Bad data can derail plan sponsors

For plan executives, accurate data has always been vital for effective day-to-day operations. Yet, many fail to make data management a priority. With the recent industry shift toward programs to derisk the balance sheet in defined benefit plans and to limit risks and lower costs in defined contribution plans, clean data is more important than ever.

Accurate data is absolutely crucial to the success of a complicated undertaking such as pension benefit cash-out or risk transfer. Before embarking on any major program to derisk the balance sheet or lower plan costs, executives should establish procedures to clean up and maintain accurate data, locate missing participants, fulfill routine management reporting requirements and create audit trails.

Inaccurate data is a recurring issue for both DB and DC plan sponsors, and yet it is often ignored until it creates problems. Data can become outdated when plan participants change jobs, or experience changes in life status.

Today's typical employee will change jobs numerous times throughout a career. Industries such as retail and hospitality are much more likely to have higher employee turnover rates because of a significant percentage of younger, more transient employees.

Participants might not place a high priority on updating contact information in the midst of life transitions. And with younger workforces, actions associated with such plans seem too far in the future to require immediate attention.

Yet, when participants fail to update their information, it doesn't remove the plan sponsors' fiduciary responsibility to maintain regular communications with them or mitigate the very real risk of fraud. We worked with one plan sponsor that discovered after a participant was deceased that a family member continued to receive and cash pension checks.

DC plan sponsors can encounter similar instances of fraud. Any efforts by the plan sponsor to reclaim the funds would likely require legal action against the perpetrators, resulting in legal and administrative fees. Often in such cases, legal efforts are unsuccessful because perpetrators spend the funds before they are caught by authorities. With clean data, plan sponsors can avoid these and other issues.

Failure to conduct routine data maintenance and management can raise regulatory red flags and affect your ability to fulfill routine communication requirements, such as regular statements, annual funding notices and summary annual reports. DB and DC plan sponsors often rely on outside resources such as their record keepers to maintain accurate participant data. Routinely, our clients come to us assured their plan providers have supplied accurate addresses, only to learn when mailings are returned that this is not the case.

The longer you wait to update participant data, the more complicated it might become to resolve, especially in scenarios where the participant has died and you are now left to track down beneficiaries.

Previously, plan sponsors could enlist the help of the Internal Revenue Service to communicate with missing participants about benefits or tax issues. For a relatively small fee, the IRS would search its database to locate the individuals, providing a reliable resource for current contact information. Last year, the IRS stopped this service. While the Social Security Administration has a similar service, it recently increased its fees to $35 per participant from $25 per participant.

Traditionally, plan sponsors have focused on mortality because they realize cost savings when they can remove participants from the plan. Yet, missing participants and uncashed checks can result in significant expense in both fees and personnel costs year after year. More importantly, when implementing strategic programs such as lump-sum distributions and other alternatives, the quality of all the participants' data can make or break the success of your program.

Having accurate data and understanding the demographics of your participants can help DB plan sponsors design the best program to derisk the balance sheet. The average age and length of employment, current and future retirement statistics, participant gender and life expectancy are all key factors in determining the best long-term program. This is critical information when deciding how best to handle current and future retirees. While the emphasis is often on the retirees, the demographics of the population as a whole are just as critical when designing or selecting the right program — and ensuring its success.

Demographics will impede or ensure the success of your efforts to communicate with participants. How do you communicate clearly and in the right way to elicit action or the desired response? Recently, RCP worked with a DC plan sponsor that had completed all communications requirements to notify participants about a pending rollover. One participant received the mailing, put the letter aside for later action and forgot about it. He found the notification two years later, long after the response deadline had passed.

Providing participants with a variety of ways to respond — via mail, electronically or by phone — as well as providing call-center services to answer questions and provide more information can all contribute to an increased response rate. In the case mentioned above, perhaps a series of automated reminder calls would have helped ensure action on the participant's part.

Once you've fulfilled the reporting and communication requirements, take the necessary steps to document your efforts. The process is not complete without comprehensive management reporting documents and an audit trail to prove that you fulfilled fiduciary and regulatory requirements. Participants have been known to file complaints, contending plan sponsors did not do everything possible to locate them, or did not act in the participants' best interests. These complaints can raise red flags with regulatory agencies and might lead to audits by the IRS or Department of Labor.

Whether your goal is to increase efficiency and decrease costs, or a larger strategic derisking initiative, take the steps to address these issues now. By taking action, you can avoid potential roadblocks and bumps and reduce risk on more than just the balance sheet — you can reduce the overall risk to your company.

Ms. Steigerwalt is the chief operating officer of RCP Solutions, and a partner responsible for RCP's Retirement Plan Management Services group.