Defined benefit (DB) plan sponsors paid $145 million in Pension Benefit Guaranty Corporation (PBGC) premiums in 2015 alone that could have been avoided, according to a paper from October Three.
The report contends that not optimizing their contribution recording and timing caused plan sponsors to overpay PBGC premiums.
“Minimizing PBGC premiums depends on plans’ maximizing the use of ‘grace period’ contributions—amounts contributed to a plan after the end of the plan year but still attributable to that plan year,” the report says. “Failure to adopt best practices around quarterly contribution requirements and applying funding balance has caused plan sponsors to overpay PBGC premiums due to not getting full credit for grace period contributions. In many cases, all or part of contributions made to satisfy quarterly contribution requirements could have been characterized as grace period contributions but weren’t. So, plans often report lower asset values than they could have and, as a result, pay higher premiums than they need to.”
Over the six years analyzed by October Three, DB plan sponsors have missed out on more than $700 million in savings. As an example, October Three’s review uncovered a plan ($330 million in assets, 8,300 participants) that owed a variable premium of $2.9 million during 2015, but could have reduced this premium by $685,000 simply by recording grace period contributions differently. “That is, an action that would only take the plan’s actuary minutes to complete, cost this sponsor almost $700,000!” the paper says. October Three notes that the plan paid actuarial fees from the trust during 2015 of $160,000.
October three calls these missed opportunities “recording errors”—plans could have reduced premiums without changing anything they did except for paying attention to quarterly contribution and funding balance rules at the time. NEXT: Accelerating contributions