Best Practices for Tackling DB Challenges

In an article offering best practices for plan sponsors to provide long-term value to defined benefit plan participants, October Three Consulting LLC recommended focusing on four key pillars: data management; compliance and governance; communications and support; and cost controls and efficiency.

In 2024, the DB industry encompassed more than 24.74 million participants, with assets totaling $1.15 trillion across 17,330 plans. While defined contribution plans have continued to proliferate since their introduction to the U.S. via the Revenue Act of 1978, DB plans remain a meaningful source of retirement security for millions of Americans. To maintain sustainability and compliance in the DB sector, October Three suggested plan sponsors implement certain best practices for oversight and governance.

Data Management

According to the report, data management influences each of the other three best practice pillars. Many plan sponsors with which October Three has worked have encountered common data errors that can impact decisionmaking, compliance and participant experience.

“Some people actually still do pension administration in house … [and] maybe still [have] some paper files. So that’s always an issue with data,” says Monica Gallagher, October Three’s administration practice leader. “Sometimes, there’s missing historical data …or sometimes it’s just inconsistent data.”

Gallagher says that since DB plans have a history nearly 100 years longer than DC plans, data errors can pose a larger issue for pensions than 401(k)s.

To mitigate data management challenges, October Three suggested that plan sponsors conduct a full data inventory; document and track the various versions of decisions, including why they were made; perform routine testing on systems, such as for major events like plan terminations and conversions; decommission redundant systems; and restrict and monitor access to sensitive data.

These “are just smart to do, no matter whether it’s a defined benefit plan or a defined contribution plan,” Gallagher says.

Compliance and Governance

“When October Three takes over DB administration from in-house administrators or other administrators, we see a few things that are often overlooked,” says Gallagher. “Typically, this is because the transactions are less common occurrences and can fall through the cracks if consistent processes are not in place to catch them.”

One example Gallagher uses concerns required minimum distributions, which the SECURE 2.0 Act of 2022 updated to begin at age 73. In some cases, employees will leave their organizations well before retirement but are still entitled to a future pension benefit, she notes. In most cases, employers commence their pension benefits at retirement age—but a small percentage do not and, thus, need to ensure their plan participants know how to take their RMDs once they reach 73.

To stay up to date on regulatory changes and to remain in compliance, October Three suggested plan sponsors maintain a formal compliance calendar; implement and document fulfillment standards, providing clear records of outgoing and incoming mail in the event of an audit; conduct periodic plan governance reviews; maintain centralized plan records and communications; and stay current on regulatory developments via resources that regularly publish information on regulations, such as retirement associations and organizations.

Communications and Support

“Effective plan communications engage the participant at the right time while remaining within compliance and legal requirements,” October Three found. To promote a positive experience for pension participants, the firm recommended that plan sponsors provide multi-channel communication options that cater to participants’ communication method preferences; provide internal training to ensure team members are knowledge about the plan; track and analyze participant responses to discover potential efficiencies and opportunities to improve; and establish a governance calendar.

To illustrate the importance of effective communication, Gallagher references a participant who leaves a company and has deferred vested benefits, with her emphasis on delivering and documenting effective communication.

Plan sponsors “are required to give that person a letter that says, ‘Hey, you’re entitled to a pension sometime in the future,’” Gallagher says. “So, you want to make sure that you (1) give the person that letter, and (2) track that you did that.”

On the other end of the spectrum, Gallagher says, plan sponsors need to reach out to plan participants who are approaching “normal retirement date” to inform them they have a pension. If a participant has not reached out to claim their pension, the plan sponsor has a responsibility to try to contact them.

Gallagher also notes the importance of offering electronic communication, including the option to opt in or out of it. She considers communicating through multiple channels a best practice for both DB and DC plans.

Cost Controls and Efficiency

Regarding cost savings and efficiency, Gallagher places importance on conducting regular death audits, a practice that can save ongoing administrative costs and Pension Benefit Guaranty Corporation premiums.

Audits should be conducted “not only of people who were former employees, but also any joint annuitant beneficiaries they might have,” Gallagher says. “The assumption is that if a married annuitant has passed, their spouse will receive their benefit. But if [the spouse] has already passed, there is no longer a liability to pay.”

Audits, according to Gallagher, are likely more essential for DB plans than for DC plans. Current employees who continue to be paid and make DC plan contributions are clearly living, and human resource departments often send contribution data to recordkeepers. “Whereas pensions, we don’t necessarily get that type of information,” Gallagher says.

Other cost-saving best practices October Three recommended include implementing portfolio de-risking strategies, conducting regular participant status audits and implementing annual electronic funds transfer solicitations.

October Three, a Chicago-based consulting firm focused on defined benefit plans within the actuarial and retirement benefits industry, has provided retirement benefits consulting and pension plan management since 2009.