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5 Ways to Cut Your Defined Benefit Plan Spend

Despite the fact that DB pension plans have, for the most part, been replaced by DC plans, there remain more than $3.1T of assets in the market that could be moved off corporate books. 

While the popularity of DB plans has been waning for many years, ongoing economic uncertainty is likely to accelerate the pace of change as organizations look for ways to control costs. It’s a fact that DB plans come with a significantly greater burden of expense for employers over other types of retirement savings plans. However, for organizations that still offer a DB plan, there are several creative strategies that can help slash ongoing spend while supporting employees’ wealth planning goals. Here are five ways to cut your DB plan spend right now. 

1. Pension Risk Transfer (PRT)

One increasingly popular method for managing pension risk is the transfer of pension liabilities to professional risk managers such as life insurance companies. This essentially includes purchasing annuities from an insurance company that transfers liability for some or all of your plan participants away from you. Depending on business objectives and cost considerations, this transfer may be accomplished through either a single purchase or a series of purchases.

This approach to de-risking continues to gain traction as companies strive to reduce their financial risk, improve their bottom line, and focus more on managing other areas of their business.

2. Terminated vested lump sum payouts

With average retiree life expectancies continuing to rise, so do the funding requirements on a guaranteed annuity. Employers also bear the risk of liability changes as interest rates and mortality change, making funding of the plan fairly unpredictable.

The terminated vested lump sum payout (TVLS) is a de-risking strategy that transfers risk from the company to former employees. When a terminated employee is fully vested but has not commenced his or her payments, this strategy could save your company millions over time. This is accomplished by paying former employees a one-time payment in lieu of a monthly annuity at some point in the future.

The lump sum eliminates future risk as the plan sponsor bears no additional financial or administrative burden.

3. Plan audits

Plan sponsors typically have strong data assurance for both active participants and participants currently in pay status. However, data on participants with deferred benefit payments is often out of date. Participants with deferred benefits include terminated vested participants, beneficiaries of deceased employees, alternate payees, and beneficiaries of current retirees.

The main reason for the data disconnect is that it’s often several years before participants with deferred benefit payments actually commence their benefits under the plan. Their data could drastically change prior to commencement for a variety of reasons including deaths, which are not always reported. This creates avoidable costs for the plan sponsor. However, a plan audit can improve the accuracy of the data, save the plan sponsor unnecessary costs, and reduce plan risk. Specific benefits of an audit include:

  • Reduces funding and accounting liability
  • Lowers Pension Benefit Guarantee
  • Accelerates annuitization or plan termination process (reduces data preparation fees)

4. Data management and automation best practices

Accurate plan data is an essential element for cost effective plan administration. If plan data is accurate, then the participant experience will be enhanced because of increased calculation automation, an efficient retirement commencement process, and more accurate payments. By cleaning up data, a plan decreases its reliance on microfiche/paper records, reducing manual work — which in turn mitigates errors and reduces administrative costs.

Accurate data results in more accurate reporting for actuarial valuations and PBGC premium filings. It also positions the plan for more successful special projects such as terminated vested lump sum payouts or plan terminations.

Plan sponsors should consider ongoing data cleansing an integral part of their recordkeeping. This best practice helps identify issues that can be targeted for future cleanup projects as well as the most opportune areas for automating calculations.

5. Specialized frozen plan administration

Freezing your DB plan for all future benefit accruals, or to new entrants, often results in immediate cost savings (that’s good). However, it doesn’t free the plan sponsor of plan maintenance responsibilities or eliminate cost volatility (a second challenge to consider). This is a situation where greater savings can be realized by organizations that choose to work with an outsourced plan partner.

Organizations that offload plan administration and sun-setting are in a better position to save more money over time while minimizing the risk associated with payout responsibilities and compliance.

Ready to cut your DB plan spend?
Conduent can help. Our team has a deep history working with a range of clients to administer and manage their DB plans. We understand that DB is at a critical inflection point and organizations must consider the future of their plan offerings under a new lens.

We specialize in working with clients to make plan administration seamless — whether that includes “steady state” plan management or executing on one or more cost-saving plan transitions. Our expertise in creating the ultimate employee experience guides all of the work we do, creating exceptional outcomes for our clients and the employees who count on them each day.

Learn more about our Defined Benefit Solutions.

About the Author

Don Saccente is Conduent's Defined Benefit Director, Center of Excellence. He has more than 35 years of experience in Retirement/Defined Benefit administration, consulting and outsourcing, with expertise in process, product, plan design, communications and compliance.