As a defined benefit (DB) plan sponsor, you have many options when selecting a service provider to manage and execute the termination of your plan. Your third-party administrator, plan actuary, or another external vendor may all provide the services to support your project, and selecting the best-in-class solution to support your project is a major decision in the pursuit of your organization’s long-term employee benefit plan goals. Vendor experience and expertise, system and communications capabilities, and—of course—cost must all be considered.
Don’t put all your eggs in one basket – it might not be a one-stop shop
You have determined that terminating your defined benefit plan will help your company achieve its financial goals, and now you must select a vendor to manage and execute the plan termination. It is in the best interest of the plan and its participants to explore all of your options for completing the plan termination project.
You may find that different vendors are able to terminate the plan according to more accelerated timeframes, with more automated procedures and effective communications, and with lower fees. Many proposals will market a one-stop solution that will cover the many facets of a plan termination. Of course, it makes sense from a vendor perspective to obtain all of the work, but buyer beware. Your critical decision point is to ensure a high-quality and cost-effective approach that is in the best interests of your plan participants.
Ask the right questions
Plan terminations are complicated. As the plan sponsor, it is critical for you to have a sufficient understanding of the process to evaluate the capabilities of the various vendors you are considering. You should first seek out a vendor that is transparent in summarizing the process and their services. To do this, you need to ask each vendor some important questions:
- What are the steps and the timeline for terminating the plan?
- What steps will you complete?
- What steps will another vendor need to complete?
- What steps will I need to complete as the plan sponsor?
- How will the vendors work together during the project?
- Who will answer questions from my participants?
- Does the vendor offer a call center or website?
- Will the vendor facilitate call center training for the project?
- Will my participants need to interact with different contact points?
- How will the vendors provide support to me after the plan termination is completed?
Don’t compare apples to oranges
When comparing proposals from different vendors, it is critical to ensure that you understand the differences in the work each proposal includes. Many proposals are presented as a one-stop comprehensive solution, but it is important to understand exactly what each vendor is able to offer. No two proposals are exactly alike, and it is not sufficient to compare only cost. It is prudent for you as the plan sponsor to understand the scope of the services each vendor will provide along with its expertise in those areas. Some key issues to consider for the execution of the plan termination are:
- Required participant notices
- Calculation of accrued benefit
- Early retirement adjustment calculation
- Late retirement adjustment calculation
- Annuity optional form of payment calculations, in addition to a lump sum offering
- Call center support available throughout the termination process, or only during a limited portion of the window
- Address searches that meet diligent search guidelines
- Death searches
- Coordination with trust for payment processing, including payment file submission and reconciliation
- Actuary or enrolled agent with authority to sign and submit Internal Revenue Service (IRS) and Pension Benefit Guaranty Corporation (PBGC) filings
- Annuity placement services, including brokerage and management
The devil is in the details
Plan termination readiness plays a key role in the scope and timeline for a plan termination. As you work with a vendor to plan for the termination process, you should ensure that the vendor and key decision makers are aware of any roadblocks that may present additional challenges and costs for the project.
Unresolved participant data issues, incomplete participant records, uncashed checks, and lost participants may require significant additional research and action before the plan termination process can begin. These issues can result in longer timelines and additional costs for closing out your plan.
It is also important to ensure that a full plan termination is a part of your strategic goals. Other plan de-risking projects may be the best answer in the short term, and they will follow a path toward termination with a lower cost and less disruption to your plan population.
Read the fine print
It is important to take the time and spend the effort to conduct thorough discovery and planning of this complex project. Ensure that any vendor proposal is well documented through a global project plan that covers all of the key project components. Any proposal will likely include limitations on the scope of the project, with additional time and expense for work not defined at the onset of the project. It is critical that these scope limitations are documented up front during the proposal phase of the project. For a project as extensive and complex as a plan termination, there is always work that cannot be identified until the project is in progress. The plan sponsor should seek to understand the potential additional work and related cost to the plan, in particular if any of the key steps noted above are not included in the project.
Milliman has the experience and expertise to guide you through the plan termination process. Our consultants and administrators can support every step of the termination of your plan. For more information on how we can help you navigate this complex process, contact your Milliman Relationship Manager.