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Depending on the plan's funding level,
a termination could require a significant
infusion of cash to cover the shortfall.
" That's the decision many sponsors
face, " says Henry. " In order for them to
pursue that strategy, it may accelerate any
funding of a pension shortfall that exists
in the plan. "
A Spin-Off Plus Termination
Michael Clark, managing director
and consulting actuary in River and
Mercantile (soon to be Agilis), says DB
plans' initial PRTs often involve retirees
and vested terminated participants. After
dealing with those groups, an analysis of
remaining participants might show that
many are still active. If the plan has been
frozen for a while, a large number of them
may have small benefits that have stopped
accruing. At that point, the sponsor realizes
it is " paying a lot in administrative
fees for having them in the plan for a very
small benefit that's promised to them way
into the future, " says Clark.
If the company is unprepared to
its plan completely, spinning
terminate
off a segment of it and then terminating
that can give participants access to their
accrued benefits. The procedure results in
two plans, temporarily. The terminating
plan will include active participants, but
it also can hold vested, terminated participants
and retirees, Clark says. Once the
plan is terminated,
its participants are
offered the same options as those available
in a full termination: Take a lumpsum
payout or the plan will transfer their
benefit to an insurance company, to be
paid out in the future.
Henry strikes a cautious note on spinoffs
and terminations. It is a big decision
for an organization to terminate a plan,
he explains, but spin-off and termination
strategies are more complex decisions yet.
" And, quite frankly, the process of spinning
participants out of the plan into a new
plan carries a number of legal and regulatory
considerations that sponsors have
to evaluate as well. So, in those types of
cases where sponsors that really want to
get a lump-sum offer in the hands of their
active employees, for example, pursuing
a spin-off and termination is a relatively
complex solution to the situation. "
In-Service Buy-Outs
The Setting Every Community Up for
Retirement Enhancement Act's passage
created another option for sponsors to work
with active participants. Prior regulations
allowed plans to offer in-service, lump-sum
distributions to employees of age 62 or
older. The SECURE Act lowered the qualifying
age to 59.5, and McDaniel believes
that change will benefit numerous participants.
-Ed McCarthy
A Bad Rap Undeserved
THE practice of revenue sharing for retirement plans has been questioned in some
excessive fee lawsuits; however, it can be used in certain instances to lower costs for
retirement plan participants. " Revenue sharing is an arrangement between the money
managers and the recordkeepers, where a certain amount of money is provided to the
recordkeeper if it offers certain funds, to help offset recordkeeping costs, " says Robyn
Credico, defined contribution practice leader, North America, at Willis Towers Watson.
The practice originated to offset expenses from investment funds' marketing costs,
she says.
How Revenue Sharing Works
Plan sponsors using revenue-sharing arrangements can place investments into plans
with an expense ratio that includes the cost of the investment adviser and recordkeeper
without additional charges to the plan, explains George Fraser, financial consultant and
managing director of the Fraser Group at Retirement Benefits Group.
" A fund may be at 120 basis points-1.2%; of that cost, maybe .40 is the cost of the
actual fund; .50 is the cost of the provider; and .30 is the cost to the adviser to do the
work. That's revenue sharing, " he says.
Some plan sponsors that use revenue sharing in a particular fund might rebate
a portion of the fee back to participants. " It actually reduces their overall expenses, "
Credico says.
Revenue sharing in defined contribution plans is a complicated topic that can be
misunderstood, she adds. " Sometimes consultants would recommend against revenue
sharing, [but] just because it can get you into trouble doesn't mean theirs is the right
answer, " she says. " It's not bad as long as you monitor it and understand it. "
Investment managers use tiered expense ratios-several share classes-with institutionally
priced shares being the least expensive. Revenue sharing can be a cost-saving
option for plan sponsors when choosing among funds and can be used to access the
lowest-fee share class, Credico says.
For sponsors selecting among funds, there could be one that has a " middle expense
ratio, but it gives you a better revenue-sharing amount than a fund that has no revenue
sharing, " Credico says. A revenue-sharing fund may cost 60 basis points but offset
20 points of the expenses, vs. another fund that costs 50 basis points with no revenue
sharing, she says.
" In the first example, the plan is better off than in the second because the net
expenses would be 40 basis points, whereas the non-revenue-sharing one would be 50
basis points, " she says. " And so you need to look at each and decide which makes sense
for you. " -Noah Zuss
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