Client Stories | June 27, 2022
An organization’s pension plan had been designed and implemented at a time when tenure at the employer was measured in decades rather than years.
However, as the employee landscape changed to more portable benefits and a mobile workforce less devoted to their company, the plan found itself carrying many terminated participants with low service and, accordingly, relatively low benefits.
With ever-increasing PBGC premium rates, participation by these former employees contributed to PBGC costs becoming more burdensome to the company’s bottom line.
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:
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.
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.
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.
This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.