US - Vanguard has launched a new service to advise defined benefit scheme members ahead of anticipated widespread pension plans closures.
The firm said it was launching Vanguard Pension Reinvestment Services ahead of the introduction of new Pension Protection Act (PPA) rules in 2012, which it expects will make the termination and distribution of assets to members a more attractive option for sponsors.
Until 2008, the amount of a lump-sum DB plan distribution was calculated using 30-year Treasury rates, which made these distributions fairly expensive for plan sponsors.
The new rules established under the PPA mandate a gradual transition from Treasury rates to higher corporate bond rates for these calculations. In 2012, this transition will be complete and lump-sum calculations will be based entirely on corporate bond rates, which will reduce the size of lump-sum payments.
As a result, sponsors considering plan termination may choose to begin the process in 2012 and Vanguard believes the coming years will see millions of members in those terminating plans required to choose a payout option.
The firm said research shows participants leaving a DB plan are much more likely to take a lump sum than an annuity if given an option, which often means they are handed a large sum of money that may be challenging to manage. This not only occurs when a plan is terminated, but also arises when a sponsor offers a lump-sum option to vested participants who have left the plan, as well as in other situations.
The new service will offer over-the-phone consultations with non-commissioned financial planners who will talk members through their options, including a lump-sum rollover to an IRA or 401(k) plan, their plan's group annuity, a third-party income annuity, or a combination.
Vanguard chief actuary Evan Inglis said: "Over the past decade, changes in interest rates, new funding and accounting rules, and two severe market declines have made it difficult for many plan sponsors to actively maintain their DB plans. Vanguard strongly believes that DB plans, when managed with careful attention to financial risks, can be part of an effective retirement program for many employers and their employees, and that there are ways to make DB plans financially sustainable
"Yet for some plan sponsors, especially those who have already frozen their plan, the rule changes in 2012 will make the termination of their plan an important consideration. In addition to the complexities involved in a plan termination, these sponsors are likely to be very concerned about educating their participants on their distribution options and how to choose one that meets their needs."
"For many participants, this kind of counsel from a professional planner may mean the difference between jeopardizing their retirement security and helping to protect it."
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