Regulatory roundup

June 29th, 2015 No comments

By Employee Benefit Research Group

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

Supreme Court rules state bans on same-sex marriage are unconstitutional
The Supreme Court held that the Fourteenth amendment requires a state to license a marriage between two people of the same sex and to recognize a marriage between two people of the same sex when a marriage was lawfully licensed and performed out of state.

To read the court’s opinion paper, click here.

Census releases quarterly survey of public pension funds
The U.S. Census released the 2015 1st Quarter Survey of Public Pension Funds. The 100 largest U.S. public employee retirement systems had $3.398 trillion in assets as of March 31, a 1.6% increase from three months earlier, according the survey. The increase was due primarily to $80.2 billion in earnings on investments and $34.3 billion in contributions, partially offset by $61.8 billion in benefit payments in the first quarter.

To read the entire survey, click here.

SEC establishing retirement project
The Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations (OCIE) is launching a multi-year Retirement-Targeted Industry Reviews and Examinations (ReTIRE) Initiative.

OCIE, through the National Examination Program (NEP), will conduct examinations of SEC-registered investment advisers and broker-dealers (collectively, registrants) under the ReTIRE Initiative that will focus on certain higher-risk areas of registrants’ sales, investment, and oversight processes, with particular emphasis on select areas where retail investors saving for retirement may be harmed.

For more information, click here.

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To take or not to take, that is the lump-sum window question

June 26th, 2015 No comments

By Javier Sanabria

Milliman’s John Ehrhardt was quoted in a recent Wall Street Journal (subscription required) article entitled “Should you take a lump-sum pension offer?” The article highlights one individual’s experience with their former employer’s lump-sum window.

Here’s an excerpt:

One of the simplest ways to evaluate a lump-sum offer is to find out the extent to which the money compensates you for the loss of your pension. I asked New York Life Insurance how much it would cost me today to buy a deferred annuity that will pay me $423 a month, starting in 14 years.

The answer: $45,896, which means my lump sum falls $13,808 short of what I would need to replicate my pension’s guaranteed income with an annuity.

Along the same lines, New York Life says my $32,088 lump sum will buy a monthly income of $296.13 starting at age 65, which is 30% less than my $423 pension benefit.

Of course, I can always invest my lump sum myself. But is it realistic to think that over the next 14 years I will be able to turn my $32,088 into $127,000? That is the amount I would need, starting at age 65, to generate $423 a month using the 4% withdrawal rate that long has been considered a “safe” level of spending over a 30-year retirement.

The answer: probably not, since I will need to earn 10.35% a year, net of investment fees. A portfolio evenly divided between U.S. large-cap stocks and bonds has returned 7.7% a year, on average, since 1926, according to investment-research firm Morningstar.

With a 7.7% annual return, my $32,088 would appreciate to $90,650 by the time I turn 65. Applying the 4% rule yields an initial monthly withdrawal of $302 that, with annual inflation adjustments of 2%, would grow to $423 by the time I am about 82.

…”It’s important to find out whether there are benefits or features that are available to you with the pension that you’d leave on the table if you take the lump sum,” says John Ehrhardt, principal at actuarial consulting firm Milliman.

Every participant’s situation is different. Milliman’s David Benbow offers some perspective in his blog “Lump-sum windows: Too much information?

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Longevity plans can benefit employers and employees

June 25th, 2015 No comments

By Javier Sanabria

A supplemental defined benefit (DB) longevity plan may be able to reduce pension costs for employers and offer employees an annuitized source of income during their later years in retirement. In their paper “Longevity plans: An answer to the decline of the defined benefit plan,” Milliman consultants Bill Most and Zorast Wadia provide an example of these advantages.

Let’s take a look at a cost example of a 2-percent-of-pay career average plan for a participant hired at age 45 and terminating at age 65. We’ll further assume a starting salary of $60,000 and a 2.5 percent salary scale. This would result in a salary of roughly $106,500 just prior to termination.

The participant’s life annuity benefit commencing at age 75 would be about $31,000 per year. If the participant’s benefit were to be funded over that person’s working career of 20 years, the annual employer cost to fund this benefit would be about 1.8 percent of pay. By comparison, if the participant’s retirement benefit were to commence at age 65 under current Internal Revenue Service rules, the annual employer cost to fund this benefit would be about 2.5 percent of pay.

