Tag Archives: David Benbow

Communicating lump-sum windows

Lump-sum windows are common ways for defined benefit (DB) plan sponsors to shed pension liabilities. According to Milliman consultant David Benbow, effective communication is essential when employers consider offering of a lump-sum window. He offers his perspective in a recent Money Management Intelligence article.

Here is an excerpt:

Three things are necessary to make a lump-sum window successful: communication, communication, communication. In addition to the required legal notices informing participants of their rights, you should do your best to create a package that is eye-catching (not many people read their mail after it goes in the trash) and easy to read (if it reads like stereo instructions, people will jump to the election forms and make up their own rules). The communication should spell out the pros and cons of taking a lump sum so that the participant can make an informed decision. The last thing anyone wants is for a well-intended offer to turn into a class action because participants were misled.

It takes time to create a good communication package, and usually there will be several people who wants to take a whack at the piñata, including legal counsel. Just know that clear communication up front will reduce the number of questions and follow-up on the back end.

For more Milliman perspective on lump-sum distributions, click here.

To take or not to take, that is the lump-sum window question

Milliman’s John Ehrhardt was quoted in a recent Wall Street Journal article entitled “Should you take a lump-sum pension offer?” (subscription required). The article highlights one individual’s experience with a former employer’s lump-sum window.

Here’s an excerpt:

One of the simplest ways to evaluate a lump-sum offer is to find out the extent to which the money compensates you for the loss of your pension. I asked New York Life Insurance how much it would cost me today to buy a deferred annuity that will pay me $423 a month, starting in 14 years.

The answer: $45,896, which means my lump sum falls $13,808 short of what I would need to replicate my pension’s guaranteed income with an annuity.

Along the same lines, New York Life says my $32,088 lump sum will buy a monthly income of $296.13 starting at age 65, which is 30% less than my $423 pension benefit.

Of course, I can always invest my lump sum myself. But is it realistic to think that over the next 14 years I will be able to turn my $32,088 into $127,000? That is the amount I would need, starting at age 65, to generate $423 a month using the 4% withdrawal rate that long has been considered a “safe” level of spending over a 30-year retirement.

The answer: probably not, since I will need to earn 10.35% a year, net of investment fees. A portfolio evenly divided between U.S. large-cap stocks and bonds has returned 7.7% a year, on average, since 1926, according to investment-research firm Morningstar.

With a 7.7% annual return, my $32,088 would appreciate to $90,650 by the time I turn 65. Applying the 4% rule yields an initial monthly withdrawal of $302 that, with annual inflation adjustments of 2%, would grow to $423 by the time I am about 82.

…”It’s important to find out whether there are benefits or features that are available to you with the pension that you’d leave on the table if you take the lump sum,” says John Ehrhardt, principal at actuarial consulting firm Milliman.

Every participant’s situation is different. Milliman’s David Benbow offers some perspective in his blog “Lump-sum windows: Too much information?

Lump-sum windows: Too much information?

Benbow-DavidIn January, the U.S. Government Accountability Office (GAO) issued the report “Participants need better information when offered lump sums that replace their lifetime benefits.” This is much easier said than done. There is so much information included in lump-sum kits that they typically run at least 25 pages. The Special Tax Notice alone takes up five pages.

The relative value rules are supposed to give participants a heads-up if they’re about to forfeit an early retirement subsidy, but very few participants ask questions about the relative value descriptions in their pension kits. Could the reason be that the relative values clarify things so much that everyone understands all the consequences of their elections? Could it be that participants are already suffering from information overload and simply tune out?

“Better information” is only better if participants understand it and are willing to take the time to read it. Unless each lump-sum kit is hand-delivered by a pension specialist and an actuary, participants will never understand the required information.

There is still a great deal of interest in offering lump-sum windows. Many plan sponsors have been offering lump sums to terminated vested participants, and in 2012, both Ford and General Motors got approval to offer their retirees the opportunity to trade in their lifetime payments for lump sums.

The Internal Revenue Service (IRS) has, for the time being, stopped issuing Private Letter Rulings allowing companies to offer lump sums to retirees. But why? Are they afraid retirees will be bilked out of their future payments? Retirees wouldn’t be losing out on any early retirement subsidies like terminated vested participants might. Furthermore, there are several reasons why it might be very advantageous for retirees to take lump sums:

  • If they don’t expect to live very long

Remember that retirees are old. If you knew your days were numbered and you were receiving monthly payments for life, wouldn’t you jump at the opportunity to trade your $200 monthly payment for an $18,000 lump sum?

