New Factors in Considerations of Lump-Sum Windows

As defined benefit (DB) plan sponsors try to decrease their risks, offering a lump-sum distribution opportunity for certain participants has become a popular option.

Recent accounting, market and regulatory developments make it important for sponsors considering offering a lump-sum distribution window to look at the option now, speakers suggested in a webcast hosted by PwC.

David Ehr, manager of PwC Human Resource Services, pointed to the Society of Actuaries’ (SOA) recently released final mortality tables. He said the new mortality tables could increase pension liabilities up to 10% or more, which will also increase calculated lump sum amounts for DB participants.

Ehr noted the Internal Revenue Service (IRS) currently uses older SOA mortality tables for funding and lump sum payments, and the timing and method of adoption by the IRS is unknown. “The IRS has specified mortality assumptions through 2015, so updates may not take place until at least 2016,” he said.

Additionally, the interest rate environment was favorable for offering lump sums during 2014 for calendar year plans, according to Ehr. But, interest rates have fallen throughout 2014, and this will increase the cash cost of lump sums for a 2015 offering relative to a 2014 offering, he said.

“For plans strictly focused on the cost of lump sums for deciding if the strategy is right for them, these developments may cause them to put on the brakes on any action, but for companies that consider all the factors and advantages of offering lump sums, they will want to continue with a strategy,” Ehr said.

For example, Pension Benefit Guaranty Corporation (PBGC) premiums have risen quite a bit—flat rate premiums went from $49 per participant to $57 in 2015, and will increase to $64 in 2016 and 2017, he noted. This will make maintaining DB plans more expensive for plan sponsors.


Ehr pointed out the advantages of offering a lump-sum buyout:

  • Permanent liability reduction;
  • Reduced future administrative costs – most notably, plan administration and PBGC premiums that are scheduled to rise considerably;
  • Pending change in mortality tables effective in the near future will increase both liabilities and lump sum costs;
  • Lump sums are less expensive than purchasing annuities; and
  • Accelerated participant access to retirement assets.

However, there may be some disadvantages:

  • Potential settlement accounting changes;
  • In some cases, additional contributions to maintain funded status;
  • Loss of investable assets (perceived value of asset arbitrage);
  • Potentially significant short-term administrative costs;
  • Anti-selection among lump-sum eligible population; and
  • Participants left to manage their retirement saving on their own.

A successful process is important to mitigating the disadvantages, according to Cornell Staeger, director of PwC Human Resource Services. “Good project management is key,” he said.

Execution questions to consider include which groups to target—whether to offer the lump-sum window to only terminated, vested employees or also to retirees who have begun receiving payments, as well as whether to include surviving spouses and alternate payees of a qualified domestic relations order (QDRO). Should the lump-sum window include retirees who have just started receiving benefit payments, Staeger queried. Jim McHale, principal of PwC Human Resource Services, added that these issues are not only important for making sure the plan sponsor does not discriminate in offering the lump sum, but for considering participants’ reactions to the offering.

Staeger pointed out that the plan should allow for lump-sum distributions, or it may have to be amended. There should be enough lead time put into the implementation timeline for this. Plan sponsors should also look at what the plan provides for when determining what interest rate will be used to calculate the lump sums.

There also needs to be lead time for preparing data. Dates of hire and termination must be right. Addresses should be verified by participants, and a missing participant or “bad address” population determined. Staeger said the best practice is to use a third-party service to search for addresses for this population.


Before communicating the lump-sum opportunity, plan sponsors should identify all stakeholders and prepare messaging ahead of time, Staeger suggested. “What questions will investors or active participants have, or retirees already receiving payments if they are not offered the lump sum,” he said. Staeger also suggested plan sponsors plan to offer reminders throughout the lump-sum window. “Outreach reduces the number of claims or appeals by people who say they didn’t know the option was available.” In communications, include a checklist for participants, he added.

When considering the length of the lump-sum window, Staeger conceded that 30 days is a short amount of time to make such an important decision, but, he said, if the window is too long, there will be no urgency for participants to act. Plan sponsors should choose a time frame that is a balance between enough time to make a decision and getting a person to act.

Payments typically must be made in the year the window is offered. Processing time must be accounted for when selecting window dates to ensure enough time for payment file to be created, tested and finalized.

McHale said there is also work to do after the lump-sum window is closed. Plan sponsors should have a plan for what, if anything, to do with accounts of participants they discover are deceased or whom they simply cannot find.

Plan sponsors will also need to look at their plans’ asset allocation after the window, as well. The remaining participants will not need to be paid out for a longer time, so the asset allocation will need to be adjusted.

Finally, he said plan sponsors should document those participants who were paid out in the plan’s Form 5500 filing, to address participants who may think they still have a claim to benefits. “It can help out staff members who succeed you in the future.”