DB Plans Should Start Reviewing Payment Practices

The DOL has begun investigations, attorneys tell PLANSPONSOR.

The U.S. Department of Labor (DOL) is rolling out an initiative focused on the investigation of benefit payment practices of the defined benefit (DB) plans of a number of Fortune 500 companies, according to a client alert from Morgan Lewis & Bockius LLP.

The investigations are concentrated on plan procedures in three key areas: (i) locating missing participants, (ii) informing deferred vested participants that a retirement benefit is payable, and (iii) commencing benefit payments when the participant reaches age 70½.

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The DOL hasn’t made a formal announcement of the initiative, but Robert L. Abramowitz, with Morgan, Lewis in Philadelphia, tells PLANSPONSOR some DOL employees have mentioned it when speaking at events, with one speaker saying the efforts started in Philadelphia and will be expanding. ”I wouldn’t be surprised if at some point the DOL makes this formally known,” adds Matthew H. Hawes, with Morgan, Lewis in Pittsburgh.

As to how the DOL is advancing its initiative, Abramowitz says several clients have been subpoenaed for information and one client received an audit notice. He adds that the DOL is not picking DB plan sponsors at random; a DOL spokesperson said the agency is tracking Form 5500s and looking for DB plans with large numbers of deferred vested participants, which, Abramowitz says, tends to be bigger, older companies.

NEXT: Suggestions for DB plan sponsors

Hawes says not every DB plan has a problem—some do participant searches regularly—but it’s not a bad idea for DB plan sponsors to make sure they are following procedures and complying with the law regarding making payments.

“What we tried to communicate in the client alert is plan sponsors should get in front of the issue,” Abramowitz says. “If they don’t find out there’s a problem until the DOL comes, they won’t have sufficient time to address it.”

Hawes points out that the Internal Revenue Service (IRS) letter forwarding program is no longer available, but the IRS suggested plans should use formal locator services—companies that will help locate participants and demographic data through public records—or use the Internet.

Abramowitz adds that he’s seen businesses cleaning up data for a lump-sum initiative have success by asking individuals’ former colleagues for demographic or address information.

If a plan sponsor gets a subpoena or audit notice, Abramowitz suggests it should start collecting data. If data is not readily available, start a conversation with the DOL investigator about whether requested information can be narrowed based on a particular or whether an extension can be granted to gather data.

While Abramowitz doesn’t think it is necessary for plan sponsors to go through an attorney to interface with the DOL, Hawes says many clients feel more comfortable with that.

Stretching the Match a Motivation to Save More

Research finds many retirement plan participants use the match as a guide for how much to save in their plans.

The company match can act as a powerful incentive that drives employee behavior, says Michael Ericson, an analyst with LIMRA Secure Retirement Institute.

A study released by LIMRA shows workers in private sector and nonprofits alike will save only enough in their defined contribution (DC) plans to receive the full company match.

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Nearly half of American workers believe they are not saving enough for retirement, and four in 10 working households have less than $25,000 saved for retirement, LIMRA says. Using a stretch match strategy— which would require an employee to save a higher percentage to attain the full company match—can be a way for plan sponsors to increase plan participants’ savings behavior.  

Fewer than half of workers surveyed (four in 10, in both private sector and nonprofit industries) consider themselves “savers.” Of those with access to a DC plan, 20% are not making any contributions at all to the plan. Those in the private sector who are not contributing are more likely to say they cannot afford to defer any salary or to have competing savings priorities, compared with nonprofit employees (67% vs 53%).

Institute researchers found more than one-third of Millennial workers in both the nonprofit and private sectors are saving 10% or more (34% and 35% respectively). Only 27% of Boomers and 28% of Gen X not-for-profit workers are saving at that rate. In the private sector, Boomers and Gen X workers save a bit more than their Millennial counterparts: 36% of Boomers and 35% of Gen X workers are saving 10% or more in their retirement plans.

Even with robust saving habits, pre-retirees surveyed have no plan on how they will withdraw the assets from their DC plans once they retire. Just one-third have calculated their savings and expenses in retirement. The study found nearly half of pre-retirees said they plan to withdraw 9% or more of their assets each year in retirement. Most financial experts recommend drawing no more than 4% a year and in low-interest rate environments, maybe less.

“With longevity at an all-time high, retirement can last more than three decades,” says Ericson. “Understanding how to safely draw down savings becomes critically important for retirees. Not-for-profit workers are more likely to have a pension income along with their DC plan, but most for-profit workers will not have one.”

Ericson says professional advice can be helpful to both types of workers. The key is to understand the unique challenges and obstacles each group is facing.

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