month, financial middlemen have helped to set up websites with names such as and to connect with pension recipients.

The pensioners need immediate cash; the investors are lured by promises of higher returns.

Harkin told the paper that he plans “to take a closer look at these issues in the coming months to ensure that our laws are respected and pension participants are not abused.” A committee spokeswoman said it is early in the process, and the senator declined to elaborate on possible courses of action.

“The financial middlemen bundle information obtained by the websites into spreadsheets that are supplied to financial advisers for their clients,” Scism writes. “The investor pays an agreed-upon lump sum to the retiree, who signs a contract pledging to hand over all or part of each month’s check for a set number of years. The deals typically are priced to yield investors 6% to 7% or so a year, as their money is returned over a period of several years to 10 years.”

Meanwhile, she adds, an array of middlemen collect fees: They are spread among the website operators, firms that do the heavy lifting of pulling together transactions, distributors and the financial advisers who land individual investors.

“These firms have their eye on the hundreds of thousands of military veterans, police officers and firefighters who can start receiving pension checks while they are still in their 40s, many of whom have moved on to other jobs and wouldn’t be put in desperate financial straits if they pledge some of their future pension income for a wad of cash.”


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