Regulatory roundup

July 28th, 2015 No comments

By Employee Benefit Research Group

More retirement-related regulatory news for plan sponsors, including links to detailed information.

IRS announces changes to determination letter program for qualified retirement plans
The Internal Revenue Service (IRS) has issued Announcement 2015-19, describing important changes to the determination letter program for qualified retirement plans.

The changes outlined will eliminate the staggered 5-year determination letter remedial amendment cycles for individually designed plans and will limit the scope of the determination letter program for individually designed plans to initial plan qualification and qualification upon plan termination. The announcement also provides a transition rule with respect to the remedial amendment period for certain plans currently on the 5-year cycle.

The IRS is requesting comments on specific issues relating to the implementation of these changes to the determination letter program.

To read the entire announcement, click here.

PBGC issues proposed rule to amend annual financial-actuarial information reporting
The Pension Benefit Guaranty Corporation (PBGC) is proposing to amend its regulation on annual financial and actuarial information reporting to codify provisions of the Moving Ahead for Progress in the 21st Century Act (MAP-21) and the Highway Transportation and Funding Act of 2014 (HATFA-14) and related guidance that affect reporting under ERISA section 4010.

PBGC is proposing to limit the reporting waiver under the current regulation tied to aggregate plan underfunding of $15 million or less to smaller plans and to add reporting waivers for plans that must file solely on the basis of either a statutory lien resulting from missed contributions over $1 million or outstanding minimum funding waivers exceeding the same amount (provided the missed contributions or funding waivers were previously reported to PBGC). The proposed rule also makes some technical changes.

To read the entire proposed rule, click here.

IRS updates guidance and FAQs for pre-approved retirement plan
The IRS has updated its guidance and frequently asked questions (FAQs) for employers adopting pre-approved retirement plans. The guidance and FAQs were updated after the Service issued:

• Rev. Proc. 2015–36, which sets forth the procedures for issuing opinion and advisory letters regarding the acceptability under §§ 401, 403(a), and 4975(e)(7) of the Internal Revenue Code (Code) of the form of pre-approved plans (that is, master and prototype and volume submitter plans)

• Announcement 2015-16, on the issuance of opinion and advisory letters for pre-approved defined contribution plans for the second six-year cycle, deadline for employer adoption, and opening of determination letter program for pre-approved plan adopters.

To read the FAQs, click here.

The guidance is available at the following links:

Types of pre-approved retirement plans

Deadline extended for pre-approved defined benefit plans

Preapproved plan submission procedures

DOL web page houses comment letters related to conflicts of interest rule
The Department of Labor (DOL) has a web page containing submitted comment letters on the fiduciary definition, conflicts of interest rule, which was re-proposed on April 14, 2015. The comment period closed on July 21, 2015.

To read the comment, click here.

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Paying a lump sum to retirees in a lump-sum window? “Not so fast my friend”

July 23rd, 2015 No comments

By Tim Herman

Herman-TimOn July 9, 2015, the Internal Revenue Service (IRS) announced that the U.S. Department of the Treasury and the IRS intend to amend regulations to prohibit qualified defined benefit plans from paying lump sums to retirees and beneficiaries in a lump-sum window. In Notice 2015-49, the IRS reported that its intent is to have the amendments to regulations apply as of July 9, 2015, except in certain situations described below.

What does this mean?
Many pension plan sponsors have provided a lump-sum window offer to deferred vested participants, and some of these sponsors have included retirees and beneficiaries in the window. After July 9, 2015, plan sponsors will not be permitted to offer lump sums to retirees or beneficiaries in a lump-sum window unless the amendment satisfies one of the exceptions below. However, there is nothing included in the IRS Notice that would preclude offering a lump sums to deferred vested participants.

Exceptions
The amendments to the regulations are intended by the IRS to apply as of July 9, 2015. However, the amendments will not apply to a plan amendment for a lump-sum window in one of the following four situations:

1. If the amendment is adopted or authorized prior to July 9, 2015.
2. An amendment where a private letter ruling or determination letter was issued by the IRS prior to July 9, 2015.
3. Where written communication to participants stating an “explicit and definite intent” to implement a lump-sum window was received by participants prior to July 9, 2015.
4. Adopted pursuant to a collective bargaining agreement between the plan sponsor and a union prior to July 9, 2015.

