There has been a lot of buzz lately about offering lump sums to terminated vested participants. Several large employers implemented lump sum windows in order to de-risk their pension plans and reduce Pension Benefit Guaranty Corporation (PBGC) premiums. I recently had a client ask about taking it to the next level and offering a lump sum window to existing retirees.
They were interested in targeting retirees who were receiving small benefits (but they hadn't decided yet what they considered to be small).
It sounds like a simple enough project, but there are a few potential complications that employers should consider if they re interested in offering such a window.
Don t we have to amend the plan?
Absolutely. But not yet.
Even though a plan doesn't allow paying out existing retirees, a targeted group needs to be identified. Sponsors hoping to cash out small benefits will want to work with the plan actuary to calculate present values for as many retirees as possible. Then the group can be sliced and diced by both monthly amounts and total present values to determine eligible participants for the window and the effect on plan funding levels.
Plan sponsors should also consult with their legal counsel about getting a Private Letter Ruling from the IRS.
There will be time for amending after the dust settles. Plan sponsors have until the end of the plan year to adopt discretionary plan amendments.
Old people have old data
Because many retirees may have been receiving payments for decades, their data could be missing things that are necessary for calculating present values. It's very common for actuaries to make assumptions about missing birth dates. If lump sums are offered, the actual birth dates (for participants and beneficiaries) must be used.
Communication considerations
Be careful when communicating about the lump sum window to retirees. Remember that the people in this group are easily worried, have a lot of questions, and talk to each other. Make sure to explain that this is just an option, that pensions can stay the same if that's what they choose. Call centers should be prepared in advance.
Manual mailings
If a pension administration system is used for day-to-day processes, forget about using it for a retiree lump sum window. Calculating and communicating these benefits will be a highly manual process. Allow for the extra time or expense that manual calculations and mail-merges require.
Deceased beneficiaries
In some cases, returned election forms will reveal that spouses and beneficiaries have predeceased retirees. That could lower the present value because the payment is valued over one lifetime instead of two. The sponsor should decide how to communicate this. Retirees will not be pleased when the amount comes back lower because it is based on a single life.
QJSA requirements
Keep in mind that the same spousal consent requirements apply as for traditional lump sum elections. Qualified Joint & Survivor Annuity (QJSA) notices must be provided and spousal consent must be obtained and notarized the spouse would be the person to whom the retiree was married when the original benefit commenced, even if they are no longer married.
No guarantees
After all is said and done, there are no guarantees that any of the retirees will choose the lump sum. You might expect that retirees are old and set in their ways. After all, they've been receiving payments for a long time and may be reluctant to let go of their small monthly check.
But actual results may surprise you. In a recent plan termination for one of our clients, nearly half of the retirees elected to take the lump sum and there was little demographic difference between those who took lump sums and those who didn't. While broader trends can't be predicted from a single example, it's somewhat reassuring that all the effort involved in opening the window may not be in vain.
They were interested in targeting retirees who were receiving small benefits (but they hadn't decided yet what they considered to be small).
It sounds like a simple enough project, but there are a few potential complications that employers should consider if they re interested in offering such a window.
Don t we have to amend the plan?
Absolutely. But not yet.
Even though a plan doesn't allow paying out existing retirees, a targeted group needs to be identified. Sponsors hoping to cash out small benefits will want to work with the plan actuary to calculate present values for as many retirees as possible. Then the group can be sliced and diced by both monthly amounts and total present values to determine eligible participants for the window and the effect on plan funding levels.
Plan sponsors should also consult with their legal counsel about getting a Private Letter Ruling from the IRS.
There will be time for amending after the dust settles. Plan sponsors have until the end of the plan year to adopt discretionary plan amendments.
Old people have old data
Because many retirees may have been receiving payments for decades, their data could be missing things that are necessary for calculating present values. It's very common for actuaries to make assumptions about missing birth dates. If lump sums are offered, the actual birth dates (for participants and beneficiaries) must be used.
Communication considerations
Be careful when communicating about the lump sum window to retirees. Remember that the people in this group are easily worried, have a lot of questions, and talk to each other. Make sure to explain that this is just an option, that pensions can stay the same if that's what they choose. Call centers should be prepared in advance.
Manual mailings
If a pension administration system is used for day-to-day processes, forget about using it for a retiree lump sum window. Calculating and communicating these benefits will be a highly manual process. Allow for the extra time or expense that manual calculations and mail-merges require.
Deceased beneficiaries
In some cases, returned election forms will reveal that spouses and beneficiaries have predeceased retirees. That could lower the present value because the payment is valued over one lifetime instead of two. The sponsor should decide how to communicate this. Retirees will not be pleased when the amount comes back lower because it is based on a single life.
QJSA requirements
Keep in mind that the same spousal consent requirements apply as for traditional lump sum elections. Qualified Joint & Survivor Annuity (QJSA) notices must be provided and spousal consent must be obtained and notarized the spouse would be the person to whom the retiree was married when the original benefit commenced, even if they are no longer married.
No guarantees
After all is said and done, there are no guarantees that any of the retirees will choose the lump sum. You might expect that retirees are old and set in their ways. After all, they've been receiving payments for a long time and may be reluctant to let go of their small monthly check.
But actual results may surprise you. In a recent plan termination for one of our clients, nearly half of the retirees elected to take the lump sum and there was little demographic difference between those who took lump sums and those who didn't. While broader trends can't be predicted from a single example, it's somewhat reassuring that all the effort involved in opening the window may not be in vain.