De-Risking Your DB Plan with Lump Sum Payouts

October 1, 2020 Phil Parker

Defined Benefit plan sponsors face the constant challenge of managing the amount and volatility of plan costs. One key strategy for managing costs that’s gained popularity in the past decade is offering terminated vested plan participants the option of taking a one-time lump sum payout of the value of their plan benefit rather than a future annuity payment.

At Conduent, we work with clients each day who consider this strategy, and it’s important that plan sponsors have a clear understanding of the benefits and key steps involved with offering terminated vested lump sum (TVLS) payouts of plan dollars. 

Why offer TVLS payouts?

One immediate benefit of offering a lump sum payout option is a reduction in Pension Benefit Guaranty Corporation (PBGC) premiums. The PBGC annually increases the premiums that pension plans are required to pay to protect the benefits of participants. The per participant portion of the premium (flat rate) is now up to a payment of $83 per participant in 2020. This is more than a 150% increase since 2012. Additionally, the variable rate premiums, which are based on unfunded liabilities, have increased significantly since 2013.  Depending on the asset/liability ratio for terminated vested employees, plan sponsors may also see a large decrease in variable rate premiums.

By implementing a TVLS window, plan sponsors can reduce future risks and current costs with specific benefits including:

  • Transfer of liability: Liabilities are eliminated from the plan for the participants that elect the lump sum when the benefit is paid to the participant.
  • Elimination of risk: Plan sponsors may see immediate risk reductions across the board — including investment risk, longevity risk, mortality risk, interest rate risk and unforeseeable events risk.
  • Reduction of future administrative costs: Conduent’s typical take rate for TVLS payouts has been 50-70% of eligible participants. This results in significant cost reductions in plan administration, plan audit and PBGC premiums.
  • Lower costs, overall: Leveraging lump sum windows generally costs less than purchasing annuities.
  • Greater flexibility and access for participants: Offering a lump sum option accelerates participants’ access to their retirement assets — providing greater flexibility to choose how they use the money as an investment for the future.

Six steps for implementing a TVLS payout window

Here are six steps plan sponsors should consider in order to implement a successful TVLS program. These steps are most often done by a partner such as Conduent, which handles many aspects of window administration.

Step 1: Identify TVLS target participant pool

Key target criteria are based on the plan sponsor’s primary goals which may include risk mitigation, PBGC premium reduction, phased termination of the plan, etc.

Step 2: Calculate annuity/lump sum payment amounts

  • Verify and calculate accrued benefits.
  • ​Adopt plan amendments.
  • Calculate optional forms of payment.
  • Collect demographic data.

Step 3: Administer lump sum window

  • Verify addresses and participant status.
  • Draft support communications plan (a robust communications plan including reminder postcards, emails and calls can significantly increases take rates).
  • Compose, print and mail notifications.
  • Establish call center support, with all calls recorded and tracked to completion.
  • Provide online resources including decision support tools, online election functionality, and access to key documents.
  • Establish and update weekly funding report.

Step 4: Scan and image incoming responses

  • Review and follow up with participants as needed.
  • It’s worth noting that when the plan sponsor or administrator provides an online tool for participants to make their elections and access their lump sum, it is a much smoother process overall and makes it easier to satisfy compliance requirements.

Step 5: Deliver payment file

Scan, index and store all incoming mail so the plan sponsor has access to all records electronically.

Step 6: Send confirmation letters   

  • Ensure that both the trustee and plan administrator receive electronic files of employee elections and payment information.
  • Mail election letter/statement to participants including a confirmation of their election and notification of their payment amount and payout start date
Pension de-risking in action
Major manufacturing company sheds $1B+ in pension liabilities

Client challenge:

  • Company had 211,000 plan participants (including retirees) and $27 billion in liabilities
  • Concerns about volatile plan liabilities and skyrocketing PBGC premiums of over $100M annually
  • Despite other de-risking measures, the company still faced volatility and unpredictability in pension expense and contributions

Conduent solution:

  • Client partnered with Conduent to offer TVLS payouts to targeted members
  • Created and staffed online election portal backed by a specialty call center for questions
  • Created custom communications to guide and coach members in making decisions
  • Performed data remediation and cleanup to uncover additional savings

Results:

  • Take rate of terminated vested participants was over 50%
  • Released over $1B in liability from the company’s books
  • Company is now saving over $100M/year in PBGC premiums

Is a TVLS payout the right choice for your business?

As you consider options for de-risking your Defined Benefit plan(s), it’s important to make sure the actions you take now align with your company’s goals over the short- and long-term.

It’s also important to balance the needs of your current and former employees as you carefully weigh your options. Providing plan the potential pitfalls involved with taking a lump sum — and how to manage their personal assets against risk.


Learn more
For more information about TVLS and how you can get started, talk to us today. Conduent offers a wide variety of wealth and retirement solutions to support organizations’ plan administration and participant education goals — and we’re ready to help your organization too.

For additional resources about HR and benefits de-risking, visit our Path to Recovery site.

Previous Article
Success Starts with Putting Clients at the Center of Your Model
Success Starts with Putting Clients at the Center of Your Model

Next Article
America’s Opioid Epidemic: Why Local Data Matters
America’s Opioid Epidemic: Why Local Data Matters