Lump-sum windows can present a “win-win” scenario for both defined benefit (DB) pension plan sponsors and participants. Sponsors can decrease their PBGC premiums by reducing the amount of participants within a plan. On the other side, participants in need of cash can benefit from a lump-sum payout.
Before implementing a lump-sum window sponsors must first consider the various administrative aspects related to such an offering. The DB digest article “Lump-sum windows: Administrative tips to consider” by Nicholas Pieper highlights these nine administrative tips that can help plan sponsors with the process.
• Identify the eligible population
• Clean up the data
• Seek legal counsel assistance
• Determine the duration of your window
• Set a manageable deadline
• Deliver an announcement mailing
• Anticipate participant inquiries
• Create the ultimate lump-sum window packet
• Prepare for special circumstances
To learn more about lump-sum windows, click here.
Data cleanup can help defined benefit (DB) plan sponsors avoid incorrect participant payments and the cost associated with correcting mistakes. Milliman’s Audrey Palmer discusses the potential mishaps that may result from inadequate pension data and the benefits of data cleanup in the DB digest article “Why good data matters.”
Here is an excerpt:
Each year, your plan’s compliance with Internal Revenue Service and Department of Labor regulations also depends on the integrity of the plan’s data. Incomplete or incorrect data can potentially cause noncompliance with many plan-disqualifying regulations, including disclosure requirements, minimum funding requirements, and minimum coverage, participation, and vesting requirements. It can also cause a serious financial burden to participants when excise taxes are imposed that are due to late payment of required minimum distributions. …
… A data cleanup project can make a significant impact to the ongoing administration of your plan by enhancing the individual participant experience, helping to ensure compliance with regulatory requirements, and keeping the plan agile and able to respond to an ever-changing financial and regulatory landscape.
The up-front cost of a data cleanup project is justified when care has been taken to identify the gaps that are easiest to close and will make the most impact. Milliman consultants have experience with this prudent analysis and can help determine which cleanup projects will produce the best return on investment.
An essential part of any data cleanup project is an evaluation of the ongoing periodic data files that provide the participants’ statuses, compensation, hours, and any indicative data to the recordkeeper. Each payroll should undergo a validation check to make certain the expected population, expected totals, and expected statuses are loaded with each file. These checks, combined with a comprehensive analysis of the file produced by the plan sponsor, will catch most errors that could cause ongoing data issues.
The U.S. Supreme Court’s repeal of Section 3 of the Defense of Marriage Act (DOMA) makes same-sex spouses eligible for the same protection that opposite-sex spouses have regarding retirement benefits when the marriage is legal in the state in which they were wed. How does this decision affect pension plan administration?
In her article “Same-sex marriage and defined benefit plans,” Milliman’s Emily Stadheim offers perspective on the following four steps plan administrators should take to ensure that their pensions are legally compliant with the repeal of Section 3.
1. Review plan documents and summary plan descriptions.
2. Review policies and procedures for spouses and domestic partners.
3. Review retirement packages and forms for compliance with post-DOMA regulation.
4. Communicate changes to benefit plans and policies and obtain same-sex marriage information from participants.
The termination by the Social Security Administration (SSA) of its letter-forwarding service creates a hindrance for retirement plan sponsors. The service allowed sponsors to mail letters trying to locate missing participants regarding their benefits as required under ERISA.
In the latest issue of Milliman’s DB Digest, Alexandra Moen addresses the implications sponsors face in fulfilling their ERISA obligations. Here is an excerpt:
ERISA, IRS, SSA, and DOL regulations have consistently emphasized “reasonable methods” when attempting to locate participants. The SSA and IRS letter-forwarding services have historically provided fiduciaries great confidence that all appropriate steps had been taken. Free Internet search sites and social media can be unreliable and inaccurate. Are these methods “reasonable” if they fail to locate a participant? Several questions regarding these government agency announcements remain, but it seems certain that plan sponsors will now have to put more time, money, and effort into these required searches for plan participants and beneficiaries.
Many plan documents do not include wording about participants who are unable to be located. It is permissible to forfeit the benefit after all reasonable means have been exhausted, as long as the benefit would be reinstated if the participant makes a claim for it. Plan sponsors may also wish to consider adding wording to the Summary Plan Description or website telling the participant of their responsibility to inform the plan of address changes, especially if their benefit could be forfeited.
To read more DB Digest articles, click here.
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?”
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.