Thus, by limiting benefit eligibility until age 45 and by not allowing benefits to commence earlier than age 75, the cost of this plan would be relatively low to fund. Using this same example, while extending benefits commencement to age 80, the employer’s cost would be significantly lower at about 1.5 percent of pay.

Having a longevity plan with a simplistic design in which only life annuities can be offered directly addresses the issue of longevity risk… Aside from single life annuities and 75 percent joint and survivor options for married participants, no other types of benefits would be allowed. Lump-sum amounts will presumably be available via a retiree’s defined contribution plan and personal savings.

Collecting an annuity benefit from the supplementary defined benefit plan would not preclude a retiree receiving a lump-sum benefit from the defined contribution plan. It would just make it easier for the retiree to make decisions on how best to manage his or her lump-sum benefit from a withdrawal and consumption perspective; the participant would know exactly when his lifetime annuity benefit would start, no earlier than age 75 in our proposed plan. Early retirement would be restricted from the proposed longevity plan because the concern is for the latter years of retirement and the understanding is that other sources of savings should be enough to get retirees through the initial years of retirement.

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Regulatory roundup

June 23rd, 2015 No comments

By Employee Benefit Research Group

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

IRS releases temporary and proposed regulations on suspension of MPRA benefits
The Internal Revenue Service (IRS) has released temporary regulations on suspension of benefits under the Multiemployer Pension Reform Act (MPRA). These temporary regulations affect multiemployer pension plans that are projected to have insufficient funds, at some point in the future, to pay the full benefits to which individuals will be entitled under the plans (referred to as plans in “critical and declining status”).

To read the temporary regulations, click here.
To read the proposed regulations, click here.

IRS releases procedures for an multiemployer pension plans in critical and declining status
The IRS has released Revenue Procedure 2015-34 which describes procedures for a multiemployer defined benefit plan in critical and declining status to apply for approval of a proposed suspension of benefits under § 432(e)(9).

The revenue procedure provides that the Treasury Department will accept applications beginning June 19, 2015. The revenue procedure is being issued in conjunction with temporary and proposed regulations providing guidance on benefit suspensions. Section 432(e)(9) was amended by section 201 of the Multiemployer Pension Reform Act of 2014, Division O of the Consolidated and Further Continuing Appropriations Act, 2015, Public Law 113-235 (128 Stat. 2130 (2014)).

To read Revenue Procedure 2015-34, click here.

PBGC releases interim final rule on partitions of eligible multiemployer plans
The Pension Benefit Guaranty Corporation (PBGC) has issued an interim final rule prescribing the application process and notice requirements for partitions of eligible multiemployer plans under title IV of the Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Multiemployer Pension Reform Act of 2014 (MPRA).

The interim final rule is published pursuant to section 122 of MPRA in order to carry out the provisions of section 4233 of ERISA. PBGC is soliciting public comments on the interim final regulation.

To learn more about the interim final rule, click here.

FASB issues technical corrections and improvements
The Financial Accounting Standards Board (FASB) released Accounting Standards Update No. 2015-10, Technical Corrections and Improvements. The amendments contained in this ASU include items raised to the Board through the Codification’s feedback mechanism.

Regarding employee benefits, the ASU contains:

• Amendments to Subtopic 715-30, Compensation— Retirement Benefits—Defined Benefit Plans—Pension. (p. 25)
• Amendments to Subtopic 715-80, Compensation— Retirement Benefits—Multiemployer Plans Disclosure (p.26)
• Amendments to Subtopic 718-40, Compensation—Stock Compensation—Employee Stock Ownership Plans (p. 27-33)

To read the entire ASU, click here.

IASB proposed narrow-scope amendments to pension accounting standards
The International Accounting Standards Board (IASB) proposed narrow-scope amendments to pension accounting standards. The proposed changes are included in an exposure draft entitled “Remeasurement on a plan amendment, curtailment or settlement/availability of a refund from a defined benefit plan.”

When a defined benefit plan is amended, curtailed or settled during a reporting period, the entity needs to update the assumptions about its obligation and fair value of its plan assets to calculate costs related to these changes. The proposed amendments to IAS 19 Employee Benefits specify that the entity is required to use the updated information to determine current service cost and net interest for the period followed by these changes.

To read the entire exposure draft, click here.

