When defined benefit plan sponsors are asked: “How do you perform your benefit calculations?” many reply that they have to check with their actuary or look in boxes or filing cabinets. This inefficient, error-prone process not only places excess burden on internal resources, but also could result in inaccurate calculations that can lead to an assortment of detrimental outcomes. Still, for many of these DB plan sponsors, outsourcing their plan’s administrative services may seem like more of a wish than a practical solution.

But it doesn’t have to be that way. In fact, if the data exists — and it always does — there’s a better solution that allows DB plan sponsors to delegate the benefits administration, calculations, and reporting. Best practices dictate that the optimal approach is a modern three-tiered systems architecture that delivers integration of and tight controls around the data, program, and presentation layers — resulting in a powerful and efficient service delivery model.

Sometimes, plan sponsors believe a better system must be much more expensive or that it won’t allow them to maintain their current actuary or investment manager. Other times, they think that the DB systems don’t match up to their defined contribution counterparts. Both of these aren’t necessarily true.

Outsourcing allows for the ability to integrate the plan’s administrative services with other DB plan services. For example, if a plan sponsor is already working with an investment manager or actuary, the sponsor doesn’t need to dissolve those relationships to work with a new provider. Outsourcing can also incorporate updates without the excess cost of the previous models. This is particularly important when legislative changes are enacted or when the sponsor organization is going through a merger or acquisition. In the older models, these scenarios could result in the sponsor paying significant charges for benefits program updates. With an advanced benefits engine, there are generally no additional charges because the engine is its own entity — built so updates can be pushed out to any plan with no additional programming.  

Finally, the completeness of participant data allows the sponsor to be more proactive in educating and reaching out to plan participants with actionable information. The math of the calculations is certainly not too complex with today’s powerful computers, but if the data is not up-to-date and accurate, answers are guaranteed to be wrong. The improved process solves this data issue by updating historical data all at once. As a result, there is no longer a need for tedious data reconciliation on a calculation-by-calculation basis. In the end, a “cleansed” historical database updated with periodic payroll feeds enables true automation. Without this step of the cleanup project, DB plans with forever be in the dark ages. Once a sponsor’s DB plan is on payroll feed updates, it is identical administratively to the way DC has been done for years. Therefore, true automation on a total retirement basis is no longer a wish, but a reality.

Patrick Kendall, F.C.A., E.A., is vice president and defined benefit practice leader with Diversified.

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