Defined-benefit plans have been pummeled by the markets in the past few months. In October and November, the defined-benefit plans of the S&P 1,500 companies saw their funded status shrink by $240 billion, according to Mercer.
As a result, many employers may find that their plans are below the 80 percent funded status required to be able to pay retiring employees full lump-sum payments. Under current regulations, companies with defined-benefit plans that are below 80 percent funded can pay only half of the lump sum owed to retirees. HR executives need to be in close contact with their company’s actuaries to determine whether this is going to be an issue at their firms, experts say.
"I think we will see a significant minority of firms that fall below the 80 percent funded status [required for full retiree lump-sum payments]."
Watson Wyatt Worldwide
Companies that don’t certify their funded status by April 1 will be assumed to be 10 basis points below their 2007 levels. That means any company that was 90 percent funded or less last year could have issues, experts say. Congress did give defined-benefit plan sponsors some relief late last year by passing legislation that will allow companies that are less than 60 percent funded to use their January 1, 2008, funding levels for the year. Under the Pension Protection Act, companies with plans that are less than 60 percent funded have to freeze their plans, and thus cannot dispense lump-sum payments, so the last-minute legislation was a relief to many employers, experts say.
Still, there will be issues. "I think we will see a significant minority of firms that fall below the 80 percent funded status," says Alan Glickstein, a senior consultant at Watson Wyatt Worldwide.
Companies with plans that are below 80 percent funded will have to decide in the next few months whether they will contribute more to their plans to increase the funded status, and HR executives need to be part of those discussions, says Brad Klinck, senior vice president in Aon Consulting’s retirement practice.
"Some are going to have to choose between making contributions to their plans or keeping people employed," he says.
"Some [companies] are going to have to choose between making contributions to their plans or keeping people employed."
—Brad Klinck, senior vice president, Aon Consulting's retirement practice
HR also has to decide how to communicate this to employees. "It’s a very difficult question to answer," says Eric Keener, a principal and senior consultant in the retirement practice at Hewitt Associates. From a fiduciary point of view, the HR executive has to decide whether it’s better to allow retiring employees to take lump-sum payments before the restrictions take effect or whether that’s a bad idea because it will result in less money in the plan, he says.
This could become a real issue for companies in which there are unions, he says. "I think if a union is going into collective bargaining in the future, you will see them want to include some language around these issues," Keener says.
HR executives at companies with benefits restrictions also have to make sure that they communicate to all employees about the changes, not just the ones who are retiring soon, Glickstein says.
In some cases, employers may even find themselves as defendants in lawsuits brought by employees affected by the restrictions, experts say.
"People are going to be wondering, ‘Does this mean my company is in trouble?’ " Glickstein says. "It could affect productivity and morale."
Workforce Management, January 19, 2008, p. 35 -- Subscribe Now!