As defined benefit plan sponsors look harder for ways to cut expenses and lower exposure to market forces that challenge keeping their pension obligations funded, an obvious cost to evaluate is their commitment to lifetime retirement benefits for participants.
Nearly 40 percent of U.S. employers with DB plans told Aon Hewitt in its recent 2013 Hot Topics in Retirement: Focusing on Financial Wellness survey that they are “somewhat” or “very likely” to add or offer more retirees and terminated vested participants a lump-sum option in 2013. Last year, just 7 percent of DB plan sponsors added this option for eligible participants, said Aon Hewitt, the global human resources consulting firm that conducted the study in October 2012.
Yet Aon Hewitt’s survey also found that most employers — 84 percent — don’t plan to make changes to the benefit accruals they offer participants. Of those that are planning changes, fewer than one in five (16 percent) said they are somewhat or very likely to reduce DB pension benefits. Closing their plans to new entrants in 2013 was considered by only 17 percent of respondents, while 10 percent said they were somewhat or very likely to freeze benefit accruals for some or all participants.
“There is no question, employers are looking for new ways to aggressively manage their pension volatility,” said Rob Austin, senior retirement consultant at Aon Hewitt, in a Feb. 13 press release on the study. “In 2012, many DB plan sponsors were exploring options and planning their strategies — we think 2013 will be the year when many more actually implement large-scale actions such as offering lump-sum windows.”
Annuities, which are used to make retirees’ long-term payments from DB plans, can be expensive because they usually use lower interest rates than are employed to calculate lump-sum distributions. According to Aon Hewitt, annuitization also is more costly because the insurer uses its own mortality tables and has a profit margin built in.
Austin mentioned that Pension Benefit Guaranty Corp. premiums begin to rise this year and in 2014, which adds to the carrying cost of pension liabilities and gives sponsors an economic incentive to transfer those liabilities off their balance sheets.
IRS funding rules restrict “prohibited payments” such as lump-sum distributions, once a DB plan’s funded status falls below 80 percent, an average level that’s above that of plans tracked in several money management indexes of funded status.
As part of its survey, Aon Hewitt asked human resources professionals at 230 DB plan sponsors, representing nearly 5 million employees, about current and future retirement strategies, including plans for limiting pension obligations and balance-sheet risk through one-time distributions, known as lump sum payouts, to participants.
Finding out More
To read the complete story on Thompson’s HR Compliance Expert, click here.
To learn more about types of retirement plan distributions, see ¶810 of the Pension Plan Fix-It Handbook.