Tag Archives: pension administration

Milliman Hangout: Milliman Actuarial Retirement Calculator™ (MARC™)

The Milliman Actuarial Retirement Calculator (MARC) is a pension administration and communication tool for pension plan sponsors. The system offers data storage, benefit calculation, correspondence management, a participant website, and more.

In this video, Milliman’s Kevin Hicks explains some of MARC’s benefits. He also showcases MARC’s participant website.

To learn more about MARC, click here.

Is pension outsourcing right for you?

Benbow-DavidThere has been much discussion about the relevance of the defined benefit (DB) pension plan. For decades, people have bemoaned the demise of DB plans, saying they are too costly to administer and too expensive to maintain. Others have suggested that there is no other type of plan that will provide a sufficient and stable source of retirement income. There has been a growing trend of top employee benefit providers shifting their DB outsourcing service models by partnering with firms such as Milliman, while others have opted to exit the DB outsourcing business completely, as recently announced by Vanguard.

Does that mean DB outsourcing is no longer relevant?

Outsourcing is more relevant than ever, but it’s become so specialized that it’s best handled by experts who do it as their core business. DB plan outsourcing was once very expensive, but technology and economies of scale have made outsourcing much more affordable. Here are a few reasons why DB plan sponsors should consider outsourcing.

The changing of the guard
Many employers have a person (call her “Betty”) who has single-handedly administered a DB plan for years, maybe decades. Betty is friendly, she is dedicated, and she knows everything about the pension plan—including when to look people up in the big red binder. Betty is 62.

Not only is Betty going to retire someday, but she hasn’t trained anyone to take her place. Betty is very dependable, but has she stayed current on all the new pension legislation, and would her work stand up to an audit by the Internal Revenue Service or U.S. Department of Labor?

Because a change is imminent, someone else should also be considered with at least as much experience as Betty, someone who is familiar with the challenges of automating the information that’s in Betty’s head (and in the big red binder), and who keeps abreast of the latest pension rules—namely, a DB outsourcing provider.

Participant convenience
We’re more than a decade into the 21st century and, thanks to our laptops, tablets, and smartphones, we’ve gotten used to having information available instantly. Participants meeting with a financial planner will want to look up their pension benefits online as well as model a few different retirement dates to see what works best for them. Some outsourcing providers have this capability, which renders the annual pension statement obsolete (participants never bothered to look at them anyway).

Providing self-service options for participants also cuts down on requests to human resources departments (and Betty is pretty overloaded with requests for estimates).

For participants who still prefer human interaction, an outsourcing provider may include a call center of friendly DB experts, who have full access to the participant’s information. They can field questions ranging from plan eligibility to the ever-popular “Where is my check?”

Plan sponsor convenience
As mentioned earlier, DB plans have become much more complicated to administer. In order to calculate benefits consistently and efficiently, a dedicated system is required for all but the simplest plans.

Plan auditors are more confident with calculations produced by a pension system instead of hand calculations or clunky spreadsheets. System results can be stored indefinitely along with evidence that calculations were reviewed. In addition, many outsourcing providers are independently audited and can provide plan auditors with a Statement on Standards for Attestation Engagements No. 16 (SSAE 16 Type 2) report for additional reassurance.

With a dedicated pension system, plan sponsors can also have a wealth of data at their fingertips. Regular reports can be generated for compensation and benefits committees and data extracts for plan actuaries. Mailing lists for summaries of material modifications (SMMs) or annual funding notices are made much simpler.

Finally, with the day-to-day pension operations off its hands, the benefits department can focus on other, more urgent matters.

It takes a village
It takes quite a few people to administer a DB plan: Actuaries to measure plan funding and forecast liabilities, administrators to calculate benefits, representatives to answer participant phone calls, and payment processors to work with the trustee. A full service outsourcing firm houses all these roles under one roof, creating a seamless team of professionals to make life easier for plan participants and plan sponsors.

If you’re wondering whether Milliman can help with the administration of your DB plan or would like to see a demo of our administration system or participant website, feel free to contact me or visit www.milliman.com.

Life after the Death Master File

Benbow-DavidOn March 26, the U.S. Department of Commerce’s National Technical Information Service (NTIS) released interim final rules regarding access to the Death Master File (DMF). The DMF is the file that allows people to research whether someone is living or dead. It’s very useful for people who administer defined benefit (DB) pension plans because it’s really not prudent to continue paying people after they’ve died. The new rules were published in the Federal Register (Vol. 79, No. 58).