If the amendment satisfies one of these four exceptions, then a lump-sum payment in lieu of future annuity benefits for retirees and beneficiaries appears to be allowed.

Plan termination
It is not clear whether or not the IRS intends to prohibit defined benefit plans from paying lump sums to retirees and beneficiaries when a pension plan is terminated. This issue will need to be clarified when the amended regulations are published by the IRS.

Observations on regulatory action
Earlier this year, the U.S. Government Accountability Office (GAO) issued a report entitled “Participants need better information when offered lump sums that replace their lifetime benefits,” and the Pension Benefit Guaranty Corporation (PBGC) announced its plans to begin collecting data on pension plan de-risking measures. In a surprising move, IRS Notice 2015-49 was issued on July 9, 2015, with an intended effective date of July 9, 2015. There was little or no indication of pending guidance from the IRS or any indication that the IRS is open to feedback on the notice. This is unlikely to be the last step in the regulation of lump-sum windows.

Please contact a Milliman consultant to discuss how this notice might impact your intentions to offer a lump-sum window.

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Regulatory roundup

July 20th, 2015 No comments

By Employee Benefit Research Group

More retirement-related regulatory news for plan sponsors, including links to detailed information.

IRS releases Revenue Procedure concerning pre-approved plans
The IRS published Revenue Procedure 2015-36, providing procedures of the Internal Revenue Service for issuing opinion and advisory letters regarding the acceptability under §§ 401, 403(a), and 4975(e)(7) of the Internal Revenue Code (Code) of the form of pre-approved plans (that is, master and prototype (M&P) and volume submitter (VS) plans).

To read the IRS’ official statement, click here.

DOL releases Field Assistance Bulletin related to defined contribution plans
The Department of Labor (DOL) has issued Field Assistance Bulletin (FAB) 2015-02, Selection and Monitoring under the Annuity Selection Safe Harbor Regulation for Defined Contribution Plans. The FAB provides clarification of plan sponsors’ fiduciary obligations concerning annuity product selection for defined contribution plans.

The purpose of the FAB is to provide guidance regarding these issues, including the application of ERISA’s statute of limitations to claims relating to annuity selection, and assist the Employee Benefits Security Administration’s national and regional offices in responding to questions from employers and other interested parties.

To read the entire FAB, click here.

JCT issues present law and background information on federal excise taxes
The Joint Committee on Taxation released the report entitled “Present law and background information on federal excise taxes” (JCT Report JCX-99-15). The document provides a description of present-law federal excise taxes, and when applicable, background information on trust funds financed with excise tax revenues.

The document contains information on excise taxes relating to employee pension and benefit plans and excise taxes related to healthcare.

To entire report can be downloaded here.

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Longevity risk poses long-term solvency issues for GCC public pensions

July 17th, 2015 No comments

By Javier Sanabria

Longevity risk is a primary exposure for state-managed pensions within Gulf Cooperation Council (GCC) countries. In this Middle Eastern Insurance Review article, Milliman’s Simon Herborn, Khurram Mirza of Osool, and Fahad S. Alajlan of the General Organization for Social Insurance (GOSI) discuss how refinements to benefit structures can improve the sustainability of GCC pensions.

With a framework that delivers a meaningful view of life expectancy, we can prepare better forecasts of future financing requirements. As previously mentioned, this analysis is likely to reveal the schemes are not self-sustaining—that is, co-contributions will be required from the state. If these are deemed too onerous, the next recourse is higher contribution rates from the participants or employers. Failing this, the natural progression is refinements to the benefit structure to reduce costs.

One route could be raising the retirement age. All else being equal, this would shorten the time span for which benefits will be paid and thereby lead to a reduction in costs (though it should be noted that the full cost implications are deceptively complex and careful consideration is required to achieve the desired effects). This type of intervention has been very common in other parts of the world, among both state- and employer-sponsored schemes.

There are many other ways in which the benefits can be refined to help manage costs – for instance, changing the definition of salary for determining benefits (for example, an average of salaries over the individual’s career rather than just at retirement age), limiting cost-of-living increases, making dependent benefits less generous (though this coverage often has significant importance, particularly in this region), and penalising early retirements. These changes do not directly target longevity exposure but can still be very effective in reducing the overall quantum of exposure.

