Background
For several years, plan sponsors have been looking for ways to de-risk their defined benefit retirement plans in an effort to reduce or eliminate the liability associated with pension expenses. There are different settlement strategies that plan sponsors can explore, and voluntary plan termination is one of them.
One of our clients of over 13 years, a family-owned integrated package and paper producer with approximately 800 active and terminated vested employees, decided to freeze accruals of the salaried plan with the intention of terminating the plan soon after. In preparation for the plan termination, the plan sponsor offered all terminated, vested, and active participants the option to take a full lump-sum payout of their pension benefit regardless of age, even though the plan’s early retirement age was 55.
The Milliman Plan Actuary and Milliman Administration Project Team worked very closely with the plan termination consultant to manage, organize, and track the termination from start to finish and was responsible for the following:
- Calculating accrued benefits for all participants and determining the plan’s obligations and total accrued liability
- Providing actuarial support for all aspects of the termination
- Obtaining the most up-to-date addresses for mailing communications to participants
- Managing all communication mailings to participants and assisting participants with questions
- Drafting the plan amendment and filing for the plan termination with the IRS
- Addressing participant questions about the plan termination and explaining the benefit information they received
- Providing data to the annuity provider
- Working with the trustee to process payments to participants in a timely manner
Both the Milliman Plan Actuary and Milliman Administration Project Team worked very closely with the client and the plan consultant to develop a detailed timeline that included all of the required participant and IRS mailings for the lump-sum window. As the Milliman Administration Project Team worked through the lump-sum window, we were in communication with the plan termination consultant who had prepared all the necessary filings and amendments. The Milliman Administration Project Team was responsible for mailing all participant communication and monitoring various questions regarding the lump-sum window from plan participants.
Several changes were made to the timeline to accommodate the required mailings and the client’s timeline. During every phase of the process, there was communication between the plan participants, plan fiduciary, ERISA attorney, annuity carrier/broker, custodian and annuity consultant, or the Milliman Administration Project Team. Because each group played a specific role at different times during the process, the detailed timeline was shared with all parties. Throughout the project, Milliman provided preliminary participant data to the actuary and the annuity provider to help with the filing and reporting they needed to complete.
Communication with employees and other parties is critical and may cause plan participants to feel anxious, given the changes a plan termination can bring. The Pension Benefit Guaranty Corporation (PBGC) has certain mandatory filings/communications, such as a notice of intent to terminate notice of plan benefits, a notice of annuity information, and notice of annuity contract. In addition to the mandatory filings/communications, the Milliman Administration Project Team suggested additional communications; one example was the payment confirmation that was sent to everyone who made an election during the voluntary window period. The payment confirmation detailed the election made by the participant and timing of payment. Sending this notice minimized the number of calls from participants to our contact center.
Finalizing the data file for the annuity provider is important to capture all payment elections from the receipt of last-minute election paperwork. The data file the annuity provider uses should reflect all payments made during the lump-sum window. As the lump-sum window neared completion, additional data files were provided to the plan termination consultant and the client to help the various annuity providers during the bidding process. The data file was provided to both the client and the plan termination consultant to forward on to the annuity provider, clearly indicating that this was not final, reconciled data.
Challenges
There were several challenges associated with a plan termination. One unexpected challenge was proper coordination between all the parties involved. We were all working from a detailed timeline, but in hindsight, it did not contain sufficient detail on who was responsible for each step of the process. An example of the lack of specific timeline detail resulting in a missed step in the process was when the final data file provided by Milliman was sent to the plan termination consultant and the client. The timeline indicated that the final data file was supposed to be sent to the annuity provider, but unfortunately did not clearly specify if this was the responsibility of the plan termination consultant or client contact. In this case, neither party forwarded the final data file because each thought the other was going to send it.
This oversight was revealed when a participant contacted the Milliman Benefit Service Center regarding the annuity certificate he received from the annuity provider. This participant had just received a lump-sum distribution as part of the voluntary offering. After researching the situation, Milliman determined that the participant was in the preliminary data file but was not part of the final data file that was provided to the client and plan termination consultant. Milliman raised this issue to both the client and the consultant, and client determined that the final data file was not provided to the annuity provider and that the preliminary data file was used for the annuity purchases. An updated Group Annuity Benefit Report needed to be generated with the correct population; letters were mailed to participants who should not have received an annuity certificate. Additionally, the annuity provider had to revise the premium amount and issue a refund to the plan. If this had not been caught, it could have resulted in a premium overcharge of more than $600,000 to the plan.
The magnitude of the calculation error would have created a large plan surplus as well as a large tax penalty if refunded back to the company as a plan sponsor at the conclusion of the plan termination. Additionally, annuities would have been purchased for participants who had already taken full distributions from the plan. This could have put the employer in the uncomfortable position of seeking a refund from the participants. Not keeping all parties (plan participants, actuary, IRS, Department of Labor [DOL], and annuity providers, in this case) accurately informed in a timely manner could have led to a disastrous outcome for the client.
Solution
Fully using a plan termination consultant should eliminate these types of issues/oversight. In this case, the plan termination consultant thought the client was going to take responsibility for sending the final data file to the annuity provider. A line item to ensure that the final data file was received by the annuity provider should be added to the timeline. Plan administrators should also request confirmation from all parties upon receipt of final data.
Outcome
The client worked with its plan counsel and concluded that a surplus in the plan that results from a contribution made because of a “mistake of fact” could be returned to the company within one year of the date on which the contribution was made. Because this error was caught within this timeframe, the client completed and signed the appropriate refund form from the annuity provider. No penalties were assessed and the issue was corrected.
In perspective
Here are some reminders from an actuarial perspective when administering a plan termination:
- In general, ensure that the plan sponsor understands the length and complexity of the plan termination process. They probably do this infrequently, so be prepared to act as a guide throughout the process. Start working on data issues with the plan sponsor as soon as possible, such as looking for lost participants and inquiring about spouses.
- Take care in selecting the date of plan termination (DOPT). The end of the plan year tends to work best because the actuarial valuations are required through the DOPT. By using the last day of the plan year, a partial year actuarial valuation will not be a concern.
- Remember that the final PBGC premium filing is due when the post-distribution certification is submitted. If final benefit payments are made early in the plan year, the final filing is due much earlier than in a normal plan year. Similarly, do not forget about the due date of the final 5500; it may be due earlier as well.
- While the final actuarial valuation is for the plan year of the DOPT, auditors will need values for financial statements for the years between the DOPT and the final asset distribution.
- Make sure the plan administrator, actuarial team, and legal service providers work together from the beginning of the process.
- Have a clearly written timeline and assignment of responsibilities. Make sure all parties have a working knowledge of what the others are doing. For instance, if the actuary is completing the notice of plan benefits, the actuary and plan administrator need to coordinate the information and have a good working relationship. In addition, the plan administrator/provider should be aware that all the election forms need to be ready quickly once the plan determination letter comes in.
- In actuarial calculations, do not overestimate the number of people who will take a lump sum. Some terminated vested participants will not respond to mailings and may be defaulted into an annuity.