By Chuck Yanikoski
We’re well aware that when plan sponsors restructure or terminate defined benefit pensions the primary reasons are financial. But we also know that finances don’t tell the whole story, and we know that if you’re the plan sponsor, you know it, too.
Still, while all the spreadsheets and legal documents are shuffling back and forth, it’s easy to temporarily lose sight of the impact on individual plan participants. One of our goals here at CREWS is to help assure that this doesn’t happen.
Participant concerns matter for three kinds of reasons: legal, business, and moral.
Basic legal protections for participants are built into ERISA and subsequent regulations, but even if you follow the letter of the law, if participants feel that they’ve been forced into a decision that’s unfair to them or beyond their comprehension, they can take legal action. This has happened before, and even if participants ultimately fail in court, they can create extra work for you, extra expenses, adverse publicity, and ongoing employee relationship issues.
Business reasons for going the extra mile for participants include the legal reasons, but go beyond them. Your DB plan has probably been around a long time. It was probably created – and supported all these years – both for competitive business reasons and to accept a social responsibility for the post-career needs of long-term, loyal employees.
The competitive landscape has changed, of course, and most new plans are now defined contribution plans like 401(k) or 401(a) plans. But the fundamental purposes of all pension plans are the same: to provide a competitive retirement benefit allowing you to attract and retain good employees, and to take care of them reasonably well in their old age.
Most experts agree that DB plans usually do a better job of achieving these goals than DC plans do, so by restructuring your DB plan, you are probably creating some legitimate concern among employees that their benefit plan isn’t worth as much as it used to be. This perception may or may not be true in your case. But either way, ignoring the perception is undercutting the main business reason that the plan was created – to make employees feel good about working for you. You overcome this problem by making sure someone is hold their hands through the process.
Just sending them the legally required notifications doesn’t cut it. Properly understood, a lump sum offer is at least potentially beneficial to everyone, but for those who don’t fully understand the offer and how it will affect them personally, reactions can be deeply negative – confusion, fear, even anger. Not everyone reacts this way, of course (some people are delighted with the opportunity to convert a pension to cash), but for those who are worried or upset by the offer, you need to offer participant services during the transition.
We also mentioned moral reasons. Most organizations offering pension plans of any kind have always had a benevolent interest, in addition to their financial and business interests, in sponsoring such a plan. Most executives do care about their employees, and understand that, especially where there are long-term relationships, some moral obligation for employee welfare is implicit. Besides, organization leaders are themselves employees, and have many direct connections with fellow employees. Where financially feasible, employee welfare is a natural extension of the collegial nature of workplaces in our society. Caring about employees while they are with you, and caring about what happens to them when they retire, is natural, healthy, and commonplace.
So, helping them through your pension plan’s evolution is simply the right thing to do.
It’s worth noting here that others – government agencies, consumer advocacy groups, and even the general public – also have a benevolent interest in the welfare of your employees. This will be the subject of a forthcoming blog post, but it brings us full circle back to the legal reasons for taking extra care of plan participants during the pension restructuring process – because others are watching, too.
And so, for many reasons, making sure that participants understand and are assisted through the pension restructuring process is very much a matter of doing well by doing good.