Milliman Hangout: Variable annuity pension plans (VAPPs)

January 23rd, 2015 No comments

By Javier Sanabria

Retirement security is tricky. Traditional defined benefit plans have contribution volatility that is difficult for sponsors to manage. Defined contribution plans typically do not provide participants with stable, lifelong income. Variable annuity pension plans (VAPPs), however, combine the best of both worlds—better meeting the needs of sponsors and participants. Sponsors get stable contributions like defined contribution plans and participants get lifelong income like defined benefit plans.

Milliman consultants Kelly Coffing and Grant Camp discuss some of the benefits that VAPPs offer sponsors and participants in this Milliman Hangout.

For more perspective on VAPPs, click here.

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Defined benefit plan investments: Planning for the future now

January 22nd, 2015 No comments

By Jeff Marzinsky

Marzinsky-JeffDuring December 2014 U.S. equity markets peaked at all-time highs – over 18,000 for the Dow Jones Industrial Average and 2,090 for the S&P 500 Index. Then, in January, equity markets became more volatile and both indexes pulled back dramatically, as international economic uncertainty rose and oil prices fell. Some thought interest rates couldn’t go any lower during 2014 with the U.S. Federal Open Market Committee (FOMC) hinting at an upward adjustment. But interest rates on the longer end of the maturity spectrum dropped during 2014, which most likely had a detrimental effect on defined benefit (DB) pension plan liabilities.

Now, more than ever, plan sponsors should be reviewing their DB plan investments as we react to these market movements, which are critical in the asset allocation process. For more perspective on the shifting landscape, see my paper “Developing pension plan investment strategy: A variety of considerations,” published last year to help DB plan sponsors understand the range of considerations and how they interact in the development of a pension plan investment strategy.

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Regulatory roundup

January 19th, 2015 No comments

By Employee Benefit Research Group

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

PBGC submits draft forms and instructions for premium filings to OMB
On January 12, the Pension Benefit Guaranty Corporation (PBGC) submitted draft forms and instructions for 2015 premium filings under the Paperwork Reduction Act to the Office of Management and Budget (OMB) for review. Included in the OMB submission is a supporting statement addressing, among other things, public comments received on new questions related to certain lump-sum windows and annuity purchases.

Comments are due to OMB by February 11, 2015. For more information, click here.

PBGC posts increase in 2015 flat-rate premium for multiemployer plans
The Multiemployer Pension Reform Act of 2014 increased the 2015 flat-rate premium for multiemployer plans from $13 to $26 per participant. The PBGC has updated its website to reflect this increase.

For more information, click here.

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Pensions remain an important part of retirement security

January 16th, 2015 No comments

By Javier Sanabria

Defined benefit (DB) plans are still relevant even though defined contribution (DC) plans have become more common. In the latest DB Digest, Milliman’s David Benbow highlights a 1970 article by actuary Bill Halvorson that looks 30 years in to the future of DB plans. David also explains why the best possible retirement solution would combine DB and DC plans in addition to Social Security.

Here is an excerpt:

Reading this article from 1970 is like opening a time capsule. And, while Bill Halvorson didn’t predict everything that would happen to pensions, he did say a few things that ring very true nearly 50 years later.

Bill speculated that Social Security would spiral out of control and that if pensions integrated with Social Security, they would be diminished. This would lead to the emergence of savings plans, thrift plans, and profit-sharing plans as the only viable way to supplement expanding Social Security.

Bill also suggested that funding regulations would strangle private pensions…

DB plans are not dead. Not yet, anyway. And I, for one, hope that the pendulum will swing back toward the stability of some form of DB plan because as life expectancy increases, so does the likelihood of outliving your savings. The best solution is likely a combination of DB and DC plans in addition to Social Security. The DC balance could be designed to provide income for a fixed number of years, at which time the DB plan (or “longevity plan”) would kick in and provide lifetime income at later ages, while Social Security would provide inflation-adjusted lifetime income. Because DB benefits would be paid over shorter life expectancies, the funding would be much less volatile.

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Milliman Hangout: Pension Funding Index, January 2015

January 13th, 2015 No comments

By Javier Sanabria

The funded status for the 100 largest corporate defined benefit plans decreased by $22 billion during December 2014, according to the Milliman 100 Pension Funding Index (PFI). Historically low interest rates were the dominant factor in the $105 billion deficit increase during 2014. While higher than expected investment returns produced a solid $81 billion gain, pension liabilities increased by $186 billion. The funded ratio was 83.6% as of December 31, 2014, down compared with the ratio on December 31, 2013, of 88.3%.

