It’s complex—but outsourcing providers are here to help.
By Jeff Miller
Recently we’ve seen such auto industry giants as GM and Ford make headlines with their lump-sum pension-plan cash-out programs, and it’s likely that many more organizations with well-funded defined benefit (DB) plans will choose to reduce their pension risk by offering cash outs to eligible employees.
It’s a growing pool of participants—no longer limited to vested or terminated workers—who have yet to commence receiving pension benefits. With the blessing of an IRS private letter ruling, even participants who have already begun receiving pension payments have been given the opportunity to elect to receive a lump sum.
The emerging opportunity for the outsourcing community is to help client organizations get things right, making sure that they clearly define the goals and objectives of the cash-out programs and help plan participants consider the implications. There will be several options to consider and a third-party provider can help deliver sources of education and additional information. The simple fact is that participants need assistance in making the right decision for their personal situations, and the importance of clear, concise communication provided by the plan sponsor can’t be overstated.
Organizations are counting on their third-party providers to help smooth the way for risk-reducing results. It requires a strategic approach and solid execution—and it begins by positioning the lump-sum cash-out option as a positive opportunity. That’s especially crucial since the media has a tendency to paint lump-sum pension payments in a negative light, emphasizing that participants often don’t know enough about the pitfalls.
To avoid that, companies need to demonstrate key points in all relevant communications to participants and stakeholders, including:
• The lump-sum payment is only an option, not a forced cash-out.
With the addition of a lump-sum option, terminated and vested participants will have another choice when considering how they want to receive their pension.
• Different choices are always a good thing. The lump-sum payment
option allows each participant to make the decision that is best for his or her unique situation. Emphasize that no options previously available to participants are being removed.
• A lump-sum cash-out offers certain benefits. For pre-retirees who
are still building their retirement nest egg, being able to take control of their pension money early may be beneficial. A lump-sum option offers participants more choices for their overall retirement planning strategy. Individuals taking a lump-sum payment can consolidate this money with other retirement
accounts, such as individual retirement accounts (IRAs), to create a more complete picture of their total retirement assets.
Of course, there is more to consider. Effective communications should guide participants through the many factors that should be part of their decision-making process, such as comparing the value of a lump-sum payment versus an annuity; understanding the impact of deferring or not deferring payment; evaluating personal and family situations for immediate and long-term financial needs; examining the benefits of consolidating finances; and considering health and life expectancy. It’s important to emphasize that the right decision is unique for each individual and that participants should consult with their financial and/or tax adviser to assist in the decision-making process.
But just as vital to the success of any DB cash-out project is having complete and accurate data—and again, benefits outsourcing providers must work with their clients to ensure that there are complete and up-to-date lists of impacted participants, certified benefit calculations for the impacted population, and accurate addresses that meet published post office standards. (While easily overlooked, the accuracy of mailing information is critical to the success of cash-out communication strategies.)
And it doesn’t end there: From explaining the rationale of the cash-out strategy to all stakeholders—investors, clients, customers, industry constituencies, and the press—to making sure that fiduciary responsibilities are met to protect the plan’s financial well-being, legal counsel should also be consulted with before finalizing the project.
The key to getting it right is to work with a provider who is up to the challenge of cash-out complexity. Providers must deliver consultative support throughout the process. They must be battle-tested in collecting and preparing accurate data for the targeted population, as well as capable of creating and delivering specialized, clear, and engaging participant communication.
In terms of technical support, they must offer quickly scalable contact centers with informed, well-trained service representatives. And it should go without saying that they must be able to receive and process a large volume of distribution requests within a critical timeframe. As outsourcing leaders, we’ve got to stay ahead of the change as we enter a new, dynamic era of pension de-risking and participant cash-outs. There’s no excuse for anything less than excellence.
Jeff Miller is the president of Mercer’s outsourcing business, based in Norwood, Mass.