But Mom, why do I need to bundle up?

Time. Cost savings. These are all the potential benefits of bundling a DB plan’s service providers.  Bundling can also result in increased administrative oversight – especially in light of the challenges brought on by the Pension Protection Act (PPA).

Certain provisions of the PPA require additional administrative oversight. Penalties and/or restrictions may be imposed based on a DB plan’s funding status and the timing in which the valuation report is certified by an actuary.

For example:

Funding Status:

  • If a DB plan’s funding status falls below 80%, lump sum benefit payments and annuity purchases are restricted.
  •  If a DB plan’s funding status falls below 60%, lump sum benefit payments and annuity purchases are prohibited. In addition benefit accruals must be frozen.

Timing of Actuarial Certification:

  • If the plan’s actuarial valuation is not certified by the beginning of the fourth month of the plan year, the funding percentage is assumed to drop by 10%.
  • If the plan’s actuarial valuation is not certified by the beginning of the tenth month of the plan year, the funding percentage is assumed to be below 60%.

This means monitoring funding status and making benefit distributions can be a daunting task! Plan recordkeepers and actuaries need to communicate constantly — with plan sponsors typically in the middle.  In many unbundled service arrangements where there is no separate recordkeeper, it is the plan sponsor who has to constantly monitor funding levels and benefit restrictions.

Coordination is also required with the plan’s investment manager to monitory plan investment values – which change on a daily basis.  The value of the plan assets can change dramatically on any given day due to investment performance, plan distributions and deposits.  In order to employ many risk reduction techniques (see Helping DB Plan Sponsors Sleep at Night), a plan’s recordkeeper, actuary and investment manager all need to be working together.  This can be a monumental task for a typical DB plan sponsor.

With all of these moving parts, it’s easy to quickly see the advantages of bundling these functions with a single service provider.  If all of these services are provided under the same roof, a plan sponsor can take advantage of integrated systems that service providers have in place to coordinate these complex details.

Granted, a bundled approach may not be the best option for some DB plan sponsors.  But for the industry as a whole, bundling makes great sense.

In my next blog, I’ll continue to discuss the advantages of bundling, with a focus on showing the details of how both the bundled and un-bundled service model works.

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Affiliation Disclosures

Asset allocation/diversification does not guarantee a profit or protect against a loss. Use of DAA and/or any glide path does not guarantee improvement in plan funding status nor the timing of any improvement.

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.



[1]   Chatham Partners:  2011 Trends in DB Bundling and Total Retirement Outsourcing