To reduce pension risk, many organizations offer eligible participants a limited-time opportunity to receive their pension benefit as a single lump sum payment and “cash out” their future benefit. This event is often called a “window.” The audience for a lump sum window varies and can include active employees, terminated vested participants, retirees, and beneficiaries. During a lump sum window, an eligible participant can:
- Elect to receive an immediate lump sum payment
- Begin receiving (or change the form of) monthly annuity payments
- Defer benefit payments until a later date
The U.S. government requires that plan participants be provided with enough information in order to make a decision that is in their own best interest. If participants respond and take advantage of the limited opportunity, successful cash-outs can reduce fees and future plan liabilities. That’s where engaging communications enter the picture. Statistics show the more you educate, communicate, and simplify—the higher the number of participants who will take the offer. Generally, Milliman has seen that programs with effective communication campaigns can achieve acceptance rates in the range of 50% to 60%.
This article provides tips on the proven components of successful lump sum window campaigns that result in a win/win for you and your participants.
What information should lump sum window communications include?
Your main goal is to simplify the decision-making process. You also want to ensure that participants aren’t overwhelmed with their options. To accomplish these priorities, provide impartial communications that:
- Keep it simple. Clearly identify information. Then separate the facts from the action steps that need to be taken.
- List the action steps first. Move the action steps to the beginning of the participant package. This simple change helps drive participants to respond.
- Repeat. Highlight what participants need to know, what they need to do, and where they can find help along the way.
- Offer clear choices. Carefully present unbiased and understandable options. Describe forms of payment and the ability to choose a non-spouse beneficiary (if the plan permits this).
- Present materials in an eye-catching design. Design, layout, company logo, graphics, and colors are all factors that can make the difference between a participant package that gets a response and one that is ignored.
Offer support. Participants will not respond if they have unanswered questions. Look for easy-to-use ways to allow participants to ask questions and get answers, such as:
- A toll-free call center
- A dedicated human resources (HR) department
- Outside financial advisors
Then provide these service teams with support materials, such as Frequently Asked Questions (FAQs), communication samples, and training, to prepare them to answer questions and support the initiative.
Your lump sum communication plan needs to support the U.S. Government Accountability Office (GAO) recommendations regarding the key types of information that participants should receive so that they can understand a lump sum offer.
Answer common questions. Effective communications should answer the following questions:
- What benefit payment options are available to me?
- How was the lump sum amount calculated?
- How does the value of the lump sum compare to the monthly annuity?
- What are the pros and cons of accepting the lump sum?
- What are the tax implications of taking a lump sum?
- What role does the Pension Benefit Guaranty Corporation (PBGC) play? What level of protection does the PBGC provide on each benefit option?
- How do I accept or reject the lump sum?
- What is the deadline?
- Whom may I contact for more information or assistance?
What communication elements should you include in a successful lump sum communication campaign?
The purpose of having a communication campaign is to simplify the message through multiple touch-points. Don’t expect one mass mailing to do the job. Instead, announce the window, educate about the opportunity, and provide reminders about the deadline. Lastly, send postcards confirming receipt and acceptance of paperwork once participant elections are confirmed. Below is an outline of communication elements to keep the message front and center for participants.
Announcement postcard — Build awareness and alert participants of the upcoming opportunity.
Send this communication two to three weeks in advance of mailing the participant packages. The announcement postcard accomplishes two things:
- Informs participants that they will receive an important package of information from the plan sponsor.
- Notifies the administrator about bad addresses.
Reminder postcard — Reminds participants about the one-time opportunity and deadline.
Send participants a reminder two weeks prior to the close of the window. Historically, take-up rates increase after sending this tickler.
Confirmation postcard — Informs participants that payments are on the way.
Put participants’ minds at ease by sending a postcard to confirm receipt and acceptance of their paperwork after elections are processed.
Education & election packet
Participant education and election packet in one package—include everything a participant needs to know and do:
- Decision guide with page dedicated to FAQs
- Personalized election form (a must)
- Prepaid business reply envelope to make it easy for participants to respond (optional but desired)
- 9”x12” carrier envelope branded with client’s logo and including a tagline to draw attention to the contents: “Important Retirement Information Enclosed – Immediate Action Required”
Decision guide sample
Explains the lump sum versus monthly annuity option and outlines considerations, including an example of how lump sum amounts can go up or down based on interest rates, rollover advantages, and answers to other FAQs.
What extra steps can you take to boost the response rate?
Looking to increase the response rate? Go the extra mile and add these touch-points:
- Offer recorded webinars with an overview of pension benefits, a discussion of lump sums versus monthly annuities, and a look at other considerations.
- Offer live group meetings to walk through the participant package and the election process.
- Include individual consultations with experienced retirement education specialists. This personal touch increases participant responses.
- Create letters for special situations, such as qualified domestic relations orders (QDROs), alternate payees, etc.
- Include an easy, one-step direct rollover option into the employer’s defined contribution plan for active employees, if applicable.
- Develop a website with personalized statements, online election capabilities, a chat feature, and daily reporting of response rates.
- Consider offering direct deposit for lump sum payments.
- Ask the call center to reach out to participants who have not responded.
A successful lump sum window is supported by a thoughtful, well-planned, and well-executed communication strategy. Involve your communication consultant from the beginning so they can gather information early to develop messages to help participants feel confident about their benefit decisions.
To see other articles in the Frozen Pension Plans: The Way Forward series, click here.