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What changes will you make to help your employees’ retirement confidence increase?

July 15th, 2015 No comments

By Jinnie Olson

Regli-JinnieThe 2015 Retirement Confidence Survey, published by the Employee Benefit Research Institute, continues to highlight the rise of retirement confidence in American workers. An increase in retirement plan participation (14% in 2013 to 28% in 2015 for those with a retirement plan) seems to closely correlate with the rise in the percentage of workers who are confident about having enough money in retirement (13% in 2013 to 22% in 2015).

The survey findings seem to indicate that more American workers are taking retirement planning into account and they are feeling very confident about having enough money in retirement, both of which may be related to the increase in availability and accessibility of online retirement calculators and a growing confidence in the overall economy. Yet at the same time, the percentage of American workers who report having saved for retirement has stayed fairly consistent at 63%, indicating that more may need to be done in order to assist workers in saving. Here are a few standout figures from the 2015 survey results:

• 80% of current workers believe personal savings will play a large role in their retirement incomes
• 71% of employed workers report their employers offer an employer-sponsored retirement savings plan
• 12% of those without a retirement plan reported feeling very confident
• 50% of those asked what they would do if they were automatically enrolled at 3% said they would raise their contribution rate; only 2% said they would stop it altogether

It seems that, as the economy strengthens, many American workers are comfortable making retirement savings a priority, so what better time to encourage them to make the most of it?

As plan sponsors, what can be done to help keep retirement confidence on the rise for years to come? Here are some ideas.

• If you don’t offer an employer-sponsored plan, consider offering one. Behavioral finance has found that inertia makes humans their own worst enemies when it comes to retirement savings, making it all that more difficult for the 29% of employed workers without an employer-sponsored retirement plan to save for their retirement. Open the door for them to begin saving today!
• If you already offer an employer-sponsored plan, think about offering additional employer-sponsored plans. Employee stock ownership plans (ESOPs), nonqualified retirement plans, cash balance plans—there are a variety of options available that could be used to supplement your current 401(k) plan.
• Or continue to drive participation by considering plan design changes that will promote additional plan participation. Speak with your consultant about the best options for your company.
• Educate participants. Make sure your employees have sufficient information and tools to assist in their retirement planning.

What changes will you make to help your employees’ retirement confidence increase?

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Regulatory roundup

July 14th, 2015 No comments

By Employee Benefit Research Group

More retirement-related regulatory news for plan sponsors, including links to detailed information.

SEC guidance on the terms ‘spouse’ and ‘marriage’ following United States v. Windsor
The Securities and Exchange Commission (SEC) is publishing interpretive guidance to clarify how the Commission will interpret the terms “spouse” and “marriage” in response to the Supreme Court’s ruling in United States v. Windsor.

In light of the Supreme Court decision on Windsor, the Commission will read the terms “spouse” and “marriage,” where they appear in the federal securities statutes administered by the Commission, the rules and regulations promulgated thereunder, releases, orders, and any guidance issued by the staff or the Commission, to include, respectively, (1) an individual married to a person of the same sex if the couple is lawfully married under state law, regardless of the individual’s domicile, and (2) such a marriage between individuals of the same sex. This guidance is consistent with Windsor.

For more information, click here.

Senate Finance Committee releases memo from tax reform working group
The Senate Finance Committee’s Tax Reform Working Group released a memorandum on July 8 that provides an overview of the data related to retirement plan access and participation. The report addresses current law, the questions the group sought to address based on some shortcomings identified with current law, and some concepts and proposals the group has identified that seek to address these shortcomings.

The Savings and Investment Working Group has jurisdiction over the tax treatment of capital gains and dividends, financial products, defined benefit pension plans, and private retirement savings accounts.

Among the proposals cited in the report were enabling the formation of multiple employer plans, creating safe harbors for small businesses to offer retirement plans, allowing part-time workers to enroll in plans, making benefits more portable and addressing leakage. The group also called for clarifying rules for church-sponsored retirement plans.

The entire report can be downloaded here.

SEC Investor Advocate issues annual report
The SEC’s Office of the Investor Advocate has published the report entitled “Report on objectives: Fiscal year 2016.”

