Outsourced Defined Benefit Plan Administration:

Outsourced Defined Benefit Plan Administration: Instant efficiencies through effective technology A White Paper Prepared by Transamerica Retirement Solutions Patrick J. Kendall Vice President, Defined Benefit Practice Leader

Contents Your defined benefit plan administration could be costing you extra time and money 1 Defined benefit administration models four generations 2 Generation 1 (G1) model 4 Generation 2 (G2) model 5 Generation 3 (G3) model 6 Generation 4 (G4) model 7 8 Conclusion 9 About the authors Patrick J. Kendall is a vice president and defined benefit practice leader at Transamerica Retirement Solutions. Mr. Kendall is responsible at the national level for all aspects of marketing, product development, and sales regarding the defined benefit and total retirement outsourcing platforms. Mr. Kendall has been in the retirement plans business since 1989. He is a Fellow in the Conference of Consulting Actuaries, an Associate of the Society of Actuaries, a member of the American Academy of Actuaries, and an enrolled actuary. Mr. Kendall is a Registered Principal, having completed FINRA Series 6, 26, and 63, and is a graduate of Dartmouth College. For Plan Sponsor and Financial Professional Use Only

Your defined benefit plan administration could be costing you extra time and money When the pension plan was introduced to American savers in 1875 1 through railroad freight forwarder American Express Company the technology used to administer the plan was probably no more than a slide rule, some pencils, and a stack of paper. Defined benefit (DB) plan administration technology has come a long way since then, evolving to include intricate systems and sophisticated software and programs that can transform thousands of pieces of information into accurate, usable data. Still, technology isn t standardized among defined benefit plan administrators, nor is it mandated that plan sponsors choose an administrator based on a set list of criteria. This disparity in service delivery models has drawbacks. Many reading this paper, when asked, How do you perform your benefits calculations? will reply that they have to check with their actuary or look in boxes or filing cabinets. This inefficient, error-prone defined benefit process and/or system not only places excess burden on internal resources but could result in inaccurate calculations that can lead to an assortment of detrimental outcomes. The good news, however, is that there are better options available. This white paper provides clarity about current defined benefit plan administration technology and compares the advantages and drawbacks of this technology, providing defined benefit plan sponsors with the information and insight they need to make the best choice for their organization and their employees. 1 Stephen A. Sass, The Promise of Private Pensions: The First Hundred Years 1

Defined benefit administration models four generations There is no question that technology has moved defined benefit plan administration forward, making it easier to calculate and provide accurate data. Achieving the greatest level of data accuracy is critical because plan sponsors and participants are making important decisions based on this data. Storing the data is also important. The Sarbanes-Oxley Act mandates that all business records be saved for not less than five years, which can be cumbersome and risky if records are paper based. A simple fire, flood, or misplacement of records could result in serious consequences, including fines and lawsuits. Considering the importance of collecting, delivering, and storing accurate information, it s surprising that some defined benefit plan sponsors settle for older generation administration models when more modern models can deliver streamlined processes at similar or even reduced expenditures. The first question a plan sponsor needs to ask when it comes to the administration of their defined benefit plan is, Is there a better way to handle the administration so I gain efficiencies of labor and cost? The following describes the evolution of defined benefit plan administration, beginning with what is widely perceived as the oldest, least-efficient model (Generation 1), ending with the model that goes far beyond the others in terms of data integrity and allows for instant efficiencies of both labor and cost (Generation 4). Choosing the right defined benefit administration model can help a plan sponsor save money, upgrade participant servicing, and improve regulatory compliance. Is your plan benefiting from the Generation 4 (G4) model? The G4 model is the best option available today, providing an assortment of industry-leading features that help the plan sponsor save money while offering upgraded participant service and achieving greater fiduciary effectiveness. G3 G2 G1 2

Is your DB plan running as efficiently as possible? Handling your plan s benefits administration can be a significant challenge and it could be undermining your plan as well as your organization. You may be relying on internal resources or outdated systems to perform benefit calculations, which could not only be costing you time and money, but also doing considerable disservice to your plan participants if there is any possibility those calculations are inaccurate. In addition, if inaccurate information is passed along to your actuary, it can put the basic health and solvency of the plan at risk and expose you to significant liability. G4 Organizations that take responsibility for performing benefit calculations have to ensure that their methods keep pace with legal requirements if not, they could face significant fines. 3

