Investing

DB Plan Clients See Lump Sum Favorability Shift

The IRS prohibits DB plans from paying lump sums to in-pay retirees and beneficiaries,” but many terminated vested participants will view lump sums as attractive.”

By John Manganaro editors@assetinternational.com | March 21, 2017
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A recent analysis published by Vanguard suggests 2017 might be the “last best chance” for defined benefit (DB) plan sponsors to pursue a lump sum strategy on favorable terms.

The pressure to move on lump sums today is largely due to changes driven by the Internal Revenue Service (IRS) and, “to a lesser but still meaningful extent,” by the Pension Benefit Guaranty Corporation (PBGC). Recent interest rate movements are also impacting the appeal of pursuing a lump sum, according to Vanguard.  

“It's likely that most DB pension plan sponsors' major objectives are to reduce the cost of maintaining their plan, increase its funded status, and mitigate its effect on the organization's financial statements,” the firm explains. “Sponsors may be able to make progress toward these objectives in 2017 by offering a lump-sum window to terminated vested participants.”

The Vanguard analysis includes insight from Brett Dutton, Institutional Advisory Services, and Paul Bosse and Kim Stockton, of the Investment Strategy Group.

The trio explains that the IRS “indicated in September 2016 that it was postponing until 2018 the implementation of updated Society of Actuaries (SOA) mortality tables used to calculate lump-sum values, minimum funding requirements, and PBGC premiums.” Simply put, moving on lump sums now before the new SOA tables take effect may result in more favorable calculations from the plan sponsor's perspective.

Vanguard warns that “sponsors should know that the IRS prohibits DB plans from paying lump sums to in-pay retirees and beneficiaries,” but many terminated vested participants will view lump sums as attractive. In the end it can be a win-win—the participants gain more control over their wealth while sponsors gain better control of their DB plan longevity exposure. 

NEXT: Getting ahead of PBGC premium hikes