Regulation

Investigators Find a Web of Companies Duping Retirees


About three dozen companies, in an interrelated web, are marketing and selling pricey ways for retirees to borrow against their pensions, according to a report from the Government Accountability Office. The GAO looked at what’s known as pension advances, in which pensioners get a lump sum in exchange for handing over their monthly pension payments for a set number of years. The products, the GAO found, were “unfavorable” for borrowers, with effective interest rates as high as 90 percent. The advances often also require the retiree to buy life insurance, making them even more costly.

From time to time, some government and private pension plans offer lump-sum payments to buy out their pensioners, but they must follow federal regulations that set a minimum for how much they must give the retirees. There’s no equivalent rule for private companies that offer pension advances. The private lenders, which the GAO didn’t name, offered about half as much as the minimum lump sum that the pension funds themselves would have to provide under federal law.

Many of the companies marketed specifically to low-income people in need of quick cash to pay credit card debts, tuition costs, medicals bills, or other expenses. Two companies specifically targeted military pensions, including one website that also sold patriotic merchandise.

The companies could dupe investors, too. The SEC has said pension advances involve complex risks, but several of the companies advertised to investors that they offered a safe product with a good return. One promoted income strategies that “focused on keeping your money safe, paying more than bank [certificates of deposit], money markets, and Treasuries, and doing so without the downside risk and volatility of stocks, bonds, and mutual funds,” according to the report (the brackets are in the original).

The GAO found 38 companies involved with pension advances, but many of those outfits were affiliated with each other in ways that weren’t easily apparent to a consumer. One told an undercover investigator that “there’s only a couple of companies that do this … probably 80 percent of all the pensions that get sold in this country … are through us.”

That concentration could be a benefit for regulators, legislators, or state governments that want to clamp down on the products. Taking out a major player or two could hurt the whole system. But the GAO offered a cautionary tale: One provider lost a consumer class-action lawsuit, filed for bankruptcy, then reopened under a new name.

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Weise is a reporter for Bloomberg Businessweek in Seattle. Follow her on Twitter @kyweise.


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