G1 Generation 1 (G1) model Generation 1 (G1) Paper-based Actuary calculates benefit estimates Requires hourly billing by actuary and consultant Internal staff takes employee phone calls Lack of readily available salary data slows estimates managed by Human Resources Data accuracy an issue Communications materials are minimal The Generation 1 model is the least advanced of the four models because it relies more on human effort than advanced technology. In G1, plan census data is stored in worksheets, flat data files, or even paper. The plan sponsor has a person or group of people on staff who receive paper election forms and manually enter data into a spreadsheet to calculate benefit estimates. Even a mid-size employer with 3,000 active employees and 2,000 inactive workers could have 5,000 files with somewhere between 10 and 20 pieces of paper in each file. In some instances, the plan sponsor may outsource these services and pay a separate fee for each benefit calculation performed and another fee for the storage of these materials. The calculations and storage could cost tens of thousands of dollars for a smaller plan and hundreds of thousands of dollars for one that s larger. Still, no matter if it s the internal staff or outside vendor who is performing the calculations, the calculations are built on data that have been manually put into a spreadsheet. So, there is high potential for error, which can negatively impact the actuarial projections that form the cornerstone for the participants long-term retirement planning strategies. Imagine how difficult it would be for an employee to appropriately plan for the future if his or her DB benefit calculation were over- or under-estimated? It s worth noting, too, that the limited technological capabilities make it difficult for the sponsor to incorporate these benefits figures into any kind of holistic retirement planning model for participants. As a result, the sponsor often provides just an annual statement to employees. Defined benefit participants often rely solely on these annual statements from their employers; but without a clear picture of their consolidated retirement plan assets, it s difficult for these employees to accurately plan for the future. Additionally, with the G1 model, there is greater potential for the loss of plan-related historical knowledge if the organization reduces its Human Resources (HR) staff either through downsizing, departures, or retirement. 4

G2 Generation 2 (G2) model The Generation 2 model has more technological advancements than its G1 counterpart. Here, the plan sponsor hires an outside benefits administration vendor to build a calculation program at a significant cost. The program provides greater convenience for the plan sponsor (as the benefits information is easily available all day, every day), but the organization s HR staff still manages the data collection process and answers participant inquiries. As a result, there is still a significant risk of data errors. Another downside of the G2 model is that the calculation program needs periodic updates to account for legislative or plan design changes. Because the vendor builds a separate program for each client s specifications, making adjustments requires that the vendor build a brand new program for the client when changes need to be made. This, of course, is expensive and time-consuming. Additionally, the concept of a benefits estimator in this platform really isn t an advantage. Even though the tool can be programmed with the benefit formula, the data isn t truly up to date because it bases the data on a snapshot in time, not what is actually taking place at the current date. Generation 2 (G2) Benefits engine built and billed on an hourly basis Actuary calculates final benefits on a fee-per-unit basis Human Resources staff manages process Communication materials are minimal Internal staff may take employee calls Finally, like the first generation model, the limited technology doesn t allow participants any holistic retirement planning capabilities. With just an annual statement delivered to employees, the participant is lacking information about how he or she can best plan for the financial future. 5

G3 Generation 3 (G3) model Generation 3 (G3) Bundled DB outsourcing Disruption to money managers Disruption to investment consultant Salary data may reside with HR Employee calls answered by customer call center Plan sponsor website Often proprietary fund requirements Driven by participant demands for more personalized and holistic retirement information and the sponsors need for more accurate and efficient administration, some plan sponsors turn to a bundled solution where the majority of ongoing DB plan administration is outsourced. This is the G3 model. Here, the sponsor teams with an organization (typically an insurer or mutual fund) that provides a bundled services arrangement that includes benefits administration, investment management, and actuarial services. One of the trouble spots with this arrangement is that even sponsors that are perfectly satisfied with their investment manager and/or actuary will need to dissolve these arrangements when they bring the bundled provider on board. The sponsor is usually forced to include proprietary investments in their fund lineup. In general, this model does not include cutting-edge technology. The benefits engine is able to provide estimates (not final calculations) for participants in a fairly efficient manner usually through a benefits website but the data that serves as the backbone of the estimates is still manually entered by the sponsor s staff, which can lead to calculation errors. Still, there are some notable advantages over the G1 and G2 models: The benefits administrator typically offers access to a customer call center. As a result, participants have a place to go for answers to their DB benefit questions, and sponsors don t have to rely on internal staff to take phone inquiries. Employee communication materials can be personalized with current and projected DB benefits. Projected benefits are accessible on the vendor s website at all times. Participant statements include a holistic picture of the individual s DB and defined contribution (DC) investments, if applicable. In some instances, the benefits vendor conducts retirement and/or total financial planning meetings or seminars. 6

