Case study: DB plan implementation case study: Procedural overhaul makes DB plan administration a breeze

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By David W. Benbow | 01 April 2011

The challenge: Unsatisfactory DB plan administration

A company approached Milliman with concerns over the administration and operational compliance of its two defined benefit pension plans (a 450-employee union plan and a 3,500-employee salaried plan). It had used another administrator for years, and was concerned about cost, timeliness, complexity, and lack of trained staff for backup.

The solution: Modifying procedures to comply with plan document

Our experience has shown that over time, most plan administrative procedures evolve into what is easiest for staff or whatever the last administrator was able to provide training on. This evolution can create hidden administrative problems, such as procedures that are out of sync with the plan.

In a takeover situation, Milliman likes to dig deep to ensure operational compliance. As a standard practice, we conducted a two-day site visit to get acquainted with the client’s plan operations. During the site visit and throughout the implementation, we discovered that the prior administrator had implemented procedures that did not match the plan document. Some procedures had not been updated for recent legislative changes.

Milliman saw an opportunity to improve controls around Suspension of Benefits Notices, terminated participants over age 70½, proper application of qualified pre-retirement survivor annuity (QPSA) charges, using 417(e) actuarial equivalence for level income calculations, 409A rules, and FICA tax calculations for nonqualified payments. Furthermore, we identified several inconsistencies in how the prior administrators calculated age and service, and which factors they used for early retirement reduction. Finally, we were able to improve upon data storage, including storing addresses for terminated vested participants.

Milliman created a website that participants can access 24 hours a day to produce their own pension estimates. Participants can also request retirement paperwork, which greatly reduces turnaround time for calculations. Participant inquiries were transferred from the client’s staff to our full-service call center.

As part of our ongoing administration, Milliman sends out required notices, including the Suspension of Benefits Notices that had not been consistently delivered. Milliman assisted the client in resolving benefits for the participants who were missed in the past by calculating one-time actuarial adjustments to make up for the period between normal retirement and when their notices were sent.

Because the plan required that QPSA charges applied to certain participants, Milliman worked with the client to create detailed rules for calculating those charges. Similarly, we discussed the legal requirements for level income calculations and programmed the client's pension system to apply both the plan and 417(e) factors to determine the correct amounts.

Milliman also provided education covering the client's nonqualified plans, including general 409A rules and FICA tax rules.

With these solutions in place, pension administration became much more consistent because all calculations were done through a single unified system, instead of by different people using different spreadsheets. In order to iron out some of the past inconsistencies, Milliman created rules for our administration to follow and obtained agreement from both the client and the prior administrator that the rules were consistent with the plan document.

For each gap in the prior administrator's data, we worked with the client to get extracts from its HR system, or have paper records researched and input.

The outcome: Faster and more accurate pension calculations

The client is thrilled with its new pension system and the support of the Milliman team. Calculations are not only more consistent, but they are also produced more quickly and more accurately. Milliman continues to provide ongoing assistance to the client as it navigates the ever-changing pension landscape. The client subsequently asked Milliman to take on the administration of its nonqualified pension plan, and after informing us that its salaried pension plan was being merged with that of its parent company, asked if Milliman would be able to support that plan as well.