I haven't seen a lot of information on problems caused to public plans themselves by instituting a lump sum option. The two contexts in which I have seen them causing problems are (a) in private plans, which have a very limited ability to modify the interest rate used to calculate the lump sum option, and (B) for employees, who may spend the lump sum and then have no resources for retirement. It is my understanding that at least one state considered the second problem sufficiently likely to be a drain on its welfare system that it instituted a lump sum option
only for those retirees who became residents of other states.
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Employee benefits legal resource site