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.