G4 Generation 4 (G4) model G4 is the most advanced option available today, providing an assortment of industry-leading technology features that help the plan sponsor save money while offering upgraded participant service and achieving greater fiduciary effectiveness. At the core of the G4 model s excellence is the ability to integrate the DB plan s administrative services with any other DB plan servicing scenario. For example, if a plan sponsor is already working with an investment manager or actuary, the sponsor doesn t need to dissolve those relationships to work with a G4 provider. This is a particularly appealing alternative for plan sponsors who are satisfied with their investment manager and/or actuary. The G4 solution allows them to work with various vendors of their choice for investment and actuarial services while adding a new level of experience and expertise on the administrative side. This administrative services only solution provides defined contributionlike administrative functionality alleviating the sponsor s workload and responsibility with minimal disruption to existing service relationships. It allows plan sponsors to delegate the benefits administration, calculations, and reporting to a center of excellence, one that specializes in this aspect of the defined benefit program and is therefore equipped with higher-grade systems and methods to produce the most accurate and efficient results. Delegating these functions allows the sponsor s staff more time to focus on the organization s core business. Highlights of the G4 solution include: Methodology for accumulating and warehousing data. Payroll feed-based administration. Real-time processing of benefit calculations for plan participants. Participant website with modeling and projection tools. Comprehensive and integrated Contact Center services (phone, email, regular mail). Participant statements. Generation 4 (G4) Plan features adjust plug and play technology for cost-efficient automation Employee calls to customer call center Employee emails to contact center First call resolution by customer call center: 99% Fiduciary relationship for outsourced services Custom communications for plan Custom communications for employees Benefit calculations automated Death audits Efficient integration with other retirement plans such as DC, NQDC and cash balance Retirement planning tools integrate all plans and outside assets Salary data resides in relational database and is updated with periodic payroll feeds Open investment architecture Plan sponsor website Participant website 7

Generation 4 (G4) model (continued) If your organization is relying on legacy systems, multiple handoffs, and manual processing, your calculations may not reflect the more sophisticated data and techniques that are used in today s G4 systems. Another significant advantage is that the benefits engine can easily incorporate updates without the excess cost of the previous models. This is particularly important when legislative changes are enacted or when the sponsor organization is going through a merger or acquisition. In the G2 and G3 models, these scenarios could result in the sponsor paying significant charges for benefits engine updates. With the G4 benefits engine, there are no additional charges because the engine is its own entity built so updates can be pushed out to any plan with no additional programming. And because the engine is maintained by DB experts who study the industry, legislative changes are automatically incorporated into the engine s logic and then pushed out to the individual plans. With the G4 model, there is one platform for all functions, as opposed to a variety of individually designed platforms. The G4 model provides sponsors with a highly refined and robust system that is sophisticated enough to suit any plan design. This makes it seamless for clients and drastically reduces periods where they have to hold off on benefits calculations because they re waiting for their G1, G2, or G3 engine to be updated to account for legislative changes. Another advantage of the G4 engine is that audit processes automatically are run by the system, looking for holes or problems within the data. This ensures that each plan s data is clean, allowing for the fastest and most accurate benefit calculations. Effective plan communications are another area of excellence for G4 providers whose modern systems architecture can ensure the completeness of participant data, allowing the sponsor to be more proactive in educating and reaching out to plan participants with actionable information. 8

Conclusion Defined benefit plan administration technology has evolved to include intricate systems and sophisticated software and programs that can transform thousands of pieces of information into accurate, usable data. The math of the calculations is certainly not too complex with today s powerful computers, but if the data is not up to date and accurate, answers are guaranteed to be wrong. Still, many plan sponsors have to check with their actuary or look in boxes or filing cabinets for data when it comes time to perform a benefits calculation. This inefficient, error-prone defined benefit process and/or system not only places excess burden on internal resources but could result in inaccurate calculations that can lead to an assortment of detrimental outcomes. On closer examination of the current defined benefit plan administration technology and the advantages and drawbacks of this technology the Generation 4 model (G4) is the most advanced option available today, providing an assortment of industry-leading features that help the plan sponsor save money while offering upgraded participant service and achieving greater fiduciary effectiveness. As a fiduciary interested in managing and controlling risks, you would be well served to evaluate the effectiveness of your current model against the merits of the G4 model. 9

About Transamerica Retirement Solutions Transamerica Retirement Solutions (Transamerica) is a leading provider of customized retirement plan solutions for organizations of every size. Transamerica partners with financial advisors, third party administrators, and consultants to cover the entire spectrum of defined benefit and defined contribution plans, including: 401(k) and 403(b) (Traditional and Roth); 457; profit sharing; money purchase; cash balance; Taft-Hartley; multiple employer plans; nonqualified deferred compensation; and rollover and Roth IRA. Transamerica helps more than three million retirement plan participants save and invest wisely to secure their retirement dreams. For more information about Transamerica Retirement Solutions Corporation, please visit trsretire.com. Nothing presented herein is intended to constitute legal or investment advice, and no investment or plan design decision should be made solely based on any information provided herein. Nothing presented herein should be construed as a recommendation to purchase or sell a particular investment or follow any investment technique or strategy. Any forward-looking statements are based on assumptions and actual results are expected to vary from any such statements. While Transamerica has used reasonable efforts to obtain information from reliable sources, we make no representation or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. Past performance is no guarantee of future results. There can be no assurance that any particular asset class will outperform another asset class. There is a risk of loss from an investment in securities. This paper is general in nature and not intended as tax or legal advice. Because each employer is unique, an employer should consider its individual circumstances when evaluating a defined benefit plan administrative solution and should consult their retirement plan and/or legal advisor. 440 Mamaroneck Avenue, Harrison, NY 10528 914-627-3000 800-770-6797 trsretire.com PS-11149 (08/13) 2013 Transamerica Retirement Solutions Corporation