DB Lump-Sum Windows Require Much Preparation

DB plan participants can potentially benefit from a lump sum cash-out window, since it offers them more control over their money. DB plan sponsors can benefit from a window in that it can potentially lower plan-related fees and liabilities.

However, recent research on the subject shows that considerable thought and preparation need to be applied in order to bring the process to fruition. According to Kylee Bengochea, project manager at Milliman’s Seattle office and the author of the research, several factors need to be considered. They include:

• The condition of participant data;
• How to address the issue of participants that cannot be located;
• Choosing the length of the window;
• Establishing milestones and deadlines;
• Participant communications;
• Expectations and definitions of success; and
• Activity after the window is closed.

If data needs to be cleaned up, the method will vary depending on what the data issues are, Bengochea tells PLANSPONSOR. If the pension data is missing service history, pulling of participant human resource files may be needed to confirm history and recalculate the accrued benefits, she explains. 

“If there is a large population with missing or invalid dates of birth or Social Security numbers (SSNs), plan sponsors may want to do a verification audit requesting proof of age and SSN information,” Bengochea says. “If there is a large population of participants known to have an invalid address, the plan sponsors might want to do a death/address search and based on the results, send verification to the potential new addresses.”

She adds that plan sponsors choosing to perform data cleanup should factor in the cost, time and resource needs that will be associated with the cleanup.

For auditing or updating participant records, the time frame needed by plan sponsors will also vary, says Bengochea. “If updates are based on new addresses, SSNs or dates of birth, it may only take a couple months. If beneficiary updates or service history cleanup are involved, then it may take longer to perform calculations, request additional documentation and verify the data.”

With regard to deciding how long the open period for a lump-sum window should be (30, 60 or 90 days), Bengochea says plan sponsors need to consider the type of communication that will be sent to participants (e.g., election packet only or follow-up mailings), the timing of the window (e.g., summer or holiday season), and the internal resources that can be allocated to the project.

“Shorter windows, such as 30 days, may result in lost participation because there isn’t enough time to act, but longer windows don’t guarantee a higher participation rate either due to inertia or the feeling of having plenty of time to decide,” she says.

In addition to these factors, the following are also important things for plan sponsors to consider when it comes to a lump-sum window:

• QDRO adjudication. Will the plan sponsor speed up the process for QDRO adjudication? Will new alternate payees (if eligible) receive an election packet? How will the recalculation of benefits be presented to the participant?
• Pre-retirement death notification. Will the plan sponsor extend the lump-sum window to newly identified beneficiaries?
• Participant no longer eligible for lump sum. In some cases, participants will go from eligible for a lump sum to ineligible due to a date of birth change, marital status change, or rehire with the company. How will this be communicated to the participant?
• System updates. If plan sponsor forms are automated, system updates will need to be made to reflect the lump-sum payment option, as well as immediate annuity options. Updates will require additional time for coding and testing.
• Payment file submission. Plan sponsors will want to include the trust as early as possible to confirm how the payment file should be submitted, if a special file is required, and the timing for review and cutting of checks. Depending on the size of the project, the trust may require separate payment files to be submitted periodically, instead of one payment file. If the trust requires an electronic file, the plan sponsor may need to build a lump-sum file, which will require additional time for coding and testing.
• Payment corrections. After the checks have been mailed from the trust, payment corrections become an important and time consuming factor. Problems can arise if a participant closed an individual retirement account or changed jobs after submitting the election. In some cases, the rollover institution will have cashed the check only to discover they could not identify the participant. As a result, the institution will submit a check to the plan sponsor, requiring additional time to deposit the funds, confirm the rollover information and reissue a check with the noted corrections.
• Claims/denials window. How long after the close of the project does the plan sponsor want to work on claims and denials? Lump-sum windows are generally out of scope for client services agreements between third-party administrators and plan sponsors. With this in mind, any work related to the window (including claims/denial processing) will be considered time and expense. Therefore, the longer the claims/denial process continues, the more costs that will be associated with the project.

The full text of Bengochea’s research can be found here.