To read the entire report, click here.

GAO issues a report on financial literacy in the workplace
The Government Accountability Office (GAO) published a report entitled “Financial literacy: The role of the workplace.” The report provides a summary of the discussion of a forum on financial education in the workplace, which was held on March 17, 2015. The following subjects were discussed:

• The role of the employer in promoting financial literacy
• The effectiveness of such efforts
• How best to serve low-income and other underserved populations
• The federal government’s role in supporting these efforts

To read the entire report, click here.

Bureau of Labor Statistics publishes article on savings and thrift plans
The Bureau of Labor Statistics’ latest edition of Beyond the Numbers looks at the growth in the prevalence of employer-provided savings and thrift plans in private industry in the United States.

To read the entire article, click here.

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Corporate pension funded status improves by $36 billion in June

July 9th, 2015 No comments

By John Ehrhardt

Milliman today released the results of its latest Pension Funding Index, which analyzes the 100 largest U.S. corporate pension plans. In June, these pension plans experienced a $36 billion increase in funded status based on a $28 billion decrease in asset values and a $64 billion decrease in pension liabilities. The funded status for these pensions increased from 84.1% to 85.6%.

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These pensions cleared an important hurdle this month, with the discount rate that determines pension liabilities climbing above 4% following a seven-month streak of flirting with all-time lows. It’s no coincidence that we’ve seen a related decrease in pension liabilities, with rising discount rates reducing liabilities by $92 billion year to date and contributing to a strong quarter for the 100 largest corporate pensions.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.55% by the end of 2015 and 5.15% by the end of 2016) and asset gains (11.3% annual returns), the funded ratio would climb to 92% by the end of 2015 and 105% by the end of 2016. Under a pessimistic forecast (3.95% discount rate at the end of 2015 and 3.35% by the end of 2016 and 3.3% annual returns), the funded ratio would decline to 82% by the end of 2015 and 74% by the end of 2016.

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Five things to consider for a lump-sum sweep

July 8th, 2015 No comments

By Stephanie Sent

Sent-StephanieWith changes in the mortality tables pending, along with lower interest rates, many plan sponsors may decide to go ahead with a lump-sum sweep of a defined benefit plan for vested terminated participants. Having helped a number of organizations with their lump-sum sweeps, we can offer a few tips that may make a lump-sum sweep more successful. These five important organizational and administrative items should be taken into account by any plan sponsor conducting a lump-sum sweep for vested terminated participants:

1) Communicate, communicate, communicate. Build lots of communication into lump-sum projects. Lump-sum projects that see the most success are those that include communications, such as a postcard mailing to announce the beginning of the lump-sum window and alert participants to look out for the benefit election packet to come in the mail. Midway through the project, a reminder postcard to those who have not returned benefit election paperwork is helpful to remind participants that the deadline is rapidly approaching. Once a participant returns benefit election paperwork, either a confirmation that it has been received and is complete, or a letter describing what is missing and still needs to be completed, can go out next. When the deadline of the lump-sum project is close, a call to participants with incomplete paperwork is beneficial to get everything completed.

2) Prepare employees to make the right decision. The U.S. Government Accountability Office (GAO) recommends increasing communications. In addition to the typical benefit election information sent to employees, additional communications may be useful, discussing the pros and cons of electing a lump sum, as well as information on how defined benefits are insured through the Pension Benefit Guaranty Corporation (PBGC). This helps explain to employees that they don’t need to take a lump sum because of a belief that their pensions benefits may be going away.

3) Establish a timeline with a grace period following the deadline. Sweeps that enjoy the most success are those that build in a grace period following the cutoff date of the lump-sum window. Inevitably, a large number of elections will arrive on or near the cutoff date. Some forms will be missing either information or proof of age. A grace period allows time to work with the participants who want a lump sum in order to get all of their information completed on time, expediting payout of lump sums (this step also cuts down on denials).

4) Spend time on the design of benefit election forms. Even if your benefit election forms are super clear, reject rates may be higher than expected. Most employees don’t work with these forms every day so they may not understand how to fill them out, given the length and large amounts of information required (often 20+ pages). Add small touches to ease filling them out, such as simple and easy-to-understand instructions and deadline information on each page. Also, be clear about the forms for proof of age that the employee needs to provide.

