Communicating Complicated Benefit Packages

It’s a significant challenge for sponsors of both DB and DC plans to take charge of communications and participant education.

“Plan sponsors [with both defined benefit and defined contribution plans], when they pick their consultant, need to make sure they pick a consultant that’s been in the business a long time,” says Brian Blach, vice president of CBIZ Retirement Plan Services, in San Jose, California. “Having both types of plans definitely has its challenges.”

For example, plan documents and summary plan descriptions (SPD) should clearly define the different classes of employee. “Those have to be very clear on what benefits groups of employees are eligible to receive,” he says. “The last thing we want is for the employee to think they’re going to get a benefit in a plan and not be eligible for that plan. So that outline is very critical.”

Matt Adamson, senior business leader of total rewards for MasterCard in Purchase, New York, notes his company is now in the final stages of terminating its pension plan. He says the decision was employee-driven, not a cost-saving measure, and is meant to help employees take better charge of their retirement savings effort.

“We started having populations that had different retirement benefits—some people had the pension plan, some people didn’t,” Adamson explains. “We had two different matching structures on the 401(k) to accommodate the difference between who had pensions and who didn’t.”

The feasibility and advisability of maintaining two plans is company specific, Adamson says, but retirement plan advisers can help their sponsor clients to weigh these options. “I definitely think it’s manageable, from a company perspective and the administration of it,” he says, but he warns that participants might get confused by the presence of multiple account options, so sponsors will have to be exceedingly diligent.

“Communication between the plan sponsor and the consultant is very critical,” Blach agrees.

NEXT: Communicating differences

“For success in this environment, you have to have literally two types of education pieces and material,” Blach says.

In a standard 401(k), he explains, the plan’s vendor or recordkeeper sends out the enrollment kits to participants. “When I have that defined benefit plan and 401(k) plan, we actually have the human resources people receive the kits and they hand them out.” In those kits, he says, his firm ensures that HR adds an introductory memo regarding the relationship between the two plans and addressing frequently asked questions.

For smaller plans, having the recordkeeper deliver the enrollment package to one location—instead of to each participant’s address—can be easier for them, and making those materials available in the workplace affords employees time to review the information with an expert nearby.

“Most books are pretty generic,” Blach says, “but they do outline the contribution formula. We have the summary plan description in there, we have the introduction memo. My clients can speak to one of the consultants here in our office or the human resource people.”

When MasterCard began the plan termination process, Anderson found “a lot of [messaging] is dictated by the legal process—there are so many notices you have to go through and different filings.” The key to handling participant communications, especially when juggling two plans, is to approach them “very carefully,” he says.

“We tried to supplement [the required notices] as much as possible with really simple language on what the options are, because it is kind of complicated,” Blach says. “We tried to make it as simple and as short as possible, and stay away from a lot of legalese.”

Advisers can help to develop those supplemental materials, for instance answering frequently asked questions or putting together cover memos to explain the required disclosures. They should be prepared to explain what is being sent, how it affects participants, and any action they may need to take.

NEXT: Cost considerations

“They represent are different costs,” Adamson says of DB and DC plans. With a DC plan, “you know what the fixed cost is of putting in a match every pay period. You know what your administrative costs are,” he notes. “With a pension it really depends on how the markets do. You might be faced with a year in which you don’t have to contribute to it, or you might be faced with a year when you have to put a substantial amount of money into it.”

“You’re now maintaining two plans,” Blach says. “I’m not going to say the administration cost is double, but there is some additional cost there.” Still, he adds, “It’s not a huge cost.”

When running these two types of plans, advisers need to make sure their plan sponsors understand the many variables that go into the defined benefit contribution each year. “How did the performance of the assets in the defined benefit do? Did they keep up with the market? Did they beat your targeted growth rate? Did they underperform the targeted growth rate?” Next, consider the plan's demographics—older employees cost more than younger.

At a minimum, Blach’s firm tries to provide two projections every year to help employers prepare for the defined benefit contribution they will owe. Given that many of these plans come up as a tax benefit, employers want to make the contribution right before the tax-filing deadline, which for most corporate year-end plans is September or October of a given year. However, it’s assumed that that money has been in the plan and earning interest since January 1; by delaying funding, participants have effectively missed out on nine months of potential earnings, which puts them at a disadvantage for the next year.

Plan advisers can help to explain that the sooner the funds get into the trust, the better off the plan will be from a funding standpoint. “We feel that if we can get out in front of the client and do those projected contribution analyses for them, we have a better opportunity to get that money into the trust earlier in the year,” he says. Remember that the DB requires a contribution each year—in good times and in bad—and the employer needs to be sure it can fund that contribution each year.

NEXT: Juggling two plans

“Make sure [plan sponsors] understand that it’s a complicated plan and that they need to be very proactive asking about the required contributions every year,” Blach says. “They need to be communicating with the actuary and the consultant where they are in the business cycle—good or bad.

“Most plan sponsors like to say when they’re having a great year, when they’re not having a good year,” he continues. When their cash flow is not as good, “they don’t like to talk about it.” However, he warns, “that’s part of the business cycle and [part of] making sure you picked the right partner so you can talk about those things so that they can guide the client the right way and give good advice.”

As for the recordkeeper’s communications to both sets of participants, Adamson says, “I think that all went pretty smoothly ... I think most providers, administratively, can accommodate two matching schedules.

“Once again, that’s a communication thing that the employer has to make sure the employees understand,” Adamson says, particularly when it comes to individual classifications. Advisers can help the plan sponsor to clarify which groups of employees are eligible for each level of benefit, and to communicate that with participants.