For more perspective on the January’s PFI watch our latest Milliman Hangout featuring co-author Zorast Wadia.

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Regulatory roundup

January 12th, 2015 No comments

By Employee Benefit Research Group

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

PBGC requests OMB approval for reporting of pension plan de-risking measures
The Pension Benefit Guaranty Corporation (PBGC) is modifying the collection of information under its regulation on payment of premiums and is requesting that the Office of Management and Budget (OMB) approve the revised collection of information under the Paperwork Reduction Act for three years.

PBGC is revising the 2015 filing procedures and instructions for payment of premiums to require after-the-fact reporting of certain risk transfers through lump-sum windows and annuity purchases. Risk transfers can substantially reduce the premiums that plans otherwise would pay to PBGC. Because PBGC premiums and the investment income earned on them are a major source of income for PBGC, information about risk transfers is critical to PBGC’s ability to assess its future financial condition. There is currently no available comprehensive, detailed, and reliable source for information on risk transfers.

PBGC is also changing certain premium declaration certification procedures, offering the option for a plan to provide a telephone number specifically for inclusion in PBGC’s Search Plan List on PBGC’s web site, updating the premium rates (including reflecting the Consolidated and Further Continuing Appropriations Act, 2015, Pub. L. 113-235), and making conforming, clarifying, and editorial changes.

To read the entire notice, click here.

PBGC issues changes to ERISA Section 4062(e)
This announcement provides information about two important changes regarding ERISA section 4062(e). First, on December 16, 2014, the President signed into law H.R. 83, which made major changes to section 4062(e). Second, the PBGC is ending the moratorium on enforcement of 4062(e) cases that it announced in July 2014.

For more information on the changes to ERISA Section 4062(e), click here.

IRS updates 2015 revenue procedures for employee plans and exempt organizations
The IRS published its January 2, 2015, Internal Revenue Bulletin, which includes the various revenue procedures, revised for 2015, for issuing letters, rulings, determination letters, and technical advice on specific issues related to employee benefits. The documents are:

• Rev. Proc. 2015-1
• Rev. Proc. 2015-2
• Rev. Proc. 2015-3
• Rev. Proc. 2015-5
• Rev. Proc. 2015-5
• Rev. Proc. 2015-6
• Rev. Proc. 2015-7
• Rev. Proc. 2015-8

For an electronic version of Internal Revenue Bulletin 2015-1 which contains these revenue procedures and user fee schedules, click here.

IRS provides guidance on automatic approval of change in funding method for takeover plans
The IRS has released Announcement 2015-03, providing guidance on the automatic approval of a change in funding method for single-employer defined benefit plans under certain circumstances in which the change in method results from a change in plans’ enrolled actuary.

To read Announcement 2015-03 in its entirety, click here.

PBGC publishes “2014 PBGC participant and plan sponsor advocate report”
The PBGC has released the first annual report of the participant and plan sponsor advocate.

To read the entire report, click here.

DOL issues fact sheet on EBSA’s enforcement efforts
Through its enforcement of ERISA, the Employee Benefits Security Administration (EBSA) is responsible for ensuring the integrity of the private employee benefit plan system in the United States. EBSA’s oversight authority extends to nearly 684,000 retirement plans, approximately 2.4 million health plans, and a similar number of other welfare benefit plans, such as those providing life or disability insurance. These plans cover about 141 million workers and their dependents and include assets of over $7.6 trillion (as of October 29, 2014). In FY 2014, EBSA recovered $599.7 million for direct payment to plans, participants, and beneficiaries.

For more information, click here.

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New Year’s resolutions for retirement plan sponsors

January 8th, 2015 No comments

By Javier Sanabria

For many, a new year usually means a fresh start. With that thought in mind, Milliman’s Jinnie Olson provides 401(k) plan sponsors 10 ideas that can help them administer their plans more effectively in 2015. Below are her 10 ideas.

1. Create administrative procedures and internal controls—and follow them.
2. Make sure changes to your operating procedures are well documented.
3. Audit your data.
4. Transmit contributions in a timely manner.
5. Establish a Retirement Committee.
6. Understand plan fees.
7. Audit your service providers.
8. Conduct an annual plan review.
9. Establish success measures.
10. Establish a strategy for the upcoming year.

