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As defined benefit pension plan sponsors seek to transfer pension risk, offering lump-sum pension cashouts for terminated vested participants has been an attractive option to consider. Many plan sponsors embarked on such cashout projects beginning in 2012 and this trend is expect to intensify throughout 2014, according to
an analysis by HR consultancy Mercer.
“Among the attractions [of lump-sum cashouts] to the plan sponsor are reduced pension liability, leading to lower plan financial risk and volatility,” said Matt McDaniel, a senior consultant at Mercer. “Other advantages include eliminating [Pension Benefit Guaranty Corp.] premiums, investment and administrative costs, and making payments before updated mortality tables come into effect. However, the business case for pension cashouts is driven by the unique circumstances of the plan sponsor and a cashout will not make sense in every situation.”
These programs also tend to be popular with eligible participants, McDaniel added. “Take-up rates for an effectively executed lump-sum exercise can be upwards of 50 percent.”
Some sponsors for whom a cashout might be appealing are waiting on the sidelines, Mercer’s analysis notes, hesitant because of concerns that include the following:
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter
Other SHRM Articles on Pension Payouts:
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