Precept 1 of the Code of Professional Conduct for credentialed actuaries in the United States says this:
“An Actuary shall act honestly, with integrity and competence, and in a manner to fulfill the profession’s responsibility to the public and to uphold the reputation of the actuarial profession.”
What’s that mean? In the world of pension valuations, it means, among other things, using appropriate assumptions and calculation methods so as to neither overstate nor understate pension plan liabilities, even if the plan sponsor client would prefer otherwise. And that means that my usual refrain about pension lump sum conversions, that employers are not cheating employees but offering them lump sum amounts following entirely reasonable government regulations, doesn’t always apply.
Because “integrity” isn’t simply about following the letter of the law.
Back in October, I wrote that GE was following the law in providing the actuarially-fair present-value of age-65 retirement benefits to employees who elected their offer, but that the law does not require that they include the present value of early retirement subsidies, and in their case, they had an exceptionally-generous early retirement subsidy, in which former employees as young as age 60 could take their retirement benefit wtihout any reduction at all. It’s like getting an extra five years of benefits “for free” — but those who elect the lump sum forgo that extra benefit.
Did GE act unethically in excluding that extra benefit from their lump sum offer? To be fair, they explained in boldface that they had done so — but it’s a bit of a grey area whether they (and the actuaries advising them) had provided their former employees with enough information, when they don’t really understand the value of the benefit they’re voluntarily giving up.
This weekend I learned of another example that seems even more egregious, in this case, at Motorola Solutions. There, former employees who are vested in their pension benefits are able to take the lump-sum equivalent at any time, by accessing a website and following the process there to request the benefit. But in August, employees received a special letter telling them: “Action Needed!” and that they needed to make their benefit choices by November 18, 2019.
What was special about November 18, 2019? The letter doesn’t actually say. In fact, later in the letter, the text states that “you may start your benefit at a later date as permitted under the plan’s rules” and that, in fact, “if you have not started the retirement process, no action is required.” But nonetheless the letter emphasizes in bold print that November 18, 2019 is the deadline.
As it turns out, there was something special about that date — from the company’s point of view. And, in fact, the reason why my informant was asking me for help understanding his benefits was that he had waited until after this date, when he’d be eligible for a January 1 lump sum/IRA rollover check instead, and saw that his lump sum amount had increaed by nearly 40%.
Recall that I’ve been saying repeatedly that employers are required to use “417(e) segment rates” dictated by the IRS and based on corporate bond rates. Companies must specify in advance a “stability period” of either one month, one quarter, or one year and choose a “lookback month” of between one and five months, and use these two elements to determine which specific month’s rates apply to their calculation of lump sums. For example, a stability period of one quarter means that rates change each quarter, and a lookback month of two months means that they determine the rate two months prior (to give them the ability to make their calculations in advance).
In this case, the company’s “stability period” appears to have been a year, with a two-month lookback period, so that the interest rates used to calculate lump sum factors for the entire year of 2019 were October 2018 rates. In 2020, they plan entered a new “stability period” with new rates based on the October 2019 IRS-published rates.
During this time, the rates dropped dramatically, boosting the cash value of the lump sums for those starting in 2020 — and Motorola Solutions knew this. They knew that it was to their benefit to encourage as many former employees as possible to elect their benefits with an effective date during the 2019 stability period, and sent out a letter leading unwary participants to believe that this was a time-limited special offer that they were at risk of losing out on, when, in fact, the reverse was true and waiting would put more money in participants’ pockets, in this case, 40% more. (The younger you are, the more of an impact a discount rate change has on the cash value of your pension, and this person was in his mid-40s.)
What’s more, this is unlikely to have been the brainchild of some employee at the company, but of the plan’s actuaries, advising them that this is a great cost-savings opportunity. They are keenly aware of how these factors affect lump sum payout costs, and just as eager to earn extra fees. How many people who deem themselves bound by the Actuaries’ Code of Professional Conduct were involved in a project the objective of which was “by means of a special letter with carefully wordsmithed statements that strongly imply there’s a special deadline, let’s get as many 2019 lump sum elections as possible”?
And, again, it’s not much of a surprise that companies who choose to offer lump sum options on a periodic “window”-type basis do so at times when they judge the conversion factors to be advantageous to them. That’s a buyer-beware sort of situation. But to lead participants to believe they face a deadline, when that is not actually the case? I would not call that acting “with integrity.”
And the bottom line for plan participants? Read your documents carefully. Ask questions if something doesn’t make sense. And don’t get taken in by the prospect of cash.
(I reached out to both Motorola Solutions and the Aon — the plan’s actuary — for comment. The former did not respond and the latter stated that as policy they do not comment on client matters.)
Are you looking for a better understanding of lump sum offers? Read my article “How To Tell If Your Employer’s Lump Sum Offer Is A Fair Deal – An Actuary-Splainer” and reach out to me at JaneTheActuary.com for more specific advice.
How high a standard should actuaries hold themselves to? You’re invited to comment at JaneTheActuary.com!