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.