Cash Balance Plan Termination - Difficult Annuity Purchase

[DW]

Hi -

I have a cash balance plan that has terminated, and most of the distribution has been completed (95% or so of the plan participants either took their balance or elected to start an annuity). There are, however, some participants remaining who have either not responded or who have actively elected to defer commencement. They are not missing participants.

The facts are as follows:

* the benefits are cash balance based, with some grandfathered annuity benefits payable if more valuable than the accumulated balance. Unfortunately, the prior actuary and their legal counsel amended the plan so that participants may elect to receive their benefits earned before a certain date in a different form than benefits earned after that date, so participants could potentially elect two different annuity forms, or elect to take part of the balance as a lump sum and part as an annuity, etc. - that is rare in practice, though. 

* the remaining balances are about $2 million for the group of non-responders and participants deferring. Grandfathered benefits make the actual total lump sum value slightly higher than that, but not much.

* the interest crediting rate is treasury-based with a floor (the floor applies and has for five years prior to termination, presumably it would apply indefinitely since the regulations don't state that the rate ever goes back to the index base - at least not that I've read)

* the annuity broker has not been able to find someone who is willing to quote for the remaining deferred participants

* Legal counsel has determined that every aspect of the plan is protected and must be provided for in the annuity contract

 

My questions are this:

1) Has anyone had any luck transferring benefits similar to the above (or any cash balance benefits where all plan options stay intact) to an insurer. If so, can you let me know who the insurer was so that we can direct the broker to them?

2) Can anyone confirm that the 5-year average interest rate applies in perpetuity now? This seems like a given, but just checking.

3) I have heard others claim that legal counsel has allowed them to water down plan options for participants who refuse to respond when it makes the benefits unattractive to an insurer. The client probably doesn't want to do anything like that given the opinion they've already received, but I'm curious if anyone has experienced that in practice.

[david rigby]

4 hours ago, DW said:

3) I have heard others claim that legal counsel has allowed them to water down plan options for participants who refuse to respond when it makes the benefits unattractive to an insurer. The client probably doesn't want to do anything like that given the opinion they've already received, but I'm curious if anyone has experienced that in practice.

If this implies a desire for opinion from a second legal counsel, send me a private message and I'll offer a few names to consider.

[My 2 cents]

Is it not the case that if a participant with a benefit worth more than $5,000 wants to defer receipt, then a deferred annuity (preserving all plan benefit options and factors) must be purchased?  Sure, it will be unattractive to an insurer, but you still have to find one to sell you such an annuity, and (as any government official will tell you) money is not really a consideration.

The people who did not answer will either be unresponsive with known whereabouts or truly missing.  It is my understanding that the former should be treated as though they elected deferred annuities and the latter can be turned over to the PBGC under their missing participants program.

[CuseFan]

PBGC is very stringent on who they deem missing and liabilities they'll take - must truly be missing and not unresponsive. 

The pool of insurers willing to write small-ish contracts is limited, those who will write deferred contracts even more limited, and those who will write such for plans with a general lump sum feature are essentially non-existent, especially if the sponsor is in NYS. With all the large and mega market derisking going on, small and mid market plans are finding it very difficult if not impossible to place annuity contracts, that is just the cold hard fact. 

IRS, PBGC and DOL are aware of the situation but not overly sympathetic. Some advice either the DOL or PBGC provided, informally of course, was for sponsors to go back to participants and inform them that they are unable to purchase a (deferred) contract and ask them to change their election to an immediate annuity or lump sum. This might work if there are just a handful or fewer unresponsive/deferreds, but probably not on a $2M block of liabilities. 

Not sure where to steer you, maybe smaller individual annuity contracts - we had a client go that route on their own. Just finished, so we don't know how PBGC will view those contracts when they do their requisite audit.

[My 2 cents]

1.  Why do I have difficulty believing that the DOL or PBGC actually suggested going back to participants to ask them to change their elections?  I would think that a better choice (such as it is) would be to offer a special cash payment outside the plan (to avoid discrimination issues) to the participant (and spouse!) to take a lump sum instead of an annuity. [Don't say it - bribe is such an ugly word!]

2.  If you could buy individual annuity contracts to cover those who the PBGC would not accept for the missing participants program, how could the PBGC possibly have any objections?  The DOL may want to make sure that fiduciary processes were followed in selecting the individual annuity provider, but they would have to judge safety with respect to the companies offering to sell the annuities.  So what if there are much stronger companies if they won't sell the deferred annuities you need to buy?  "Safest provider" is measured exclusively by comparing those companies willing to sell, and if there is only one such company, then (perforce) it must be the safest.

[CuseFan]

We've seen that "incentive" approach (#1) tried as well. sure, why not entice the participant with a 10%, 20% or whatever "bonus"? it's still cheaper than paying a 40%-50% or more premium the lump sum value.

On #2, the issue sometimes is finding any insurer who will write a deferred annuity contract that has all the required plan features, including (and most problematic) a lump sum. 

Not impossible situation, just very challenging, and often requires requesting extension from PBGC for the distribution deadline because it takes so long to get through this process.

[david rigby]

While #1 might be "cheaper" than the annuity purchase, it may also include some other issues.  I recommend you discuss this with an experienced pension actuary.  May also be worthwhile to discuss with (or at least mention to) the plan's ERISA attorney.

[My 2 cents]

Just wondering - have you made clear to the non-responsive participants that no response means "buy me an annuity"?  I still think that, for a sufficiently loaded-up premium, you should be able to find someone who will sell an annuity that involves deferral of benefits with a potential lump sum payout.  If people actually want a deferred annuity, there is no alternative but to get them one, at whatever price is needed to obtain the offer.