Pension communication errors can lead to surprise costs for plan sponsors

Pension plan sponsors can save money by ensuring their plan texts and other communications materials are free of mistakes, says Mitch Frazer, a partner and the chair of the pensions and employment practice at Torys LLP.

At a pension and benefits fundamentals program held by the Toronto chapter of the International Society of Certified Employee Benefit Specialists in Toronto on Friday, Frazer noted that pension materials must truthfully and accurately disclose everything about the plan. Small errors in communications can lead to problems down the road, he says.

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“People administer things a certain way, and then the plan text reads another way. That happens all the time,” he says. “One that comes up a lot is you don’t put people into your plan right away.”

A pension plan text doesn’t always indicate a period between when employees start with a company and when they can join the plan. “Once they join your company, they don’t have to be put in the plan right away. You’ve got two years for that period. Some plan texts don’t say that. They say you put them in immediately, but then they hold off the two years.”

When an error like that comes to light, it can be an unexpected expense for plan sponsors. “You have to fix it, by law,” he says. “And that could often cost you a lot of money. And even so, if someone sends you a demand letter and then you have to engage lawyers in the discussion, you could end up paying additional legal fees, actuarial fees, consulting fees to figure out if there really was an error and how this came about.”

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Usually, those errors come to light when a plan sponsor changes service providers because a fresh pair of eyes is looking at the documents, he notes. “Your lawyer or actuary reviews it and says, ‘This is not the way things are actually working.'”

Also, a plan booklet may read differently than the plan text, he says. “Law will hold that external communications form part of the plan,” he says. As such, if some communication materials contradict the plan text and tells members they’ll be getting an additional benefit, the plan sponsor would have to provide it, according to Frazer.

Settlements in such matters usually happen out of court, but making the situation right for the member can cost a plan up to $250,000, on top of paying the benefits themselves, says Frazer. If the error affected multiple members or if a number was incorrect for several decades, it can turn into a big expense, he notes.

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