In the increasingly complex world of defined benefit (DB) pension plans, successful management and administration hinge on a critical factor: accuracy. First, data and calculation accuracy ensures participants receive the correct benefit(s) they are entitled to. Any inaccuracies may result in underpayment or overpayment of benefits, which can cause financial distress for participants or financial loss for the plan sponsor. Second, pension plans are subject to numerous rules and regulations, and any inaccuracies may lead to noncompliance, potentially resulting in penalties and legal issues. Third, transparency in administration helps maintain trust and confidence among participants. If participants have a more holistic understanding of their pension benefits they are more likely to have confidence in the plan administration and remain engaged. Therefore, accuracy is not just important, it is essential for the successful and efficient administration of pension plans.
In this article we explore these three aspects, which administrators should focus on to steer clear of common pitfalls, thus ensuring thorough, accurate, and efficient plan administration: data and calculation accuracy, adherence to statutory guidelines, and participant engagement.
Data and calculation accuracy
The saying "if you’ve seen one, you've seen them all" couldn't be further from the truth when it comes to defined benefit pension plans. In fact, we would argue that, if you've seen one pension plan, you've seen one pension plan. The importance of calculation and data accuracy in DB administration cannot be stressed enough. With confidence in the underlying data, calculation accuracy is possible, allowing participants to realistically plan for retirement. Boiled down to its simplest level, defined benefit administration is calculating the benefits earned and paying them to a pensioner. The accuracy of that benefit is not possible without accurate data and coding.
Implementation and data reconciliation: From day one, an administrator must understand the data required to determine plan benefits and perform a health check. Reconciling the data received to the data required is important to find potential gaps. Is there data missing and, if yes, is it possible to retrieve it? This could mean combing through paper documents or looking through fiche images. The effort made up-front has long-lasting downstream impacts toward efficiently calculating benefits.
Ongoing payroll review: Every data file received is an opportunity to receive inaccurate data. Automation is key for efficiency, and it is an administrator’s duty to have safeguards in place to identify issues, preferably before data is ever loaded into a database. This can be achieved in a few ways:
- Automating receipt of the file though secure and encrypted methods such as SFTP sites.
- Perform threshold and control total review: What level of fluctuation do you expect and consider acceptable? Do you receive data that can be compared period to period? For example, if you receive hours worked, and the total value is around 10,000 every file, but the current file contains 7,000, perhaps this is cause to question whether there is an issue. Consider what percentage of fluctuation makes sense based on the expectations of the data received.
- Validation reporting: Once the data is loaded, can you confirm the load was successful? The load process ideally will identify any areas where the data in the file was unable to be loaded as expected.
Regression testing: To minimize manual intervention, benefit calculations should be automated to the fullest extent. To ensure that automation works properly, daily testing to identify any changes to the calculator, known as regression testing, is essential. Your test bed, or predefined list of tests, should encompass calculations representing different plan provisions and break points. Daily results should be compared to preset controls to verify nothing unexpected has changed. The test bed should be a constant work in progress. As programming updates, plan provisions, or regulatory items change, new test cases should be added.
Errors and warnings: Even in a perfect world there are likely some calculations that cannot be automated. Does the plan have certain requirements around commencement dates? If so, add an error flag if the participant requested a calculation that does not properly align with the commencement date parameters. Do you expect to receive pay after termination? If so, add a warning if pay is received outside of a certain window. Thinking holistically about the limitations of your calculator and the complexities of the plan being administered will help to build out error flags and warnings. These flags and warnings will catch errors early on, ultimately providing stronger confidence in the final product.
Regulatory compliance
Remaining up to date with regulatory compliance is a crucial part of plan administration and required to ensure you are following the laws in place. This is a complex task and can be overwhelming, so we suggest using proper resources to stay ahead.
Go to the source: All the information you need can be obtained straight from the horse's mouth. Sign up for publications from the major government agencies, such as the Internal Revenue Services (IRS) and U.S. Department of Labor (DOL) newsletters, the IRS e-News subscription, and IRS statements, announcements, and publications. Frequent the IRS and DOL websites to see what is new or changing. These government agencies make significant efforts toward keeping pension professionals updated with current and relevant information.
Consulting experts: There are a lot of industry resources at your disposal to help summarize and explain what you need to know. As a client using a third-party administrator (TPA), they are your trusted advisor and you should be leaning on their expertise. At Milliman, Client Action Bulletins are created to explain complex topics related to laws and issued guidance in an easy-to-understand manner. Administrators can also look to agencies or education groups such as the America Society of Pension Processionals and Actuaries (ASPPA), the ERISA Industry Committee (ERIC), and the Associated Benefits Corporation (ABC). The key is to use a reliable source and independently verify what you are reading by looking up the Internal Revenue Code (IRC) directly when in doubt.
Participant education
Participant communication and education are crucial for several reasons. They empower participants by providing them with the knowledge and understanding they need to make informed decisions about their retirement plan benefits. Communications should state the benefits available, the terms and conditions of the plan, and how participant decisions can impact their future financial security. Effective communication and education can increase participant engagement and satisfaction.
Participant webinars: Webinars are an effective way for plan administrators to provide detailed, accessible, and interactive information about retirement plans and benefits to participants. They provide a platform for interactive learning, where complex concepts and terms can be explained in a simple, understandable manner. They may include visual aids, such as slides and infographics, which can help participants better grasp the information. Webinars also allow for real-time interaction, where participants can ask questions and get immediate responses, ensuring any confusion or misunderstandings are promptly addressed. Recorded webinars can be made available for participants to revisit at their convenience, allowing them to learn at their own pace.
Personalized communications: A dedicated communications team can play a pivotal role in enhancing participant understanding and engagement. A communications consultant would work closely with you to understand your specific needs and objectives, then craft tailored messages that convey the importance of the benefits offered. A key aspect of an effective communication strategy is the use of customized branding. Incorporating your unique company style and brand elements into communications produces a product that is not only informative but also resonates with the participants.
The intricate landscape of DB pension plans necessitates a meticulous approach to plan management and administration, with a central focus on accuracy. As explored in this article, administrators must prioritize data and calculation accuracy, adhere to statutory guidelines, and enhance participant engagement through innovative communication strategies. Focusing on these key items forms the foundation for successful administration.