Outsourcing a defined benefit (DB) plan’s administrative tasks could be advantageous for some companies. The process of gathering data, calculating pension amounts, preparing retirement paperwork, and setting up payments may become too cumbersome for in-house personnel to maintain. In addition, the vast array of regulations may be too much for some administrators to keep up with.

In David Benbow’s recent Plan Consultant article, “Replacing Betty: Why DB Plan Outsourcing Makes Sense”, Betty characterizes the sole manager of many plan sponsors’ internal pension administration system.

Here is an excerpt:

As if complicated laws weren’t enough, DB calculations depend on extensive data. Usually, the longer a plan has existed, the more data are needed to calculate the pension and, if the plan has changed hands through mergers or acquisitions, this data may not be centralized or easy to obtain. Companies that have administered their DB plans in-house often have one key person—let’s call her “Betty”—who has been calculating the pensions for 35 years. Betty has all the historical knowledge; she knows which employee groups are special and why; she remembers when she has to go look someone up in the red binder to get the frozen amounts that are listed in it. Betty is friendly, reliable and indispensable. And Betty is 62.

As impossible as it may be to imagine life without Betty, we know her days are numbered and someday she’ll retire. So far, cloning Betty isn’t an option and training others isn’t really Betty’s strong suit, but we have to find a way to take the knowledge out of Betty’s brain and document it for posterity.

Could it be time to think about outsourcing the DB plan? Outsourcing sounds expensive, and our culture has always been to take care of our own employees. Then again, we may be forced to take the plunge.

It’s very common for a pension plan to have some data-related skeletons in the closet, and experienced pension administrators have seen it before. By looking at samples of Betty’s calculations, they can identify the key pieces of data, store them in a central, accessible location, and have the mysterious red binder keypunched so it can be automated. Betty will still be around to use as a resource, but with the processes automated instead of sitting between Betty’s ears, there won’t be any surprises when she retires.

The article also discusses the scope of outsourcing DB plans and provides two examples demonstrating how outsourcing can help streamline administrative tasks.

Read more…

Administering and communicating pension plans has always been a puzzle. Utilizing in-house administration systems for pension calculations can be time-consuming and unreliable. However, the Milliman Actuarial Retirement Calculator (MARC™) is a robust pension administration system and an overall retirement program communication system.

This video discusses how MARC™ can streamline final benefit calculations, prepare election forms and notices, produce annual benefit statements, create pension estimates, and provide actuarial valuation data.

To learn more about Milliman’s pension administration system, click here.

Defined benefit plans face many administrative challenges as new regulations are enacted, old rules are changed, and companies are reorganized. In the past, it may have been easier to keep defined benefit pension administration in-house with skilled, knowledgeable staff who could calculate benefits using a spreadsheet. But now, the volume and ever-changing rules and regulations have made administration more complex. Out-of-date calculation spreadsheets and internal systems no longer meet compliance requirements, and replacing pension staff members is difficult once they retire.

In the latest issue of DB Digest, Jean Smith discusses the benefits one company experienced by outsourcing its pension administration system. To read the article, click here.

Many defined benefit (DB) plan sponsors are in the process of considering whether to offer a lump sum “sweep” to terminated deferred vested participants. Essentially, a “sweep” is a plan amendment that offers lump sums to terminated vested participants during a temporary period.

By removing these participants from the plan in 2012, sponsors may accomplish the following:

• Take advantage of an arbitrage opportunity by cashing out terminated vested participants using 2011 interest rates—as interest rates continue to decline in 2012, this opportunity may not be available in upcoming plan years
• Cause the plan to experience a gain resulting from terminated participants forgoing early retirement subsidies to which they would otherwise be entitled—because lump sums do not need to include the value of early retirement subsidies, the plan may experience a gain when those eligible for such subsidies elect to take an immediate lump sum payment
• Save future administrative expenses associated with these participants, such as Pension Benefit Guaranty Corporation (PBGC) premiums and plan administration costs—the passage of MAP-21 will cause fixed-rate PBGC premiums to increase significantly in the near future, from $35 to $42 in 2013 and to $49 (indexed) in 2014 and beyond
• Transfer the longevity risk associated with these participants to the participants themselves
• Reduce interest rate risk from the plan to the extent that cashing these participants out lowers the plan’s liability duration—terminated vested participants typically have very high liability durations

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The June issue of Milliman’s DB Digest summarizes the benefit statement requirements of the Pension Protection Act (PPA) that are related to defined benefit (DB) plans and explores some considerations to help individuals determine the best alternatives for both plan sponsors and plan participants.

Read this month’s DB Digest here and share it with your colleagues.

Milliman has launched a new publication, “DB Digest,” which focuses on best practices in pension administration. The first issue, which features an article by David Benbow called “Form 8955-SSA, Participant Statement: More Than Meets the Eye,” is available here.