By Jane Meacham, Contributing Editor

Lump-sum windows that offer defined benefit (DB) retirement plan participants a chance to convert their vested accrued monthly benefit into a one-time lump-sum cashout have gained popularity as a way for pensions to “derisk” their balance sheets and lower their headcount for U.S. Pension Benefit Guaranty Corporation (PBGC) premiums.

But setting these windows up can require DB plan sponsors and their third-party administrators (TPAs) to take several preparatory steps. A client bulletin from global actuarial and consulting firm Milliman, which assists with lump-sum window projects, summarizes some of the most important activities for plans that are considering this move.

Most Important Steps

Among them:

Identify the eligible population—Milliman advises that it’s necessary to identify the affected population first. Some questions the firm says to keep in mind include: Will your window be limited to terminated vested participants only? Are you worried that paying a large number of lump sums might trigger a “settlement” that would require special legal or accounting procedures? Milliman says answering these questions early in the process will make it easier to deal with people who are upset that they weren’t offered a lump sum.

Clean up the data—Once the eligible population has been identified, the plan must ask how clean its data on the participants is. Missing employment dates and other forms of bad data may cause problems when calculating benefits. Milliman suggests the plan’s actuary be involved throughout the planning process, to assist with data issues. It says running participant and address searches using two or more sources can provide a precautionary approach to keeping data current.

Seek legal counsel assistance—Including legal counsel through the lump-sum window process will help resolve matters such as whether there are plan amendments in effect that would interfere with the window, or whether a new plan amendment is needed to before engaging in the window.

Determine the duration of the window—Once this is known, a deadline needs to be set for participants to take advantage of the window. Plans should be sure that their election packet clearly states the date by which all documents and required forms are to be submitted, qualified, postmarked, and returned.

Deliver an announcement mailing—This preliminary step will ensure that the actual mailing of election packets for the window is not a surprise to anyone. The announcement mailing should include: a summary of what to expect, deadlines, frequently asked questions (FAQs), plan contact information, and a phone number for more information. It also may be useful to have a reminder section telling participants to have readily available copies of important documentation, if they are considering participating.

Anticipate participant inquiries—After the announcement mailing has been sent out, the plan’s call center should be fully prepared to handle participant inquiries on the frontlines before, during, and after the closing of the window, the Milliman bulletin says. Their questions may touch on eligibility for the window, required documents, and deadlines. The consulting firm also suggests the phone number given for lump-sum buyout information have a prerecorded message, in case of high call volumes.

Create the lump-sum window packet—Milliman in the bulletin contends that the packet is the “biggest contributing factor to ensure the overall success of the program.” To start, the firm suggests it be sent in an envelope that captures the participants’ attention, and includes a return address in case it does not reach the participant. The envelope is especially important if the plan has merged several different companies’ pension plans. Milliman advises using company logos and wording such as “IMPORTANT PENSION INFORMATION” on the envelope as well.

The packet’s election guide should get right to the point and outline choices in participant-friendly language. A checklist with necessary items and a section with instructions and deadlines (with these repeated throughout the packet) is also part of best practices for lump-sum payouts.

Election forms should be single-sided in case they need to be scanned. The bulletin also recommends adding a separate booklet with required legal notices such as an explanation of payment options, disclosure of right to defer distribution, and special tax notice regarding plan payments and rollovers.

Once the Window is Closed

The bulletin cautions that “[w]eird stuff is bound to happen” once the window has closed. Plans should be prepared for participants who were not accepted into the window pleading their cases, or those who claim they cannot provide complete forms. It also recommends being ready for a participant accepting the lump sum, then dying before the payment is received. Other participants may contest the value of the lump sum shown in his or her election packet. And it may be necessary to recalculate a few lump sums if an incorrect birth date is supplied, for example.

“Having a template for a detailed calculation worksheet will bring peace of mind when reassuring participants that the amounts are accurate,” Milliman states.

In order to minimize administrative error, the plan should have a solid scanning protocol in place. The consulting firm says knowing what to expect will reduce this type of error, confusion, and resending of paperwork by participants.