5) Work with your trustee’s timeline. As the end of the year approaches, be sure to confirm with the trustee that the number of checks can be fully executed before year end, because they will be the ones actually cutting the checks. Note that the values of payouts typically change on the first of the month, so trustees will need enough time to cut and mail the checks before the amounts have to be recalculated and reissued.

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U.S. Supreme Court rules in favor of same-sex marriages and the Affordable Care Act subsidies

July 3rd, 2015 No comments

By Employee Benefit Research Group

The U.S. Supreme Court has handed down decisions on two significant cases that have direct or indirect implications for employer-sponsored retirement and healthcare benefit plans. This Client Action Bulletin summarizes these cases of interest for employers that sponsor such plans.

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When to begin Social Security: The conundrum

July 2nd, 2015 No comments

By Jeff Bradley

Bradley_JeffIn retirement planning, especially in discussions involving those who retired early or are thinking of retiring early, this question usually comes up: When do you plan to start taking Social Security?

To answer this question, we have to look at two alternatives:

1) If one defers payment to age 70 (currently the latest permissible date for increased benefits) or some other age, a higher monthly benefit is payable.
2) Instead, if one decides to commence payment early, say at age 62, the question then becomes how many years it takes to come out ahead by deferring. In other words, how many years does it take to reach the “break-even” point?

For example, a maximum earner, retiring at age 62 in 2015 could expect a monthly benefit of approximately $2,014. Instead, if he or she defers to age 70, that amount is estimated to be $3,544 (in 2015 dollars).

If we assume 2% CPI, the total benefits received from age 62 through age 78 are approximately $484,000. If deferred to age 70, the total benefits received from age 70 through age 78 are approximately $486,000. Thus, the breakeven point is somewhere between 16 and 17 years from age 62.

Why is it difficult to pick one or the other? Let’s examine the issues.

Many financial advisers suggest that a retiree would always be better off deferring commencement as long as possible as this maximizes the benefit. However, this may not always be the case and is really a decision that depends on several factors, many of them personal.

Obviously, to make the best decision, retirees will need to know if they (and their spouses, if applicable) will be alive at the “breakeven” point(s). Because no one knows the answer to this question, one possible approach would be to look at the present value of the two options at age 62. Using the current mortality table to calculate minimum lump sum distributions under the Internal Revenue Code and a 2% real interest rate assumption (note that the actual real rate of interest used will vary based on individual expectations), the present value of the benefit payable at age 62 to a single person is approximately $430,000 and the present value of the deferred benefit is approximately $452,000. However, if a 4% real interest rate is used, the present values are $347,000 and $327,000, respectively. Thus, the present value depends on the underlying assumptions which will vary by individual, making it somewhat subjective.

What about the “utility” of the immediate cash? In this regard, you should consider cash needs, both immediate and long-term. This would mean no Social Security cash now but more in the future versus some Social Security cash now but less in the future. We should note that it doesn’t do any good to have more money in the future if we aren’t alive or aren’t able to enjoy it. To assess cash needs, you will have to run the numbers because everyone’s situation is different.

Also, many proponents of delaying Social Security note that deferring it is a significantly lower-cost alternative than buying commercial longevity insurance. The key decision point here is that it shouldn’t matter which is a lower-cost alternative. What matters is whether longevity insurance is needed or wanted in the first place. If so, then deferring Social Security may be the right move. If you don’t want longevity insurance, deferring Social Security may not be the right move.

Don’t forget taxes! Social Security can be taxable to some individuals and can affect Modified Adjusted Gross Income (MAGI) which is used to determine eligibility for Federal tax subsidies under the Affordable Care Act.

And then we have the latest Social Security Trustee’s Report. Here’s an excerpt:

“The theoretical combined OASDI trust funds have a projected depletion date of 2033, unchanged from last year’s report. After the depletion of reserves, continuing tax income would be sufficient to pay 77 percent of scheduled benefits in 2033 and 72 percent in 2088.”

So what does this mean? Taking Social Security early may be the bird in the hand. Modeling a 23% haircut may be the deciding factor on whether Social Security should be taken as soon as possible. On the other hand, 2033 is a long way out, and we will have to wait and see.

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