PLANSPONSOR - September - October 2023 - 22

RESEARCH | 2023 DEFINED BENEFITS A ADMIN SURVEY
DEFINED ENEF
DMINISTRATION SURVEY
get an annuity from the DB plan rather than buying it inside
a DC plan-which wasn't really available back then-or taking
a distribution and finding an annuity provider outside of the
plan, " Lowell says. " The [bank] asked the IRS, which said the
participant would be transferring from one tax-qualified plan to
another, very much akin to a plan-to-plan transfer. "
At the time, the IRS's response was applicable only to Bank
of America. However, in 2012, when the agency was making
several efforts to expand access to lifetime income options to
retirement plan participants, it issued a Revenue Ruling, which
applies to plans widely.
With this feature, " you would have language
in your defined benefit plan that would specify
exactly how that will get converted to an
annuity, " Lowell says. " The idea being that it
would be done on an actuarially fair basis. "
The option has failed to arouse much
interest over these 11 years, but has not been
completely ignored either, he says, recalling
one provider's data showing that
15% of
its clients offered participants the ability to
perform such transfers.
According to Lowell,
the rule says nothing
that limits moving DC plan assets only to an active DB
plan. He notes that doing such a transfer offers protection from
longevity risk, inflation risk and sequence of returns risk.
Moreover, at a time when participants want more personalization
in their benefits, the ruling makes way for an additional
option whereby they can conform their retirement benefits to
meet their needs, he says.
DB Plan Resurrection
Also meeting needs for plan sponsors and participants are cash
balance plans.
McCarty says Principal is seeing renewed interest in the
plans particularly under two sets of circumstances: where an
industry wants to increase its retirement income alternatives
to attract and retain talented high-income earners or where a
company wants to replace a more traditional pension plan design.
" For high-income-earner industries, cash balance plans can
provide enhanced retirement savings benefits in a more efficient
manner, [allowing] plan sponsors to track benefits while more
accurately projecting present and future costs, " he says. Other
industries adopt cash balance plans to replace traditional DB
plans, he says, so they " can still provide participants a meaningful
benefit with lower and/or more controlled costs to plan sponsors. "
According to our 2023 DB Administration Survey, the
high-income-earner industries, which are those most likely to
offer cash balance plans, are utilities; oil and gas/energy; and
law firms.
Lowell says October Three's own analysis found cash balance
22 PLANSPONSOR.COM September - October 2023
plans were also popular with hospitals. " The skilled professional
staff at hospitals have very high burnout rates, " Lowell explains.
" So the fact that [staff] could accrue a meaningful benefit quickly
[via a cash balance plan] is a retention tool. "
Law firms typically use cash balance plans as " deferral
opportunities, " he says. Firm partners fund the plan and enjoy
tax deductions on plan contributions, plus the benefit-limit in a
cash balance plan is much higher than the contribution limits
for defined contribution plans. Firms put in fairly generous
benefits for support staff as well, to pass nondiscrimination
testing, Lowell says.
Contribution limits can be as high as $250,000,
McCarty notes.
As for other industries, cash balance plans
provide a generous benefit for the in-demand
talent they hire, and the plans are easy to
explain to employees, Lowell says.
It is key for plan sponsors and providers
to help participants understand the relevance
of DB plan benefits-to explain that
" guaranteed income from DB plans can help
ensure them some level of core income security
to complement their own savings responsibility
inherent in defined contribution or individual savings
plans, " McCarty says.
High earners will probably respond best to targeted,
nuanced communications detailing the added savings capabilities
the plans make possible, he says.
In sum, he says, " Both designs, traditional DB or cash
balance, offer employers an opportunity to have flexible benefits
and talk to their employees about good retirement outcomes. "
DB plan sponsors should look for key areas of support from
service providers. " Timely and accurate service for participants
is one of the most important tasks that providers can offer in
support of plan sponsors, " says Monica Gallagher, a partner in
October Three, in Jacksonville, Florida. " Many participants are
unfamiliar with their pension plan benefits, and knowledgeable
provider staff can help [them] navigate the retirement process to
ensure a smooth experience. "
Gallagher suggests sponsors look for DB plan providers
that can offer actuarial support. She says actuarial services
could be attained from a separate provider. " However, [for the
plan provider to] have actuaries on staff is invaluable as legislative
changes happen, plan sponsors consider plan design
changes, and/or they consider special one-time projects-for
example, de-risking. "
Continued business growth is a good quality to seek in a DB,
or any, provider, Gallagher says. Commitment to DB plans as a
core competency can help ensure that providers keep investing in
systems, technology and pension-knowledgeable staff, she says.
-Rebecca Moore
http://www.PLANSPONSOR.COM
PLANSPONSOR - September - October 2023

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