Hearings by Senate Committee on Benefit Inaccuracies are Annuity-Friendly
On June 16, hearings on pension benefits miscalculation were held by Senator Chuck Grassley, (R-IA), Chairman of the Senate Special Committee on Aging. The Senator intends to introduce legislation requiring employers to provide employees with a benefit statement at least once every three years with the document provided showing the benefit calculation and an explanation of its mechanics.
At the hearing, Senator Grassley showed data from the PBGC on estimated error rates in audit samples of terminated pension plans.
Over the period 1986 to 1995, the percentage of people who were underpaid pension benefits increased from 2.8% to 8.2%, according to PBGC data. About one-third of those underpaid in the 1994-1995 audit period were underpaid by at least $1,000; almost 50% were underpaid by at least $500.
Paul Holzman and Allen Engerman, co-founders of the National Center for Retirement Benefits, Inc. (NCRB), a Northbrook, IL consulting firm that reviews pension payouts on behalf of individual participants, discussed the work of their firm and the types of errors that affect the amount of a pension benefit. The firm, which works on a contingent fee basis, reviews pensions, 401(k), and profit sharing payouts from large and small companies. The firm does not review municipal, state, or federal pension plans or union plans that are not administered by the company.
Secondary Market Annuity table
Clients sign an authorization for release of retirement plan records that NCRB sends to the client's former employer along with a request for documents that include: a copy of the plan and amendments affecting the client's pension benefits; a copy of the summary plan description; and a copy of the actuarial worksheets used to compute the client's pension benefits. NCRB reviews the documents with the help of an actuary to determine whether an error occurred.
According to the NCRB, about 70% of the plans reviewed are Fortune 1000 companies, with the balance a mixture of small to medium-sized companies. Errors average 20% to 40% of the sums originally paid to clients and most of the errors are found among Fortune 1000 companies. Individual recoveries are usually in the $5,000 to $30,000 range, with the highest recovery to date of $60,000.
NCRB provided a sampling of the types of errors the firm has encountered:
- A plan fails to provide a DOL notice at the time a participant turns age 65 explaining changes in pension benefits.
- PBGC interest rate tables were not properly used by a plan administrator in calculating a pension.
- An IRS notice required to be given when benefits stop accruing to a participant was not given and as a result, the participant continued to accrue additional pension benefits before leaving the company.
- A company that amends its plan to stop further benefit accruals fails to notify the participants. A participant leaves the company two years following the amendment and receives a payout based on benefits earned until the plan amendment. NCRB would present a claim for benefits earned in the two years following the amendment.
- Pension software sold by a well known actuarial consulting firm has design flaws causing "systemic" errors that affect thousands of employees.
- Incorrect interest rates are incorporated into software used to cash out younger pension participants who have cash outs under $3,500.
- Pension benefits that are tied to Social Security benefits are miscalculated.
- A plan's actuarial/mortality tables are not used correctly.
- The pension and employment records of a participant who worked for a company that has been bought and sold numerous times cannot be located.
Thomas Walker, President of Associated Benefits Corporation, a West Des Moines, IA plan administrator, described the benefits calculations performed by his firm, the types of errors that occur, and the complicated rules that contribute to errors.
According to Walker, the error rate at his firm for defined benefit plans calculations is 1.7%, or 17 out of every 1,000 participants. Out of the 17, eight participants will be negatively affected and nine will be positively affected. Walker said that honest errors historically work equally to the detriment or benefit of both the participant and the plan sponsor.
I was hesitant at first to buy an annuity on the internet. Once I got your quote report and read your reviews I was happy I found your website. Your phone reps were always very helpful. You made the whole thing go really simple. Thank you guys!
Most of the errors involved highly compensated employees because these people tend to make more career moves than other employees making their benefit calculations more complex, according to Walker.
Errors occur in the reporting of data to the plan administrator, in the calculation of benefits, and in the actual payment process, according to Walker. One of the most common errors results from the 1,000 hour rule for eligibility. For example, an employer might consider 20 hours of work a week as part-time and, therefore, not benefit eligible. Very few small employers keep a count on employees' hours; some do not own a computer.
Walker said his firm sometimes must play the role of "Grinch," trying to recover benefits not due. For example, the firm had a situation where a retiree passed away and his son collected the benefit payments for seven years afterwards by keeping the father's checking account open.
In Walker's opinion, the vast majority of mistakes that occur are honest mistakes that cannot be regulated or legislated away. Intentional mistakes are a fiduciary violation which the law already penalizes.
Walker's firm sends benefit statements annually that show the accrued benefit and the projected age 65 benefit. If there were mandated statements, Walker said that by the time regulations were issued, his firm's usable statements would be turned into a lengthy and unreadable document. "This is because of the 'evil plan myopia' assumption that regulators exhibit consistently," according to Walker. On the other hand, if there were mandated statements, once every three years that required name, accrued benefit, and vesting status–and there were no regulations allowed on the requirement–few plan administrators would object.