  • If their monthly annuity payments are ridiculously small

Many plans only pay lump sums if the total present value is under $5,000 at the time of commencement. As a result, there are a lot of retirees out there who are receiving monthly payments of less than $50. They would probably appreciate the opportunity to turn that small payment into a chunk of money they could actually do something with.

  • If their financial situations have changed

People’s situations change over the course of time. Retirees may decide that, for whatever reason, the lump-sum payment could give them the opportunity to pay off a debt, buy an RV, or invest in a business.

Instead of saying that participants need better information, why not accept that every participant’s situation is different and no amount of additional information is going to change the fact that they know what they want?

Pensions remain an important part of retirement security

Defined benefit (DB) plans are still relevant even though defined contribution (DC) plans have become more common. In the latest DB Digest, Milliman’s David Benbow highlights a 1970 article by actuary Bill Halvorson that looks 30 years into the future of DB plans. David also explains why the best possible retirement solution would combine DB and DC plans in addition to Social Security.

Here is an excerpt:

Reading this article from 1970 is like opening a time capsule. And, while Bill Halvorson didn’t predict everything that would happen to pensions, he did say a few things that ring very true nearly 50 years later.

Bill speculated that Social Security would spiral out of control and that if pensions integrated with Social Security, they would be diminished. This would lead to the emergence of savings plans, thrift plans, and profit-sharing plans as the only viable way to supplement expanding Social Security.

Bill also suggested that funding regulations would strangle private pensions…

DB plans are not dead. Not yet, anyway. And I, for one, hope that the pendulum will swing back toward the stability of some form of DB plan because as life expectancy increases, so does the likelihood of outliving your savings. The best solution is likely a combination of DB and DC plans in addition to Social Security. The DC balance could be designed to provide income for a fixed number of years, at which time the DB plan (or “longevity plan”) would kick in and provide lifetime income at later ages, while Social Security would provide inflation-adjusted lifetime income. Because DB benefits would be paid over shorter life expectancies, the funding would be much less volatile.

Top Milliman blog posts in 2014

Milliman consultants had another prolific publishing year in 2014, with blog topics ranging from healthcare reform to HATFA. As 2014 comes to a close, we’ve highlighted Milliman’s top 20 blogs for 2014 based on total page views.

20. Mike Williams and Stephanie Noonan’s blog, “Four things employers should know when evaluating private health exchanges,” can help employers determine whether a PHE makes sense for them.

19. Kevin Skow discusses savings tools that can help employees prepare for retirement in his blog “Retirement readiness: How long will you live in retirement? Want to bet on it?

18. The Benefits Alert entitled “Revised mortality assumptions issued for pension plans,” published by Milliman’s Employee Benefit Research Group, provides pension plan sponsors actuarial perspective on the Society of Actuaries’ revised mortality tables.

17. In her blog, “PBGC variable rate premium: Should plans make the switch?,” Milliman’s Maria Moliterno provides examples of how consultants can estimate variable rate premiums using either the standard premium funding target or the alternative premium funding target for 2014 and 2015 plan years.

16. Milliman’s infographic “The boomerang generation’s retirement planning” features 12 tips Millennials should consider when developing their retirement strategy.

15. “Young uninsureds ask, ‘Do I feel lucky?’” examines the dilemma young consumers face when deciding to purchase insurance on the health exchange or go uninsured.

14. Last year’s #1 blog, “Retiring early under ACA: An unexpected outcome for employers?,” is still going strong. The blog authored by Jeff Bradley discusses the impact that the Patient Protection and Affordable Care Act could have on early retirees.

13. Genny Sedgwick’s “Fee leveling in DC plans: Disclosure is just the beginning” blog also made our list for the second consecutive year. Genny explains how different fee assessment methodologies, when used with a strategy to normalize revenue sharing among participant accounts, can significantly modify the impact of plan fees in participant accounts.

12. Doug Conkel discusses how the Supreme Court’s decision to rule on Tibble vs. Edison may impact defined contribution plans in his blog “Tibble vs. Edison: What will it mean for plan sponsors and fiduciaries?

11. In her blog “Retirement plan leakage and retirement readiness,” Kara Tedesco discusses some problems created by the outflow of retirement savings. She also provides perspective on how employers can help employees keep money in their plans.

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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.