Pandemic Relief Could Risk Spousal Retirement Security

Retirement plan industry groups are requesting changes to regulations that would make it easier for employees and retirees to access their retirement savings during the COVID-19 pandemic. However, consumer advocacy group the Pension Rights Center and women’s rights advocate the National Women’s Law Center warn that such a move would circumvent rules designed to protect spouses’ retirement security, and women in particular.

The National Women’s Law Center got involved because women are more likely than men to be dependent on a spouse’s retirement benefits for income later in life. And widowed and divorced women in particular are more likely to face poverty in old age. Therefore, the law center says, the removal of spousal protections will disproportionately harm women.

In a letter to the Treasury Department and the IRS, the Pension Rights Center and the National Women’s Law Center said they were responding to requests by the US Chamber of Commerce and retirement plan industry groups the SPARK Institute and the American Benefits Council asking for relief from compliance with certain spousal consent requirements.

For married people, the Employee Retirement Income Security Act (ERISA) and the IRS Code require that tax qualified defined benefit pension plans, money purchase plans, and target benefit plans automatically pay out benefits in the form of a qualified joint and survivor annuity. This entitles a spouse to a survivor pension equal to at least 50% of the benefit payable to the participant. In order for the participant to take a different form of payment or to designate a non-spouse beneficiary, the spouse must give written consent to the participant’s election. Regulations also specify that certain procedural safeguards must be met to execute a valid spousal consent.

“These requirements are not extensive, but they are the linchpin for the effective enforcement of this important right, and to help prevent fraud or coercion,” the letter read.

The requirements include informed consent as spouses are entitled to receive written disclosures explaining the various payout options, their value, the consequences of their decision, and their rights to withhold consent. The consent also must be provided by the spouse’s signature, which is intended to help prevent fraud. Consent must also be signed by the spouse in the physical presence of either a notary or the plan administrator. This also helps to prevent fraud and makes it less likely that the signature is the result of coercion.

The advocate groups acknowledge that a notary or plan administrator can’t be physically present during a time when people are self-isolating because of the pandemic, and they don’t object to a temporary measure to address the problem. However, they said that because of the increased potential for fraud, and the increased risk of coercion due to a worldwide spike in domestic violence reports during lockdown periods, any temporary alternative to the physical presence requirement must be carefully structured and accompanied by adequate safeguards.

“Without appropriate protections at the front end, the benefits could be cashed out and placed beyond the reach of surviving spouses, who could face an irreversible, lifelong loss of retirement income,” according to the letter.

In the letter, the advocate groups offered six recommendations to reduce the risk posed to spouses by potential changes to the consent requirements:

Modify, rather than excuse, the usual spousal disclosure and consent requirements. “A temporary inability to comply with the physical presence requirement does not excuse compliance with all the other requirements.”
Any modification to the physical presence requirement should be temporary and automatically end when state or national shelter-in-place requirements end and businesses reopen, or in six months, whichever happens first.
Lump sum distributions from defined benefit plans should be limited to a maximum of 10% of the value of the participant’s pension benefit during the emergency period.
Recorded video chats or telephone conversations can be permissible temporary alternatives.
Remote notarization should not be permissible. Plan administrators keep plan records, such as the participant’s election and the spouse’s signed consent form. They can easily preserve the video/telephone conference call as part of those records.
Require paper disclosures and backups. Before the execution of the spousal consent, the couple should receive the usual required informational disclosures on paper.

“Spousal pension rights can and must be protected during this unprecedented time of economic shutdown and physical distancing,” the letter said. “Any alternative to the physical presence requirement should be temporary, limited, and accompanied by adequate procedural safeguards.”