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IRS guidance on favorable determination letters for individually designed plans expected this summer

June 19th, 2015 No comments

By Suzanne Smith

Smith-SuzanneEvery summer we look forward to nice weather, vacations, picnics, and barbecue. And Internal Revenue Service (IRS) guidance.

Yes, this summer we are expecting IRS guidance relating to changes in the determination letter program. The IRS has informally communicated a possible halt, beginning in 2016, to the issuance of IRS determination letters for individually designed retirement plans except for new plans or terminating plans. A formal announcement with details and an opportunity for comment is expected this summer.

Initially, this may sound like a beneficial change for employers because it eliminates a burdensome and costly process that individually designed retirement plans must generally undertake every five years.

But the potential negative impact of such a change is very concerning. While there is no federally regulated requirement to have a favorable determination letter for each of your retirement plans, there are many good reasons for employers to seek them:

Reliance on audit: By having a current determination letter, an employer has assurance that its plan language is tax-qualified. If a plan is audited, the employer can rely on the determination letter to prove the plan’s tax-qualified status.
Approval of amendments to plan: Most plans are amended from time to time to incorporate new laws and optional plan provisions. A determination letter is important to demonstrate that the amended plan language meets the tax-qualified rules.
Due diligence for corporate restructuring transactions: When corporate restructuring transactions such as mergers, acquisitions, or divestitures occur, it is prudent to obtain current determination letters to review the tax qualification of the plans involved in the transaction.

Without the ability to secure a current determination letter, plan sponsors would not be able to confirm the tax-qualified status of their plans, thereby leaving them unprotected in the event the IRS finds the plan language to be noncompliant during a future audit. Such a finding could result in severe penalties.

Two types of plans that have been considered individually designed and for which an employer would generally seek a favorable determination letter are employee stock ownership plans (ESOPs) and cash balance plans.

Perhaps recognizing that it will be limiting the availability of determination letters for individually designed plans, the IRS has recently released guidance that would expand the pre-approved plan document program to include ESOPs and cash balance plans. If an employer uses pre-approved language without modifications, an employer would have reliance on the IRS opinion/advisory letter without the need for a favorable determination letter. Thus, employers with individually designed ESOPs and cash balance plans may want to consider converting their plans to a pre-approved plan document in the future.

So, as we kick off summer, we are anxiously awaiting IRS guidance on the future of the determination letter program as well as watermelon, fireworks, and pool parties.

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Lump-sum windows: Too much information?

June 17th, 2015 No comments

By David Benbow

Benbow-DavidIn January, the U.S. Government Accountability Office (GAO) issued the report “Participants need better information when offered lump sums that replace their lifetime benefits.” This is much easier said than done. There is so much information included in lump-sum kits that they typically run at least 25 pages. The Special Tax Notice alone takes up five pages.

The relative value rules are supposed to give participants a heads-up if they’re about to forfeit an early retirement subsidy, but very few participants ask questions about the relative value descriptions in their pension kits. Could the reason be that the relative values clarify things so much that everyone understands all the consequences of their elections? Could it be that participants are already suffering from information overload and simply tune out?

“Better information” is only better if participants understand it and are willing to take the time to read it. Unless each lump-sum kit is hand-delivered by a pension specialist and an actuary, participants will never understand the required information.

There is still a great deal of interest in offering lump-sum windows. Many plan sponsors have been offering lump sums to terminated vested participants, and in 2012, both Ford and General Motors got approval to offer their retirees the opportunity to trade in their lifetime payments for lump sums.

The Internal Revenue Service (IRS) has, for the time being, stopped issuing Private Letter Rulings allowing companies to offer lump sums to retirees. But why? Are they afraid retirees will be bilked out of their future payments? Retirees wouldn’t be losing out on any early retirement subsidies like terminated vested participants might. Furthermore, there are several reasons why it might be very advantageous for retirees to take lump sums:

  • If they don’t expect to live very long

Remember that retirees are old. If you knew your days were numbered and you were receiving monthly payments for life, wouldn’t you jump at the opportunity to trade your $200 monthly payment for an $18,000 lump sum?

  • If their monthly annuity payments are ridiculously small

Many plans only pay lump sums if the total present value is under $5,000 at the time of commencement. As a result, there are a lot of retirees out there who are receiving monthly payments of less than $50. They would probably appreciate the opportunity to turn that small payment into a chunk of money they could actually do something with.