As I mentioned in an earlier blog, the DMF was a playground for identity thieves, so Congress decided to restrict access to only “certified” individuals. The new interim final rules provide instructions to become a certified user of the DMF.

The rules essentially split the DMF into two groups:

• The “Limited Access DMF” includes people who have died within the last three calendar years.
• The “Open Access DMF” includes people who have died more than three years ago.

As the name implies, the Open Access DMF will be available to anyone and will not require certification. This will allow genealogists to track down long-lost relatives and (in theory) will not be of much use to identity thieves.

The Limited Access DMF will require certification because it is of much interest to identity thieves, pension administrators, and other unsavory characters.

The certification process
To apply for certification, you must:

• Complete a “Limited Access Death Master File Subscriber Certification Form” and a “Limited Access Death Master File Subscriber Agreement.” These forms are available at the NTIS website.
• Promise to behave yourself. You may not provide the information obtained from the DMF to people with no legitimate use for it. Once you have been certified, you are required to maintain a list of all employees, contractors, or subcontractors to whom you pass on the information.
• Safeguard all information obtained from the DMF.
• Pay a $200 processing fee. The certification lasts for one year and can be renewed annually for up to five years.

But wait… there’s more!
The NTIS can conduct regular and unscheduled audits of the user’s systems, facilities, and security procedures. Failure to safeguard the information can result in a $1,000 fine for each disclosure or use, up to a maximum of $250,000 in penalties per calendar year.

Sound complicated?
Most day-to-day administrators will not be willing to endure the time and expense necessary to become certified and maintain documentation for NTIS audits. Fortunately, there are still vendors available who make a living doing address searches and death audits. These vendors still have access to the DMF by completing a license agreement for use and resale, which involves a much larger fee.

What should pension sponsors include in their benefit statements?

Pension sponsors await model benefit statements from the Department of Labor (DOL) as required by the Pension Protection Act (PPA). Until guidance is issued, sponsors are to comply with new disclosure requirements in good faith. In the latest issue of DB Digest, David Benbow explains what sponsors should include in their benefit statements pending DOL guidance:

Be sure your statements contain the following required items:

• Accrued benefit
• Vested benefit, or the date the participant is expected to become vested
• A description of permitted disparity or a floor-offset arrangement if they are used in your plan

Make sure your statement is understandable to your average participant. You should check with your legal counsel to ensure that you’re in good faith compliance with the interim guidance regarding your delivery method and frequency.

Issuing benefit statements provides sponsors the opportunity to communicate a plan’s value to participants. Milliman’s Lily Taino offers more perspective in her article “Defined benefit plan statements: Getting by or adding value?

Assess administrative issues before offering lump-sum window

Offering a lump-sum window may help defined benefit plan sponsors reduce pension liabilities and participant-driven fees. There are several administrative issues sponsors need to evaluate before making such an offer. In her article “Lump-sum windows: It’s in the details,” Milliman’s Kylee Bengochea provides some practical steps sponsors should consider to address these issues.

Here is an excerpt:

How clean is your data?
Do you have gaps in service history for your plan participants? Do you have participants with birth dates showing as “01/01/1900” or “01/01/9999”? Do you have participants with the same (or no) Social Security number? Anomalies in the data can make a big difference. Without good data, you may run the risk of overpaying or underpaying a participant. When deciding whether to offer a lump-sum window, consider the cost and time that may be required to review and clean the data.

Do you have “missing” participants?
Finding missing participants can sometimes be extraordinarily difficult. Prior to sending communication pieces, it is recommended that a full address search and death audit be conducted for all participants. For participants with new addresses, a step may be needed to verify the search results are correct. For participants reported as deceased, it may be necessary to search for the beneficiary and determine whether a preretirement death benefit is payable. Performing the audits and updating participant and beneficiary records prior to offering a lump-sum window will help to minimize delays.

What type of window do you want to choose?
When a plan sponsor chooses to offer a temporary lump-sum option to participants, the plan document must be amended to state what the window of time will be for the offer. The open period of a lump-sum window typically ranges from 30 to 90 days. Choosing the right timing for your window depends on the amount of time and resources you are able to dedicate. Shorter windows usually require significantly more resources to ensure efficient processing and quicker turnaround. Choosing a longer window doesn’t mean the same issues won’t be encountered, but the schedule itself will offer more time to complete all the processing required.

Is outsourcing defined benefit plans productive?

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.

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Pension administration system, MARC™ it right

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.

Outsourcing defined benefit plan administration

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.

Lump-sum “sweeps”: Plan sponsor considerations

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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Defined benefit plan statements: Getting by or adding value?

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.