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Aon Retirement and Investment Blog

Second Offer Lump Sum Windows for U.S. Private Sector Pensions

Since our blog entry last year exploring the experiences of U.S. private sector pension plan sponsors implementing terminated vested (TV) lump sum windows, activity has continued. In addition to plan sponsors offering TV lump sum windows for the first time, we continue to see plan sponsors offering subsequent lump sum windows.
The most common strategy for a subsequent window is to expand the eligibility criteria to include TVs that were not a part of the first window. When using this approach, plan sponsors should confirm that each group of eligible participants is nondiscriminatory (U.S. regulations have specific requirements to avoid discrimination in favor of highly compensated participants).
More recently, we are also seeing increased interest in 2nd lump sum offers to participants that deferred during the first window. For plan sponsors that included most or all terminated vested participants in previous windows, the 2nd lump sum offer may be made on a stand-alone basis. For other plan sponsors, a subsequent lump sum window could be structured as a 1st offer for TVs excluded from prior windows as well as a 2nd offer for participants that previously deferred.
There are several reasons plan sponsors are offering additional lump sum opportunities:

  • Mortality Savings – New mortality tables were issued by the Society of Actuaries (SOA) in 2014 and 2015 that assume longer life expectancies than the tables currently being used to calculate lump sums. The longer the assumed life expectancy, the greater the lump-sum value of a participant’s annuity benefit. Thus far, the Internal Revenue Service (IRS) has not updated the mortality tables required for minimum lump sum calculations to reflect the SOA updates, and has not issued guidance for mortality tables to be used for lump sum distributions in 2017 and beyond. The estimated impact of such an update could be in the range of 5 to 10% increase in the value of the lump sum paid. The range of the estimate varies both as a result of a participant’s age, and the uncertainty regarding the methodology the IRS will use when applying the new mortality tables to lump sum calculations.
  • PBGC Premiums – PBGC premiums were increased (again) in November 2015. Increased carrying costs have increased the incentive to settle liabilities, particularly for participants with small benefits. As of April 2016, the present value of future PBGC flat-rate premiums for a participant age 50 is approximately $1,800.* These premiums are approximately 4-6% of the liability for a participant with a lump sum between $30,000 and $40,000. For plans at the variable rate premium cap, the savings can be even larger.
  • Participant Choice – The lump sum offer is elective for participants. Participants who elect to receive a lump sum are eligible to roll their benefit over to another tax-qualified account such as an IRA or 401(k) plan, allowing them to consolidate their retirement savings and avoid a potential tax liability on the disbursement.
  • Process Improvement – Lessons learned from earlier windows can be applied to subsequent windows. Processes and paperwork can also be leveraged to simplify implementation. Simply put, subsequent windows are easier to implement since some of the work has already been completed.
While the reasons above are applicable to all lump sum windows, there are some specific considerations plan sponsors need to review related to 2nd offers.
Our experience suggests 2nd offers receive lower election rates, likely in the 20-30% range, compared with 40% to 70% for first offers. This makes sense intuitively – some of these participants already declined the offer once. Nonetheless, participants may have ignored or not received the first election package. Others may have had a change in circumstances or simply changed their mind since the first offer.
While 2nd offers are more straightforward in some ways, they do come with some unique communication and legal issues. How will participants react to a change in lump-sum amounts? Do repeat offers create a “permanent” feature? These issues should be considered as part of a robust strategy discussion.
All lump sum windows, whether it is a plan sponsor’s first window or fifth, require thoughtful and robust implementation processes. Plan sponsors that are interested in a 2016 lump sum window should begin work as soon as possible in order to facilitate an orderly implementation.
*Source: Aon Hewitt.  Assumes 2.50% increases in the national average wage index and a 4.65% discount rate.
*Source: Aon Hewitt report.  “2014 Lump-Sum Windows: Update on Plan Sponsor Experience.”

Chris Birch is a Partner and consulting actuary at Aon Hewitt based in Chicago. Grant Martin is a consulting actuary at Aon Hewitt based in San Francisco.  

Content prepared for US subscribers, but available to interested subscribers of other regions.

The information contained above should be regarded as general information only. That is, your personal objectives, needs or financial situation were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of acting on this information, particularly in the context of your own objectives, financial situation and needs. Nothing in this document should be treated as an authoritative statement of the law on any particular issue or specific case, nor should it be treated as investment advice. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal or investment advice. Please consult with your independent professional for any such advice. The blog content is intended for professional investors only.

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