  • If their financial situations have changed

People’s situations change over the course of time. Retirees may decide that, for whatever reason, the lump-sum payment could give them the opportunity to pay off a debt, buy an RV, or invest in a business.

Instead of saying that participants need better information, why not accept that every participant’s situation is different and no amount of additional information is going to change the fact that they know what they want?

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Regulatory roundup

June 15th, 2015 No comments

By Employee Benefit Research Group

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

IRS issues guidance expanding pre-approved determination letter program
The IRS has issued Revenue Procedure 2015-36, which expands the scope of the pre-approved program to include defined benefit plans containing cash balance features and defined contribution plans containing employee stock ownership plan (ESOP) features and extends the deadline for submitting on-cycle applications for opinion and advisory letters for pre-approved defined benefit plans to October 30, 2015.

In addition, this revenue procedure updates Rev. Proc. 2011-49 to reflect changes made to the determination letter program in 2012. Rev. Proc. 2011-49 is superseded.

Revenue Procedure 2015-36 will appear in IRB 2015-25 dated June 22, 2015.

To read the entire Revenue Procedure, click here.

SSA issues final rule on 60-month period of employment requirement for government pension offset exemption
The Social Security Administration (SSA) has issued a final rule which adopts, with clarifying changes, the proposed rule previously published in the Federal Register on August 3, 2007. This final rule revises the SSA’s Government Pension Offset (GPO) regulations to reflect changes to the Social Security Act (“Act”) made by section 9007 of the Omnibus Budget Reconciliation Act of 1987 (OBRA 1987) and section 418 of the Social Security Protection Act of 2004 (SSPA). These regulations explain how and when the SSA will reduce the Social Security spouse’s benefit for some people who receive federal, state, or local government pensions if Social Security did not cover their government work.

To read the entire final rule, click here.

IRS updates listing of required modifications for chase balance and employee stock ownership plans
The IRS has published a collection of information packages designed to assist sponsors who are drafting or re-drafting plans to conform with applicable law and regulations related to cash balance and employee stock ownership plans.

ERISA Form 8955-SSA, 2-D Barcode Standards
This document covers only the 2D barcode on ERISA Form 8955-SSA – valid for Plan Years 2009-2011. The 2D barcode is intended to represent the information on the paper form. Barcodes for this form are generated from two sources:

  • The IRS Form 8955-SSA Fill-able PDF produces a barcode after printing the form in Adobe.
  • The approved software vendors for Form 8955-SSA produce a barcode when printing their forms from their software packages.

To read the entire document, click here.

IRS explanation, worksheet (alert guidelines), and deficiency check sheets
The IRS has issued three explanations, worksheets (alert guidelines), and deficiency check sheets:

IRS posts nonqualified deferred compensation audit techniques guide
The IRS has posted a guide on nonqualified deferred compensation audit techniques. The guide provides:

  • An overview
  • Audit potential
  • Compliance focus
  • General audit steps

To access the guide, click here.

IRS issues latest employee plans newsletter
The IRS has issued the June 10, 2015, edition of Employee Plans News. The latest edition contains the following content:

  • Pre-approved plan program expanded to include cash balance plans and ESOPs
  • Sample plan language (listings of required modifications) for ESOPs, cash balance and 403(b) plans
  • Guidance for permanent program for late 5500EZ filers
  • IRS Nationwide Tax Forums begin in July
  • Changes to Forms 5500 for 2014
  • IRS names seven new members to ACT advisory panel
  • Updated Voluntary Correction Program fee chart

To read the newsletter, click here.

IRS updates 403(b) fix-it guide
The IRS has updated its 403(b) Fix-It Guide. The document contains charts and explanations that address potential issues in plan administration. It includes how to find, fix, and avoid common plan errors, with hypertext links to online forms and guidance.

To access the fix-it guide, click here.

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GASB adopts two other-postemployment-benefit-related statements

June 12th, 2015 No comments

By Javier Sanabria

The Government Accounting Standards Board (GASB) adopted two statements regarding OPEB-related financial reporting by state and local governments. GASB Statement No. 74, Financial Reporting for Postemployment Benefits Other Than Pension Plans, replaces the current GASB 43 and addresses reporting by OPEB plans that administer benefits on behalf of governments.

GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, replaces the current GASB 45 and addresses reporting by governments that provide OPEB to their employees and for governments that finance OPEB for employees of other governments. These statements represent a significant change to the methods used to account for postemployment OPEBs.

