Pension Plan Scam, Beware!

By Becky Clapes, Guest Blogger

Recently, the North American Securities Administrators Association released a warning to retirees about bogus pension investments. The scam operates when investors give funds for cash advances and pension holders turn over future payments for an immediate lump sum cash payment.

Companies raised money by selling membership interests in the company. Individuals purchasing these membership interests were promised an 8% return on investment, but the payments stopped suddenly in 2009. The company advertised it was able to offer these lump sum cash payments in exchange for future pension payments from the money it raised selling membership investments. A class action lawsuit was brought against one company, Structured Investments, which found that the assignment of government pensions if prohibited by federal law. Structured Investments was ordered to pay back the pensions.

Questions to ask before you invest:

  • Is the investment registered with the state or federal government? States and regions have securities regulators where you can determine whether or not the investment in question is registered.
  • Have you looked into the background of the officers of the company offering the investment? State and regional securities regulators offer background information on officers.
  • Is the transaction legal? Check the sound of the pension funds before investing.
  • Can you afford to lose the money? Some investments are riskier than others. You must know and understand the risk of each investment before investing.
  • Can you get your money if you need it? Some investments require holding periods and do not allow you to take cash out.

Questions to ask before you sell your rights:

  • Is the company offering to buy your pension rights financially secure? You want to ensure that the company will be able to pay you upon sale.
  • How does the company make money? Typically, the company will profit off of charging fees which will make the payout lower than the value of the pension.
  • Are there restrictions on your pension benefits? Your pension administrator can tell you which restrictions apply.
  • Does the company require you to purchase life insurance naming it as the beneficiary? This purchase will increase the cost of receiving a lump-sum payment.
  • Have you considered tax consequences? Lump-sum payments may be subject to income tax.

Before making the decision to invest or sell rights, make sure to do research.