Employee option to change plans

[Guest Spock]

While thinking about the implications of freezing a DB plan to new participants (accruals will continue for current participants) an idea was suggested that we could give existing participants the option to cash out the lump sum value of their DB benefit provided they rolled it over to a 401(k) plan, concurrent with an election to choose to participate in the DC plan in lieu of the DB plan. While the DB plan currently has a lump sum option, that suggestion seems problematic on several issues: immediate, potentially heavy cash drain on the plan that could trigger higher required contributions, how to value early retirement subsidies, spousal consent issues, can that choice be offered without a distriubutable event, and would that trigger a partial termination in the eyes of the PBGC are just a few questions that come to mind immediately.

Does anyone have any experience in doing what I have described? Is there another critical issue besides the questions I identified above that I am missing?

[david rigby]

"... an idea was suggested..." I'll bet the "suggester" has a personal motive that has nothing to do with sound benefit policy or what's best for the plan sponsor.

This sounds like it requires a distributable event, and that the only valid event is plan termination. If so, you cannot pay the lump sum only on the condition of rollover.

[Andy the Actuary]

Agree wholeheartedly with Eleanor's favorite son David. Unless the DB Plan is terminated, you cannot allow a participant to elect out of the "defined benefit" feature -- that is the assurance of a guaranteed monthly pension, which you can't accommodate with a DC plan. You can terminate the DB Plan but you cannot force the Participant to elect a lump sum and roll it to the DC plan. The participant, in fact, could elect to have an annuity purchased upon termination.

What advantage would the employer gain even if this transaction were doable? Paternalism?

[AndyH]

Mr. Spock:

These esteemed commenters have apparently never encountered the "no win" scenario. As you know, not everyone believes in that.

While their comments are wise, accurate and quite logical, all of this is not prohibited. One could theoretically allow an elective rollover of db funds into a dc plan upon the attainment of NRA and some would say that an election to benefit in only one plan or another might also be allowable (I'm not certain how but I have seen it done), so some elements are theoretically possible. One problem is that you cannot condition the receipt of anything on an election to defer into a K plan. In the end, I'd tell the suggester to put his face back in the jar by the door because the scheme considering the limitations is illogical.

LL and P

[Belgarath]

AndyH - I can't spell it, but wasn't that the "Kobeyashi Maru?" So you are suggesting that they reprogram the computers?

I agree with your comments. I do have my doubts as to why such a scenario is being explored - in my experience, it usually means someone is trying to sell an investment to the new DC plan...

[AndyH]

AndyH - I can't spell it, but wasn't that the "Kobeyashi Maru?" So you are suggesting that they reprogram the computers?

Amazing.

[Guest Spock]

Agreed. This is my Kobayashi Maru, but I am not one to reprogram the computer. Perhaps in this case, the needs of the many outweigh the needs of the few, or the one.

May your journey be free of incident.