In just a few months, COVID-19 has changed our businesses and organizations dramatically—in the United States and around the world. Many employers have taken immediate action by increasing staff or staff hours, transitioning to remote workforces, reducing staff or staff hours, or even closing their doors completely.
If you are considering major changes in your workforce and think your defined benefit (DB) plan can help ease the pain of this transition, you will want to proceed carefully. With every action, there’s a reaction—often a good one but not always. Keep this in mind if you are increasing staff and are exploring:
- In-service distributions: Amending the DB plan to allow for in-service distributions as early as 59½ can help retain key talent but it can also make the ongoing administration quite complicated as well as removing the component of orderly retirement, which is an important factor in DB plans. This added complexity is less of an issue if you have a frozen plan, and are looking to terminate it in the near future or de-risk it with an annuity purchase. In this case, more in-pay participants could result in better annuity pricing. You can also include employees over 59½ in frozen plan lump sum window offerings to save on Pension Benefit Guaranty Corporation (PBGC) headcount premiums.
- Waiving suspension of benefits for rehired retirees: Rehiring retired professionals can be easier if you allow them to continue to collect their pension benefits while they work. But be aware that rehires who are subsequently laid off may be entitled to some form of paid leave. And this “double dipping” could increase plan costs due to the additional service earned.
- Increasing Normal Retirement Age: Amending the plan to increase the Normal Retirement Age from 65 to, for example, 67 could help retain more experienced, needed talent at work. But as the talent pipeline starts to fill up again, you could risk suppressing personal growth. Young talent will go elsewhere if they see older workers blocking their career paths. And keeping more expensive talent around long-term could result in more expensive benefits at retirement from longer accrual periods.
If you are decreasing staff and are exploring:
- An early retirement window: During a designated period, an early retirement window with enhanced benefits—often including temporary continuation of health insurance—can encourage retirement. The upside is that you can reduce active participant cost; the downside is that it can increase the plan cost over time if the plan is not well funded. Nondiscrimination and liquidity requirements also must be carefully considered when offering an early retirement window. Use projections to ensure you won’t trigger special accounting events (like settlements, curtailments, and special termination benefits, in both the pension plan and the post-retirement medical plan if applicable) or a partial plan termination if the plan is not frozen.
- Lower Normal Retirement Age: Amending the plan to decrease the Normal Retirement Age would allow employees to collect full retirement benefits earlier while working elsewhere so workers may leave on their own accord. There could be a few downsides: Some may be entitled to full benefits as they retire early and increase the cost of the plan. Or you also risk losing high-quality workers to competitors.
It’s important to note that all of the above defined benefit plan changes could open collective bargaining agreements in place and may affect your nonqualified plan arrangements. Short-term and long-term impacts should be carefully considered.
To discuss the benefits and possible consequences of leveraging your defined benefit plan as you increase or decrease staff, contact your Milliman consultant today.
This blog post is the third of a three-part series on workforce management during the coronavirus pandemic.