Pension Plan Sponsors Can Tackle Improper Payments

Timely and accurate pension participant data is critical to assist plan sponsors’ efforts to guard against improper payments.

Pension plan sponsors can implement additional steps and processes, including more frequent participant location and address updates, to prevent payments to deceased participants, overpayments to recipients and missed required minimum distributions, according to industry experts.

“The challenges have been exacerbated by COVID,” says PBI Research Services President John Bikus, a pension plan management provider. “What plan sponsors should be looking at right now are systems or processes [that are] the best demonstrated practices to continuously monitor populations.”

He advises that pension plans should use population location services more often to find missing participants and update beneficiary information and lists of participants. “The way to do that is to have what is called constant population monitoring,” he says. “That means more than once every couple of years.”

Plan sponsors should follow up an initial letter with a certified mailing, Monica Gallagher, partner at October Three Consulting adds. After those two steps, an employer can reasonably identify a participant as lost or missing, and go to a third party for additional assistance.

Depending on the frequency that is chosen, services can be done quarterly to update participants’ personally identifiable information, and providers can perform weekly sweeps for deceased participants and outreach to locate participants and update address information.

PBI Research finds that every year, billions of dollars are paid out to deceased pension participants. Overpayments and missed required minimum distributions also lower the longevity of pensions, can open the door for fraud, and deteriorate the trust of plan participants, according to PBI. Its research finds that overpayments are often only detected via an audit, by a service provider, or are reported by a family member.

Several prominent instances of improper payments have occurred at public plans over the years. The California Public Employees’ Retirement System paid out approximately $42 million to 22,000 dead people. The federal government sent over $1.4 billion in stimulus checks in 2020 to deceased citizens. And, over four years, 11 of Illinois’ 15 major government pension funds made $2.2 million in payments to dead people that they later became aware of and tried to recover.

“If you don’t have updated information on participants, and in some case, the beneficiaries, there are audit implications from the IRS—there are regulatory rules on what you should be doing to find and maintain your participant list,” Bikus says. Significant amounts of improper pension payments are likely to bring heightened regulatory attention from the Department of Labor and the IRS, and possible plan fines, he adds.

“The other reason is just maintaining the life of a pension plan. For example, if you are making payments to deceased people, you’re essentially taking money away from people who are owed it in the future,” Bikus says. 

Additionally, paying to the wrong participants from a pension is zero-sum because there are finite amounts of funds in total, he adds. Drained resources can limit the longevity of the pension.

“People who have worked really hard for years and years and years can’t get the money that’s owed them in retirement if you don’t accurately identify them as a lost participant,” Bikus explains, adding that incorrect payments can also cause problems. “You’re paying money out to people who shouldn’t be getting those payments.”

Bikus adds: “A lot of plan sponsors, especially [because of] COVID, might be resource-constrained, and if you start to get into an audit situation that really is going to drain resources.”

Gallagher explains that defined benefit plan fiduciaries owe a fiduciary duty to inform plan beneficiaries of benefits due as required under the Employee Income Retirement Security Act, and must make payments to eligible participants. The Employee Benefits Security Administration branch of the Department of Labor has for several years made missing plan participants one of its key areas of focus, and has published guidance for plan sponsors to follow to establish processes for finding missing participants.

Gallagher says plan sponsors should account for the most prevalent causes for improper pension payments to avoid this issue.

Beyond missed payments, the most common reason for overpayments is a death, she says. Additional causes are if the participant chose to receive the benefits by a period-only payout option—monthly annuities payments for a guaranteed period of time such as 5, 10, 15, or 20 years—or a level income option that allows a participant to ‘level’ their income from the pension plan and Social Security benefits.

“In other words, the pension plan pays a certain benefit amount before Social Security benefits commence and a lower pension plan benefit amount after Social Security benefits commence,” she explains. “The overpayment occurs when the larger pension benefit amount is not reduced at the appropriate date (i.e., there is an end date for the pre-Social Security period.)”