DB Cash Out Option

[Guest BigBish]

I manage a DB plan that does not have a lump sum cash out option for participants. My Company is thinking of adding one. Where can I get some plan design survey data that will give me information on things like number of plans with what kind of options they offer? I'd also appreciate any comments on adding this type of distribution option to a DB plan.

[Effen]

Why are they considering it? How many participants are in the plan? How well funded are they based on RPA Current Liability?

Lump sums tend to be a very expensive option. Most larger plans don't offer them. Most small plans do because the owner wants a lump sum.

[SoCalActuary]

For administrative reasons, the plan sponsor of a large plan would want to eliminate participants with

small benefits. We have some who allow lump sum payments for amounts above the $5,000 deminimus

level. The best design we see has a limit of $15,000 on voluntary lump sums. If the plan provides a

higher benefit, then no such option is available.

This policy allows us to reduce participant count and eliminate recordkeeping issues. It does come with a

price, in that lump sums must be paid at the IRS's "market rate" on 417e assumptions.

But with smaller amounts, that lump sum subsidy is balanced against no future PBGC premiums,

and no per-participant charges for administrative services.

It also eliminates the "lost participant" headaches later.

[JanetM]

One of our plans (am plans sponsor) has provision that if monthly benefit is less than $75 then you have the option of lump sum. Plan has about 875 active, deferred and retired. We cash out all the under $5K as soon as possible. About a dozen a year elect the lump sum, averaging about $11K. We figure we save on fees from bank that processes the monthly checks as well as PBGC fees.

Note that if the plan isn't well funded, the participants will get the lump sum but Owners, Key & HCE won't.

[david rigby]

Good comments. I suggest returning to Effen's first question. Plan changes/design should always be preceded by reasonable discussion of "what are you trying to accomplish?"