Outsourcing the day-to-day administrative needs of a defined benefit pension plan can take a huge load off a plan sponsor’s HR staff — and that’s just the tip of the iceberg. In today’s competitive market, top-shelf providers often go the extra mile to elevate the participant experience, improve plan compliance and provide strategic guidance to plan sponsors. Are you getting the most from your outsourcer? Here are six things to check the next time you look under the hood of your relationship.
Does your DB admin outsourcer…
1) Cater to the needs of your population?
Participant needs are not created equal. Younger participants often prefer to study plan information online, on their own time. Older participants, including in-pay retirees, are not always as tech-savvy; many prefer to talk to representatives by phone and initiate changes verbally or via postal mail. Does your outsourcer take your major population segments into account and provide services that cater to their needs? Do they understand the retirement process for your specific plan? Since the average age of your population can change over time, be sure to re-evaluate periodically.
Check for yourself: Conduct call monitoring and satisfaction surveys to verify that your call center and website are meeting participants’ needs.
2) Know when to automate — and when NOT to automate?
Plan sponsors have an obligation to carefully manage plan expenses, including those associated with administration — so it’s only prudent to work with your outsourcer to identify processes that can be made more efficient through automation. On the other hand, certain pension administration tasks are best accomplished with good old-fashioned elbow grease. Does your outsourcer appreciate the difference?
For example, distributing automated mailers to participants in advance of their normal retirement date may be all your service contract requires of your outsourcer, but is that enough to ensure participants actually go into payment when required? Sending certified letters (with a return receipt requested) and following up with additional outreach when participants turn 65 may be more expensive and time consuming, but it will better achieve the desired result of not losing track of any participants. Participants who receive disability retirement from a pension plan may also require special handling, such as coordination with any long-term disability payments they may be receiving. Is your outsourcer taking the extra steps necessary for this type of unique situation?
Check for yourself: Review your service plan to better understand whether your outsourcer’s focus is on checking off tasks or delivering results. Make a note to update service-level agreements with an emphasis on participant outcomes the next time your contract comes up for renewal.
3) Act as a good steward of your data?
Plan sponsors are required by law to keep records available. Under ERISA, plan sponsors must maintain records supporting each annual IRS Form 5500 filing for a six-year period. Other records, such as legal documents and records necessary to determine benefits due to each employee, should be kept indefinitely. We have known employees to surface nearly 30 years after leaving a company to claim they are due a benefit from the plan.
Basic IRS record-keeping rules specify that current personnel/employment files should be retained for at least seven years after an employee leaves, is terminated or retires. But since DB plan sponsors need indefinite access to tax and payroll records to determine benefits due, they must collect and retain this information before records are purged by other departments.
Outsourcers should maintain all records related to distributions, including Forms 1099-R showing lump-sum cash outs and annuities paid. They should also carefully document situations where a benefit was not paid, such as non-vested terminations or records closed out without a beneficiary.
Records may be kept in either paper or electronic format, provided they can be readily retrieved. Realistically, outsourcers should file records and calculations electronically. All incoming documents should be scanned and indexed by participant for easy retrieval.
Check for yourself: Create a sample group of participants, being sure to include some who terminated long ago, and see what data is available. Do you have the information you need to respond to a claim?
4) Chase down missing participants, beneficiaries and alternate payees?
Has your outsourcer ensured that ALL missing participants are being paid? These include not just retirees themselves, but also alternate payees from qualified domestic relations orders (QDROs), estates that are owed benefits after retirees die, and designated beneficiaries of participants who died before commencing their benefits. Does your outsourcer exert the same effort to get these entities in pay as they would the retiree?
If your outsourcer is not doing all they can to get alternate payees, estates and beneficiaries paid, then the plan is out of compliance. Most of the time, one solicitation letter is insufficient to find these entities. It takes some digging and resourcefulness.
Check for yourself: Ask your outsourcer to outline the steps they take to locate missing participants and beneficiaries. Do they consider themselves done after sending an “evidence of existence” letter, or do they go the extra mile by mining employee records, checking funeral homes and local obituaries, contacting nearby relatives or even subscribing to resources like Ancestry.com?
5) Bill you appropriately?
Are you being billed appropriately for your pension population? Some plan sponsors negotiate flat fee contracts paid on a monthly or annual basis. Other administration contracts are based on head count, which can be advantageous for plan sponsors who expect their participant populations to shrink. If your administrator bills you per head, do they charge the same rate for all participants, whether they’re vested or not?
Certain participants, such as deceased persons or those who have received lump-sum payouts, require far less time and resources to administer than deferred vested participants. Similarly, non-vested participants who terminated many years ago no longer need the detailed break-in-service tracking that more recent non-vested terminations do. The billing rate for these individuals should reflect their low-maintenance status.
Check for yourself: Review the billing terms in your contract or talk to your service provider to better understand whether your billing is tiered to reflect the varying levels of administrative effort required to service different participant populations.
6) Offer strategic advice?
The coronavirus pandemic and associated economic impacts have caused plan sponsors to re-evaluate benefits initiatives, including pension plan terminations. An experienced pension administrator can be a valuable resource, providing insight into how similarly situated plan sponsors are responding to market conditions and working with your actuary to make recommendations that serve the plan and its participants.
Does your outsourcer proactively share data or recommendations relevant to current market conditions, and do those recommendations exhibit an understanding of your organization’s strategic initiatives and unique participant population? For example, while lump-sum windows can be helpful for de-risking pension plans, they don’t add value for plans with few terminated vested employees.
Check for yourself: Ask your outsourcer to share insights and strategic recommendations on a quarterly basis.