Read Jinnie’s article “Top 10 New Year’s resolutions for plan sponsors of retirement plans” for more perspective.

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Corporate pension funding deficit grows by more than $100 billion in 2014 because of plummeting interest rates

January 7th, 2015 No comments

By John Ehrhardt

Milliman today released the results of its latest Pension Funding Index (PFI), which consists of 100 of the nation’s largest defined benefit pension plans. In December, these plans experienced a $19 billion increase in pension liabilities and a $3 billion decrease in asset value, resulting in a $22 billion increase in the pension funded status deficit and a funded ratio of 83.6%. For the year, despite market returns of $81 billion, these pensions experienced a $105 billion increase in the pension funded status deficit, fueled by a $186 billion increase in liabilities as interest rates fell to a historic low at year end.


What a difference a year makes. Last year at this time we were celebrating a historic rally for these pensions, thanks to—surprise surprise—cooperative interest rates. This year it’s the opposite story, with interest rates falling to 3.80%, the lowest rate we’ve ever seen in the 14-year history of this study. With rates this low, the liability increase for these pensions outstripped strong asset performance by more than $100 billion.

Looking forward, if the Milliman 100 pension plans were to achieve the expected 7.4% median asset return for their pension portfolios, and if the current discount rate of 3.80% were maintained, funded status would improve, with the funded status deficit shrinking to $255 billion (85%.7 funded ratio) by the end of 2015 and to $217 billion (87.9% funded ratio) by the end of 2016. This forecast assumes 2014 aggregate contributions of $44 billion and 2015 and 2016 aggregate contributions of $31 billion.

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Top 10 worldwide Milliman publications of 2014

January 5th, 2015 No comments

By Javier Sanabria

In 2014, Milliman published a range of articles and videos, covering issues including retirement ideas for Millennials, the pros and cons of catastrophe models, the value of enterprise risk management (ERM) programs, and the impact of the Patient Protection and Affordable Care Act (ACA) on financial statements. We also published on challenges related to healthcare costs and insurance and risk management issues—and about real insurance for fantasy football and insurance for ride sharing. To view this year’s 10 most viewed articles and reports, click here.

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Regulatory roundup

December 29th, 2014 No comments

By Employee Benefit Research Group

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

IRS issues guidance on rollovers of after-tax contributions in retirement plans
Prior to the issuance of Notice 2014-54, the Internal Revenue Service (IRS) treated disbursements from a retirement plan that were rolled over to multiple destinations as separate distributions to each destination, with each distribution treated as containing a pro rata portion of the pretax and after-tax amounts. Notice 2014-54, which was issued September 18, 2014, provides that all disbursements from a retirement plan scheduled to be made at the same time are treated as a single distribution even if they are sent to multiple destinations.

As a result of this notice, taxpayers with pretax and after-tax amounts in their plans, for example, can transfer through direct rollovers the pretax portion of the distribution (including earnings on after-tax amounts) to a traditional IRA and the after-tax portion of the distribution to a Roth IRA. (Previous interpretations allowed accomplishing this result through 60-day rollovers but not direct rollovers.) The guidance provided in Notice 2014-54 applies only to distributions from qualified plans described in section 401(a) of the Code (such as profit-sharing and 401[k] plans), section 403(b) plans, and section 457(b) governmental plans. The guidance in Notice 2014-54 is generally effective January 1, 2015; however, transitional rules included in the guidance permit taxpayers to utilize the new rules provided in the guidance prior to the effective date.

The guidance in Notice 2014-54 does not apply to distributions from IRAs.

For more information, click here and here.

IRS proposes changes to annual employee benefit plan report
The IRS has issued a notice and request for comment on continuing information collections: Annual Return/Report of Employee Benefit Plan, with proposed changes. Currently, employee benefit plans are required to annually file Form 5500 or Form 5500-SF, and schedules. The IRS uses the report to determine if the plan is operating properly or whether the plan should be audited.

The IRS proposes revising a currently approved collection by creating Form 5500-SUP (DRAFT), a paper-only form, to be used by retirement plan sponsors and administrators to satisfy the reporting requirements of Section 6058. Form 5500–SUP would only be used if certain IRS compliance questions are not answered electronically on the Form 5500 or Form 5500–SF. Comments are due on or before February 23, 2015.

To read the entire notice, click here.

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