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Is 2015 the year of lump-sum sweeps?

27 February 2015
At the beginning of each year, plan sponsors often ask if we see any retirement trends for the year ahead. One issue emerging in 2015 may be an increase in the number of lump-sum sweeps for defined benefit retirement plans. A lump-sum sweep is when a plan sponsor offers a lump sum temporarily to a group of terminated participants and settles all or a portion of the plan sponsor's pension obligations. There are many reasons why a plan sponsor may (or may not) choose to perform a lump-sum sweep:

The size of the plan has grown to a disproportionate size in comparison with the current size of the company. Lump-sum sweeps may be one tool to adjust that balance.
Escalating Pension Benefit Guaranty Corporation (PBGC) premiums, especially for vested terminated participants with small benefits. The flat rate PBGC premium for 2015 is $57 per participant. Remember when they used to be $19 per participant? Lump-sum sweeps may be one solution to reduce those premiums.
The plan sponsor is seeking to terminate the retirement plan or is on a de-risking glide path. Lump-sum sweeps may be one way to further the long-term objectives.

Of course, there are a number of factors why a plan sponsor may choose to not execute a lump-sum sweep as well, including:

The missed opportunity cost for higher return on plan assets, since lump-sum sweeps reduce the plan assets as well as the plan liabilities.
Depending on the interest rates used to value the lump sums versus the interest rates used for minimum funding requirements, the funded status of the plan may drop if more assets are paid out than liabilities are released.
With interest rates at a historic low, lump sums are higher than they might be in the future if interest rates increase.
The Government Accountability Office (GAO) has voiced concerns that plan participants have not received adequate information regarding lump sum distributions versus life-time annuities to make informed decisions.

Why 2015? The Internal Revenue Service (IRS) has published lump-sum mortality tables through 2015. Many expect changes for 2016 or 2017 mortality rates, so that they better reflect the fact that people are living longer. As a result, the lump-sum values of retirement benefits going forward could increase significantly, somewhere in the range of 5% to 10%. If this is the case, the timing of these forthcoming changes is important, because they could be published by the IRS as soon as the third or fourth quarter of 2015. Plan sponsors already contemplating a lump-sum sweep may want to do so in 2015 in order to avoid this increase. Of course, 2015 has just begun, so stay tuned.

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