The issue

The organization asked us to calculate lump-sum distributions for vested former employees with the intent of offering a one-time lump-sum cash-out option, which, if elected, would remove them from the plan. When we examined their data to estimate the cost of completing the work, a major issue became apparent: the plan’s census data was incomplete and contradictory.

During an initial assessment, we found data accuracy was hindered by:

• Inadequate documentation by the prior actuary
• Differences between older paper records and current electronic records
• Data input errors in the electronic system that had compounded over time

Moving forward using only the data found in the electronic system would have undervalued the lump-sum distributions, put the plan in possible non-compliance with the IRS and potentially led to expensive court challenges by the former employees.

Our solution

We retrieved copies of all older records from participating divisions within the plan and then worked on-site to correct the current electronic system by matching data from paper records. We then calculated the lump sums and assisted in drafting personalized letters to the former employees explaining the lump-sum option and the benefit. 

Our work uncovered that the vested former employees, as a group, were undervalued on average by almost 10 percent of their accrued benefit and by almost 25 percent in some cases. Fortunately for the organization, the plan was well funded and therefore correcting the records did not involve a financial burden.

The result

Approximately 55 percent of the former employees took the lump-sum option, leading to a decrease in annual PBGC premiums of approximately $300,000 per year. The organization saw further gains in reducing the expected number of future hours that administrative staff would spend on benefit calculations and was able to move forward with a renewed confidence in the accuracy of the data records and corresponding calculations.