Many plan sponsors have offered lump-sum cashout options to vested terminated participants (VTs) for a specified period of time, or window. While this strategy provides pension risk management opportunities, it is important to note that a large number of administrative tasks are necessary before offering such a window. Some of the key steps include:
• Create a timeline that lists target mailing dates, intermediate due dates, and responsibilities of each party involved in the window project. Set up biweekly or monthly calls to update status of each task.
• Estimate the total lump-sum value for all VTs and select a threshold for the lump-sum cap, if any.
• Identify which VTs are eligible for the window. The plan sponsor may want to exclude VTs with a qualified domestic relations order (QDRO) and alternate payees under a QDRO.
• Amend the plan. The amendment should include definitions for the window period, eligible VTs for the window, lump sum and corresponding annuity calculation basis. The treatment of early retirement subsidies, if any should also be addressed.
• Perform death and address searches.
• Find copies of benefit calculations for eligible VTs. This task will take a lot of effort if the eligible VT population is large. Some calculations may need to be revised or newly prepared and will require the rapid availability of data from the plan administrator.
• Prepare communication package including announcement letter, election packages, reminder postcard, etc.
The plan sponsor should coordinate all tasks with the human resources department, the actuary of the plan, and legal counsel before offering the lump-sum cashout window. Advanced planning along with a flexible timeline will allow for a successful window campaign.