Plan sponsors of defined benefit (DB) plans are continually looking to improve the financial health of their pension plan while simultaneously providing participants with opportunities to take greater control of their personal finances. One strategy that meets both these objectives is a lump sum window.

What is a lump sum window?

A lump sum window is a one-time opportunity over a brief period (e.g., three or six months) for participants to elect to receive their vested benefit as a lump sum payment. This option is usually not available outside the window period. Instead of waiting until retirement to receive their benefits as a lifetime annuity, participants can choose to take a lump sum payment at a given time. Lump sum windows are typically geared toward participants who have a vested pension benefit and are no longer employees of the company.

Advantages for the plan sponsor

Lump sum windows are advantageous for the plan sponsor.

• They reduce the plan’s head count and therefore Pension Benefit Guaranty Corporation (PBGC) premium payments.
• If interest rates used for lump sum calculations are higher than those used for funding or accounting measurements, there may be gains in the funding or accounting liabilities.
• They reduce long-term liabilities.
• With fewer participants to track until retirement, administrative costs decrease, and the risk of participants becoming “missing” is reduced.

Additional considerations for the plan sponsor

Plan sponsors should also consider the possible drawbacks of implementing a lump sum window.

• The plan may be subject to settlement accounting under GAAP ASC 715-30 if total lump sum distributions are above a certain threshold that could result in an increase in pension expense for the fiscal year. This can be mitigated by carefully setting the parameters of the window.
• The plan’s funded percentage may decrease, which may lead to additional contribution requirements.
• The plan would be forgoing future potential returns on assets used for the lump sum window.

Impact on participants

Participants should assess the implications of lump sum payments.

• A lump sum window adds flexibility for participants who may prefer to receive their benefit as a lump sum. Participants should understand that the offer is voluntary and that by taking the lump sum payment, they are forfeiting the right to future payments.
• Participants can secure their retirement savings by rolling over the lump sum into another qualified retirement plan or IRA. This helps prevent “leakage,” where funds intended for retirement are spent elsewhere, and reduces the chance of the participant losing track of the retirement funds.

How a lump sum window works

Participants typically have between 60 and 90 days to make their election,¹ but planning typically starts several months before that. It is important to note that a plan can only offer a lump sum window if it is at least 80% funded on an ERISA basis. The plan sponsor, in coordination with the actuary, sets the parameters of the window, such as the maximum eligible lump sum threshold. The actuary would then calculate the lump sum amount for each eligible participant. The plan sponsor then informs eligible plan participants about this special offer and the amount of their lump sum payment through mailings and emails.

Additional information for a successful lump sum window

The following Milliman articles on lump sum windows offer further information.

• Communication strategies to make lump sum windows more effective
• Lump sum windows: Engaging communication produces higher response rates
• Lump-sum windows: Administrative tips to consider
• SECURE 2.0: New notice and disclosure requirements for lump-sum windows
• Five things to consider for a lump-sum sweep

If you are considering a lump sum window, contact your Milliman consultant to explore the available options and assess whether the plan’s demographics and funded status support this strategy.

¹ This timeframe may change with the implementation of the new notice and disclosure requirements for lump sum windows under SECURE 2.0.