Relative Value

[John Feldt ERPA CPC QPA]

After a discussion with a prospect, we find that their defined benefit plan was frozen since August of 2003. The plan offers a subsidized early retirement option (2% per year reduction from age 65 to age 55). The plan offers a handful of annuity options, but only the participants employed January 1, 2001 or later are eligible for the lump sum option.

They have not been providing relative value disclosures when they provide distribution options for participants. The plan sponsor is a for-profit corporation.

Are there exemptions or exceptions that could apply here to the relative value disclosure rules?

If this plan has been violating this requirement, what could be the remedy for this?

[Andy the Actuary]

After a discussion with a prospect, we find that their defined benefit plan was frozen since August of 2003. The plan offers a subsidized early retirement option (2% per year reduction from age 65 to age 55). The plan offers a handful of annuity options, but only the participants employed January 1, 2001 or later are eligible for the lump sum option.

They have not been providing relative value disclosures when they provide distribution options for participants. The plan sponsor is a for-profit corporation.

Are there exemptions or exceptions that could apply here to the relative value disclosure rules?

If this plan has been violating this requirement, what could be the remedy for this?

(1) If a terminating participant was eligible for for early retirement, did the lump sum include the e.r. subsidy?

(2) If so, how many of these were eligible to elect lump sum payment?

Since the lump sum was only available to employees hired after January 1, 2001 and the plan was frozen 8/2003, it is hard to believe that other than de minimis ($5,000 or less) lump sums were paid and they would have been exempt from providing relative values.

If on the other hand, my supposition is incorrect and there were a fair number in category (2) -- i.e., eligible for e.r. with lump sums exceeding $5,000, consult a benefits attorney as there may be special hoops to jump through. The plan may want to go back to affected participants with the disclosure and the opportunity to switch elections, which would include for those who received a lump sum payment, repaying the lump sum with interest. The concern would be about taking no action is that the disgruntled former employee sought an attorney who uncovered that appropriate disclosure had not been given. However, it would not be surprising given the cost/risk/disruption issues if many employers would handle this by simply choosing to start giving the relative values comparison.

[SoCalActuary]

I believe the original post refers to participants employed after 1-1-2001, not hired after 1-1-2001. This would mean that prior terminees would not be eligible for the lump sum option.

If the OP could clarify the intent, we could get a better picture. Do you mean "first employed", or do you mean "received wages" after 1-1-2001?

But to answer the original question, ERISA disclosure rules are the issue here. Was the relative value disclosure rule ignored, either on purpose or from ignorance?

[John Feldt ERPA CPC QPA]

(1) If a terminating participant was eligible for for early retirement, did the lump sum include the e.r. subsidy?

Yes

(2) If so, how many of these were eligible to elect lump sum payment?

about 50%, the other half had termed before 2001

Anyone active 1-1-2001 has an option for their entire AB to be paid as a lump sum.

[SoCalActuary]

So the plan administrator has failed to provide proper disclosure under 1.417(a)(3)-1©.

See the related ERISA penalties for failure to provide proper information.

[John Feldt ERPA CPC QPA]

If the OP could clarify the intent, we could get a better picture. Do you mean "first employed", or do you mean "received wages" after 1-1-2001?

Anyone with 1 hour of service with the employer on 1-1-2001 (or later) has a full lump sum option. The deferred vested participants pre 1-1-2001 only have annuity options, or if under $5000 PV, a cashout option.

But to answer the original question, ERISA disclosure rules are the issue here. Was the relative value disclosure rule ignored, either on purpose or from ignorance?

Ignorance - they unbundled too much - one provider does the document, another does the Sch B and actuarial valuation, another does the 5500, and another does the distribution forms and the investments (a trust company).

[SoCalActuary]

So the Plan administrator has an ERISA compliance issue resulting from being too cheap.

Sad, but not the first time.

For example, I recall a bank doing PS allocations in the 1980's, who said they were not in the "415 testing" business.

Go get disclosure forms prepared for all past terminees since the new regs were issued. Go back to each one and offer them the chance to revise their election, with proper spousal consent if needed.

We started working on this compliance issue in 2006, and our software was ready early in 2007.

[Mr. T]

I don't want to hear no jibber jabber about ignorance. If they say they gonna do the distribution forms, then they should be held accountable. Why you makin that nice client pay for someone else's bad work. You should make those guys pay to clean up this mess.

Then again, if the relative value were all close to 100% and the lump sum included the value of the early retirement subsidy so that they weren't rippen nobody off without telling them, then they might want to say "go forth and sin no more". But if that lump sum didn't include the subsidy and they wasn't tellin nobody, then we gots a problem that probably needs fixin.

[John Feldt ERPA CPC QPA]

That's funny. I am verifying with their actuary regarding the calculation of the prior lump sums to see if they indeed contained the value of the early retirement subsidy.

Did you create a user named "Mr. T" just you you could say "jibber jabber"? You really should add "I pity the fool."

[Mr. T]

I'll add a "pidy da fool" when I see a fool worthy of pidy. Right now, I don't see one, cept maybe your client.

Oh, by the way, thank you for your service as a scout and your good service to this board. We need more people like you in this place.