This PERiScope alert offers more perspective.

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Employers helping former employees deal with rollover fees

June 11th, 2015 No comments

By Javier Sanabria

Many defined contribution plan participants are incurring excessive fees when they roll over their account balances into individual retirement accounts (IRA). Sponsors can help former employees maintain their savings by retaining the account balances within their qualified plan. In this article, Milliman consultant Doug Conkel discusses what plan sponsors are doing to help their former employees make better decisions with their plan balances.

Here is an excerpt:

Plan design thoughts

Like other transformations within the defined contribution (DC) market, the genesis of these changes is linked to creating a defined contribution plan with some attributes passed down from the “pension plan era.” Participants and sponsors alike are considering changes that shift the plan design discussion from retirement accumulation topics to the “de-accumulation” or payout phase. So what plan design changes are they making?

Partial lump-sum distributions. Many sponsors have modified their plans such that former participants can request a partial lump-sum distribution of their account balances. This enables former participants to satisfy a one-time expense while leaving a portion of their account balances in the plan.

Installments. Years ago, many sponsors simplified their distribution options by removing installments, based on the conclusion that “a participant can set up installments outside the plan (usually an IRA or annuity).” However, now some sponsors have come to realize the issues noted above with outside accounts and some participants are requesting in-plan installments. Some sponsors are again electing to liberalize the distribution options by allowing former participants to elect installment payments from the plan, which gives participants flexibility and allows them to keep their accounts in the plan….

Education and communication

Guidance on comparing fees. A plan that is run in an unbiased environment is able to provide guidance to participants to help them understand the fees they pay under the current plan provisions and how they might compare those fees to individual retail arrangements. The participant fee disclosure rules introduced a few years ago provide participants with the information they need to access their current plan’s total fees. The plan’s annual notice provides the investment expense ratios from which participants can calculate a weighted expense ratio using their personal account. Plus, using their quarterly statements, a participant can also determine the amount of direct expenses (if any) being deducted from the account. These two key pieces of information yield the total cost of a participant’s account within the qualified plan. If participants can obtain the same information about proposed IRAs or new employers’ retirement plans, they should be able to perform an apples-to-apples comparison of the fees. A best practice in the future would be to provide some guidance to former plan participants to assist them in making this comparison so they can then make informed decisions.

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Regulatory roundup

June 8th, 2015 No comments

By Employee Benefit Research Group

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

PBGC releases data tables
The Pension Benefit Guaranty Corporation (PBGC) has released its annual update on pension data. The data tables cover information recently reported by pension plans and the PBGC, comparing them to values for prior years.

The data tables provide researchers, journalists, and others interested in the federal pension insurance program easily accessible, detailed statistics for the single-employer and multiemployer plans that PBGC insures. The tables include the numbers of people and plans that the PBGC protects, the number of people receiving or eligible to receive benefits from the PBGC as well as the benefits paid to them, claims against that PBGC, the funded status of PBGC-protected plans, and other statistics.

To read the latest PBGC data tables, click here.

BLS: Automatic enrollment, employer match rates, and employee compensation in 401(k) plans
The latest Monthly Labor Review article on the Bureau of Labor Statistics website uses restricted-access employer-level micro data from the National Compensation Survey to examine the relationship between automatic enrollment and employee compensation in 401(k) plans.

To read the entire article, click here.

GAO report: Most households approaching retirement have low savings
The Government Accountability Office (GAO) recently released a report entitled “Most households approaching retirement have low savings” (GAO-15-419). According to the report, many retirees and workers approaching retirement have limited financial resources. About half of households age 55 and older have no retirement savings (such as in a 401(k) plan or an IRA). Additionally, many older households without retirement savings have few other resources, such as a defined benefit (DB) plan or nonretirement savings, to draw on in retirement.

To read the entire report, click here.

SEC memo addresses pay ratio disclosure
The Securities and Exchange Commission’s (SEC) Division of Economic and Risk Analysis released a memorandum to assist the Commission in developing final rules regarding pay ratio disclosure. The division analyzed the potential effects on the pay ratio calculation of the exclusion of different percentages of employees. The memorandum states that excluding some employees from the determination of median employee compensation, which some commenters suggested, can affect the calculation of that median and thus change the ratio of the annual total compensation of the principal executive officer (PEO) to the median of the annual total compensation of employees (“pay ratio”).

To read the entire memo, click here.

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